Stock Analysis: Emera Inc (EMA)

As we are in the middle of a COVID19 pandemic, a lot of people were laid from their jobs or had to work from home to due to things like providing childcare to their children.   

As the economies are starting up all around the world, precautions are still need to prevent the spread of the virus.  

The pandemic might of led people to have an epiphany when it comes to their finances. Some of these people will have to want to drastically change their financial situation for the better.

An individual could improve their finances by budgeting their money and fast tracking their debt repayment.  An individual might want to grow their passive income through investing. 

When it comes to investing, a person could invest for more income via dividend growth stocks.

Investing in dividend growth stocks is a strategy is just as it sounds.  Investing in companies the pay dividends and increase the dividends on a regular basis.  

When it comes to investing, you do not want to over pay for a stock.  Over paying for a stock results in higher risk and lower starting yield.

To determine if a stock is undervalued or overvalued, we due a quantitative analysis on the company in question.

Ultimately, you want to purchase a stock far below the price determined by doing a valuation analysis. The lower the purchase price the better.  The lower the purchase the greater the starting yield, which means your money will be working harder for you.

Emera is a utility holding company that started as a single electrical utility in Nova Scotia to a conglomerate in the utility space.  Nova Scotia is a small province on the east coast of Canada.  Emera has operations in eastern Canada, United States and the Caribbean.  

Emera has grown into a major company in the utility space with over $32 billion in assets at end of 2019.  At the end of 2019, Emera had approximately 7400 employees and 65% US earnings.  

One of the major projects Emera was involved in was the Maritime Link. The Maritime Link which would bring hydro generated electricity produced at Muskrat Falls in the province of Newfoundland and Labrador to Nova Scotia.  This project provides electricity to Newfoundland and electricity to Nova Scotia via undersea cable. 

Now, I will to an fundamental analysis on Emera Inc.  Emera trades on the Toronto stock exchange under the ticker symbol EMA.  

Dividend Information

Currently, Emera is trading at $53.75 at the close on July 10.  Emera pays an annual dividend of $2.45 per share, or $0.6125 per share quarterly.  The stock is currently yielding 4.56%.  This yield is 7 bps above the stock's own 5 year average and around 100 bps above that of broader market.

The earnings per share (EPS) for the trailing 12 months is 3.57.  The dividend payout ratio is currently  68.6%.  This dividend payout ratio for a company in this space is great.  The earnings with a company in this space deal with outages and major weather events leading to high costs from time to time.  

The 5 year dividend growth rate is 10%.  The 10 year dividend growth rate is 8.7%.

Emera has increased their dividend for 13 consecutive years.  

Revenues and Earnings 

People use utilities to live their everyday lives.  Earnings in the short term will be effected due to the COVID19 shutdowns of their industrial and commercial customers.  This decrease in revenue will be offset by small increase in revenues from residential customers who utilities will cost more due to being at home more.  

Emera grew revenues from $1.5537 Billion in 2010 to $6.111 billion in 2019.  That is a CAGR of 16.44% over the last 10 years.  

Emera grew by acquisitions by buying utilities and entering generating deals with other energy providers. 

Emera grew earnings per share from $1.65 per share in fiscal year 2010 to $2.76 per share in fiscal year 2020.  That is a compound annual growth rate of 5.88%.

This EPS growth is lower than what I expected.  As the company is transitioning to more renewable energy, I expect the EPS will growth at larger rate due to lower costs to produce electricity.  

In 2020, Nova Scotia's block of energy from Muskrat Falls will start to flow. Muskrat Falls is located in Newfoundland and Labrador and will bring electricity to Nova Scotia via an undersea cable.  This will help to reduce Nova Scotia's use of coal to provide its electricity needs.  

As the companies owned by Emera Inc increase the amount of energy from renewables, the earnings should increase as a result.  Emera also has entered into generation agreements with other energy providers to provide energy to customers. 

Financial Position

We now move over to the balance sheet.  The long term debt to equity ratio is 1.59.

The interest coverage ratio comes in at 2.04.  I look for the interest coverage ratio to be over 5 to be comfortable.  As their cost will likely go down as energy is produced by more and more renewable sources and paying down their debt, I am not too concerned about this. Their cost should also be reduced to due lower prices of oil, natural gas and coal.  

Emera announced they are aiming to grow their dividend between 4 to 5 percent to 2022 a few years back due to their debt.  This dividend growth rate still beats the rate of inflation.  The dividend was growing at a rate 6 to 9 percent yearly before that.  

Over the last 5 years, the average net margin is 9.11% and the average return on equity is 8.24%.

The net margin is basically the amount of revenue, after all expenses, hits the bottom line expressed as a percentage.  So, the higher the net margin the better.  

Stock Valuation

The P/E ratio is currently 14.93.  

This P/E ratio is roughly the same as the broader market, which in this case is the TSX composite index.  

The current P/E ratio is a lot lower than the stock's own 5 year average P/E of 24.4.

Looking at cashflow, the current P/CF of 8.4 is slightly higher than the stocks own 5 year average P/CF of ratio of 7.5

The current yield of 4.56% is less than 10 bps higher than the stock own 5 year average yield.

These metrics do not look like the stock is undervalued. 

I will use a dividend discount model analysis to try to value the stock.  

I factor in a discount rate of 9% and a long term dividend growth rate of 4.25% for 7 years and then grow at 6% thereafter.

This long term dividend growth rates are lower than the stock's 5 year and 10 year dividend growth rate.  As the company announced a few years, they are aiming for 4 to 5 percent growth in their dividend out to 2022.  So, I being conservative in my approach with the growth rate to err on the side of caution.

The Dividend Discount Analysis gives me a fair value of $58.17.

I like to compare this to a 3rd party, so see if my analysis is reasonable.  

Morningstar currently rates Emera as a 3 star stock.  This would indicate the stock is equally valued.

Morningstar has a quantitative fair value of $55.68.

I take the average of these two numbers are get a fair value of $56.92.

Conclusion:

The stocks appears to be approximately 6% undervalued as of closing price on June 10. 

I would not be a buyer of this stock at this price as the margin of safety is too low. Valuing a stock is not an exact science. 

Disclosure:  Long EMA in margin account

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

Stock Analysis: Fortis Inc.

As investors in individual stocks, one of the goals should be to reduce risk of losing money.  This can be done by choosing stocks that are known as blue chips.  Blue chips cost more but tend to hold their value.

Another way to reduce risk is to do a valuation of a stock.  Valuation is not an exact science but an investor can do an analysis on what the stock is worth.  

This number on what price the stock is worth compared to the actually price of the stock will indicate if the stock is undervalued or overvalued.

Ultimately, you want to purchase a stock far below the price determined by doing a valuation analysis. The lower the purchase price the better.  The lower the purchase the greater the starting yield, which means your money will be working harder for you.  

Fortis is a leading utility in North America that is headquartered in St. John's, Newfoundland and Labrador. Fortis Inc. started in 1885 under the St. John's Electric Light Company in what would become the province of Newfoundland.  The St. John's Electric Light Company eventually came the Newfoundland Light and Power Co. Ltd.  The latter eventually became the first subsiduary of Fortis Inc in 1987.  

Fortis is a holding company that operates under various subsidiaries in the utility space.

Fortis has over 9000 employees and serve their customers in Canada (5 provinces) , 9 American states and 3 countries in the Caribbean.  Fortis has $53 billion in total assets at the end of 2019.  The customer base consists of 1.3 million gas utility customers and 2 million electric utility customers.

Now, we will look at the fundamentals of the stock.  Fortis Inc. trades on the Toronto Stock Exchange and New York Stock exchange as FTS.

As I am in Canada, I will use the Toronto Stock Exchange FTS quote in my analysis.

Currently, Fortis is trading at $53.25 at the close of May 8, 2020.  Fortis pays an annual dividend of $1.91 per share, or $0.4775 per share. The stock is currently yielding 3.59%. This yield is 10 bps below the stock's own 5 year average and 30 bps below that of the broader market. 

The EPS per the trailing twelve months (TTM) is $3.73.  The dividend payout ratio is 51.2%.  This is a great dividend payout ratio showing half of the earnings are going to investors while the other half as retained earnings. 

At the end of fiscal year 2019, 99% of earnings came from regulated utilities. 

The 5yr dividend growth rate is 7.4%.  The 10yr dividend growth rate is 5.8%.

Fortis has raised their dividend for 46 consecutive years.  This is the second highest streak in Canada.  

People use utilities to live their everyday lives.  So, in good and bad times the company makes money.  In the current COVID19 pandemic, earnings could take a hit from the industrial and commercial side of the business as a lot of places are shut down.  The earnings from residential customers will increase as people are home more and therefore using their utilities more than normal.

Now, we will take a lot at the some fundamentals over the last 10 years.  Although third party information, like Morningstar, is quite accurate, it is best to get the information from annual reports from Fortis directly.  The fiscal year for Fortis ends December 31, which is same as regular calendar year.

Fortis grew revenues from $3.664 billion in 2010 to $8.783 billion in 2019.  This is a compound annual growth rate (CAGR) of  10.33%.

This CAGR is fantastic. During this time, the price of oil has been varied from near a $100 per barrel to $30 a barrel.  The lower the price of oil means higher earnings due to lower cost.

We next take a look at diluted EPS over the last 10 years.  Fortis grew diluted EPS from $1.62 per share in 2010 to $3.78 per share in $3.78 per share. This is a CAGR of 9.87%.  

A CAGR near 10% for EPS was helped by 3 major acquisitions.  

The number of shares outstanding has increased by 134% over the last 10 years.  During the last 10 years Fortis had 3 major acquisitions to grow their assets.  

I expect the EPS to continue to grow over the long term, but be reduced in the short term.  The EPS will likely decline in the short term as most of their industrial or commercial customers have been shut down to help reduce the spread of COVID19.  Although their residential customers have been increasing their use of utilities during the COVID19 pandemic, the increase in revenues will not come anywhere close to replacing the losses via by their industrial and commercial customers.  The economy is starting to open up, but is will be a slow recovery as things will have to be done differently by individuals and businesses. 

The long term debt to equity ratio comes in at 1.16.  The interest coverage ratio is 3.06.

The higher the interest coverage ratio the better.  The interest coverage ratio is a measure of the ability of a company to pays the interest on its debt.  Ideally, I would look for an interest coverage ratio of minimum 5.  I am not too concerned with Fortis ability to pay its debt due to earnings will be helped by the low price of oil and costs being reduced via increase of renewable energy.

Fortis has an average annual net margin of 12.59% over the last 5 years.  Net margin is basically what percentage of revenue hits the bottom line after every expense is accounted for.  The net margin fell a bit in 2016 but increased in the next 3 fiscal years. 

Fortis has an average return of equity of 8.16% over the last 5 years. 

Investing in Fortis has served investors well over the last 10 years.  As utilities allowed people to live their lives and to run the industries and businesses in various aspects of the economy, the company is highly recession proof. 

We do not want to over pay for a stock. Ultimately, we want to purchase a stock for less than we think it is worth.  By doing this, we have a large margin of safety.  The lower you purchase a stock, the higher the starting yield which means your money is working harder for you right from the start.  

Valuation

The stock is currently trading at P/E of 14.35.  This is well below the stock's 5 year average of 19.7 and slightly above that of the broader market (TSX Composite Index) of 12.2. 

The stock is basically on par in terms of price to book and price to sales when compared to the stock's 5 year average.

The stock is currently trading at P/CF (Price to cash flow) of 8.8.  This is on par with the stock's own 3 year average of 7.6.  The current P/CF is also on par with that of the broader market of 7.9.

With these numbers that stock does not look appealing at $53.25.

I will attempt to value the stock using a dividend discount model analysis. I am going to use a discount rate of 9%.  I choose 9% as this represents what I am for in terms of annual return with a stock with a current yield of 3.6%.  I am going to use a dividend growth rate of 5.5% growth rate. This is slightly lower than the aim of Fortis to grow their dividend annually at 6% to 2024.  

The Dividend Discount Model Analysis gives me a fair value of $57.57. 

I want to compare this to a 3rd party to see if my analysis is reasonable.

Morningstar currently rates Fortis as a 3 star stock.  This would mean the stock is equally valued.

Morningstar has a fair value of $54.76.

I take the average of these 2 numbers to get a fair value of $56.16.

Conclusion:

The stock could be possibly be 5.2% undervalued.

I would not be a buyer currently as I believe the margin of safety is too low.  Valuing a stock is not an exact science.  

Disclosure:  I do not own FTS.TO in any of my accounts.  

Photo credit www.fortisinc.com

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

Stock Analysis: - Telus Corporation

Most people wake up and go to work at least 5 days a week.  People trade their time for money.  If you are not at work, you do not get paid. Most people do not think is there a way this way of making a living.

Some of these people have discovered a way of making money besides their job.  If you are reading this article, you are interested in investing.  You do not read a blog about investing by accident.  You are here for a reason.

You cannot walk down a street, take public transit, or visit a coffee shop without noticing the amount of people looking down at their smart phones.  It was not like this until 2007.  In 2007, Apple came out with the iPhone are changed peoples life forever.  The iPhone was the first smart phone without a physical keyboard.  That meant a bigger screen.  Since the release of the iPhone in 2007, the world has changed.  People basically are carrying a computer in their hand.

Nowadays, almost everyone has a smart phone.  Senior citizens are likely the only people who do not have cell phones of any sort.  

In Canada,  we have 3 big communication companies and 1 that is quite large.  The big 3 are Bell Canada Enterprises , Roger's Communications and Telus Corporation.  The other major communication company is Shaw Communications. Shaw Communications is trying to branch into wireless with their purchase of Wind Mobile, which they renamed Freedom Mobile.  Freedom Mobile has a very small foot print and customer base. Freedom Mobile does not have customers nation wide.  

Telus is the local exchange carrier and the telephone provider in Alberta and British Columbia, providing services such as television, Internet, and land line services.  

Telus also is in the wireless communications business.  Telus and its subsidiaries provide wireless services all across Canada. Telus has its own cell phone towers in western Canada and use cell phone towers belonging to their competitor Bell Mobility ( a part of Bell Canada Enterprises) in the rest of the country.  This agreement also allows Bell Mobility to use Telus towers out in Alberta and British Columbia.

Right now, Telus Corporation is installing fiber optics in buildings. For example, my building is wired for fiber optics.  The wiring ends just above the inside of my entry door to my apartment.  If I decide to switch to Telus, a technician would be dispatched with the equipment and would just have to wire form the modem to the fiber optic junction just about my apartment entry door.

More and more people are ending their use of landlines and going to only cell phones for their telephone services.

 The basic cell phone plans allow people to call locally wherever they are and not be charged long distance. Instead of searching for a payphone and individual could use their cell phone to make a local call but would be using air time minutes. They calls they would receive outside their local calling area would be classified as incoming long distance and be charged as long distance.

In recent years, cell phone planes have changed. Now cell phones plans often have unlimited local or national calling and text messaging. This alone has made people drop the land line altogether and just have cell phones.

On May 31, 2017, Telus no longer used CDMA has their type of wireless signal. Their wireless was switched to a more update signal that will allow it to expand and offer better wireless services to its customers. So all the phones and other wireless devices that used CDMA would not longer work.  So their customers either upgraded to newer model phones and possibly switched carriers if a better pricing plan was found.

Telus is upgrading their network in Manitoba, which will mean an large increase in capital expenditures.  Telus acquired about 25% of the customers of Manitoba Telecom Services from Bell Canada Enterprises after Bell Canada Enterprises takeover of Manitoba Telecom Services.

Now, we will look at some fundamentals of the stock.  Telus Corporations trades on the Toronto Stock Exchange and New York Stock Exchange as T and TU, respectively.

As I am in Canada, I will be using the Toronto Stock Exchange stock T for my analysis.

Currently Telus is trading at $47.17 as of the close on July 7, 2018.  Telus pays a dividend of $2.10 per share.  The stock is currently yielding 4.45%.  This yield is 45 bps above the stocks own 5 year average and 155 bps above the broader market.  

The EPS for the trailing twelve months is $2.45.  The dividend payout ratio is 85.7%.  This is rather high so this requires a more in depth look over the past years.  By looking at Morningstar for Telus we see the dividend payout ratio was between 50% to 62% from 2008 to 2013 and then increased afterward.  In the final quarter of calendar year 2014, the price of a barrel of crude oil started to fall.  The price of a barrel of crude oil continued to fall over the next 3 years.  Telus has a large customer base in Alberta and British Columbia.  So, as the price of a barrel of crude oil continued to fall, businesses directly involved in the oil and gas sector started doing layoffs and continued with more layoffs from 2014 to 2017.  The crash in oil prices also affected companies servicing the oil and gas sector which trickled down to hotels and restaurants.  This meant Telus has some customers scaled back their wireless and non-services or eliminated them all together.

The 5-year dividend growth rate comes in 10.1% and the 10-year dividend growth rate comes in 9.6%.

Telus has increased the dividend for 14 consecutive years. Their main competitor in Western Canada, Shaw Communications, has not increased their dividend in about 3 years.

With oil prices rebounding over the past several months trading above $70 a barrel, Telus will strongly benefit from people upgrading the wireline or wireless services.

Now, we will look at some fundamentals over the past 10 years.  Although 3rd party information, like Morningstar is quite accurate, it is best to use the annual reports from Telus to guarantee the correct numbers. The fiscal year for Telus ends December 31, which is the same as a normal calendar year.

Telus grew operating revenues from $9.653 billion in 2008 to $13.202 billion in 2017.  This is a compound annual growth rate (CAGR) of 3.54%.

This CAGR is good considering the amount of jobs that were lost over the past 3 years due to the huge collapse in oil prices and the corresponding layoffs as a result.  Telus is targeting revenue growth of 4 to 6 percent for 2018.  Some of increase in revenue is increasing prices on the current residential and business customers.

Next, we look at EPS over the last 10 years.  Quickly looking at the numbers we see the EPS for 2008 is higher than EPS for 2017.  This is a red flag that required some investigation. Looking at number of shares outstanding which drastically different leads to looking at a 10 year chart of Telus.  We see Telus did a 2:1 stock split around 2013. So, to reflect this we dividend the EPS in 2008 by 2.  Therefore, Telus grew EPS from $1.755 in 2008 to $2.46 in 2017.  This is a CAGR of 3.82%.

This a somewhat good.  Telus has reduced their share count approximately by 10% since 2012.

Besides their major customer base in Alberta and British Columbia being affect by the oil price collapse, these markets were drastically affected coming out of the worst recession  of 2008-2009 since the great depression.

I would expect the EPS to grow over the next couple of years as increases to their average revenue for residential and business customers and as more new customers.  With western Canadian having people migrate from others parts of Canada to find better paying jobs, the demand for Telus services should increase.

Telus has spent money on their build out of fiber to the home.  Telus's wireline division surpasses their main competitor Shaw Communications in this space.  As the increase of fiber optics on their networks means Telus is well positioned for the expansion of 5G networks, which likely be very fiber intensive.

The long term-debt to equity ratio comes in around 1.48.  The interest coverage ratio is 4.54.

The higher the interest coverage ratio the better.  As the economy in western Canada is rebounding with price of oil over $70 dollars. With more people moving to Alberta and British Columbia, the need for Telus's services will increase.  So, I am not too concerned and believe Telus is have no issues with regarding to servicing their debt.

The profitability of Telus remains very consistent.  The loss of customers is offset to the average revenue of ongoing customers increasing. With the economy of western Canada improving, the addition of new customers will make sure the profitability remains stable and possible increase.

Telus has an average annual net margin of 11.03% over the last 5 years.  During this time, Telus had 2 years of negative free cash flow in 2015 and 2016. The average revenue per customer gets reduced as people cut back or eliminate services altogether when the job market is bad.  Telus also  had a lot of capital expenditures with upgrading their networks such as more fiber optics.

The average annual Return on Equity over the last 5 years comes in at 17.39%.

Investing in Telus Corporation has served investors well over the past 10 years. Wire line and wireless communications are a part of everyday life. Customers are looking for quicker and reliable Internet at reasonable prices.

We do not want to over pay for a stock. Ultimately, we want to purchase a stock well below what we think the stock is worth.  By doing this, we have a large margin of safety.  The lower you buy a stock, the higher starting yield which means your money is working harder for you right from the start.

Valuation

The stock is currently trading at P/E of 19.3.  This is in-line with the stock's own 5-year average of 18.4 and much greater than that of the broader market of 15.9.  The industry average P/E ratio  is 18.6.

The stock is basically on par in terms of price to book and price to sales when compared to the stock's own 5-year average.

The stock is currently trading at P/CF (Price to cash flow) of 6.9.  This is on-par with the industry average and lower that the stock's own 3-year average of 7.5.  The current P/CF is lower than the broader market of 9.3
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The stock does not look appealing at current price of $47.17.

I will attempt to value the stock using a dividend discount model analysis.  I am going to use a discount rate of 10%. I am going to use a dividend growth rate of 6.5% for the first 5 years and 5.5% growth rate for the next 5 years after.   I am using a dividend growth rate lower than the 5-dividend growth rate as I believe the growth of earnings to be smaller over coming years.  

The Dividend Discount Analysis gives me a fair value of $51.42.

I want to compare this to a 3rd party to see if my analysis is reasonable.

Morningstar currently rates it as a 3 star stock.  This would mean the stock is equally valued.

Morningstar has a fair value of $47.00.

I take the average of these 2 numbers to get a fair value of $49.21.

Conclusion:

The stock could be possibly around 4.3% undervalued.

I would not be a buyer currently as I believe the margin of safety is too low.

Disclosure:  I do not own T.TO shares in any of my accounts

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

Stock Analysis - Bank of Nova Scotia

What is one of the things that Canada is known for?  When it comes to banks, the big 5 banks in Canada are known as some of the best banks in the world.  The big 5 banks are known as Royal Bank of Canada (RY), Canadian Imperial Bank of Commerce (CM), Bank of Montreal (BMO), Toronto-Dominion Bank (TD) and the Bank of Nova Scotia (BNS).  Canadian Bank of Commerce is more commonly known as CIBC.

All 5 of these banks trade on the New York Stock Exchange and Toronto Stock Exchange.

I previously did an analysis on RY and TD.  These 2 banks I have owned in the pass, but do not currently own them.

Nowadays, an individual needs more than one source of income.  The job wages have been stagnant for the most part since the 70s, but adjusted for inflation.  In fact, the generation right behind the baby boomer's generation is believed to have it worse off than their parents.  This is the first time in history that this will occur.  In the early 1990s, the federal government of Canada has increased the amount of student loans that a student could possibly borrow by over $5000.  The government wanted anybody the opportunity to attend University.  The downsides to this is students have crippling student loan debt and the market is saturated with university educated people.

One of the sources of income could come via investing in the stock market.  See, when an investor buys shares of stock in a company, they become part owner of that specific company.  Being a part owner of a company means you can receive a share of the profits via a dividend.  Each company has a board of directors that determine if a dividend is paid or not paid.  The board of directors also determine the amount of dividend and the payment day of the dividend.  As the company grows over time and becomes more profitable, the dividend could be raised.  Collecting dividends is a great source of passive income and requires very little work on your part.

Bank of Nova Scotia (BNS)

Bank of Nova Scotia trades on both the New York Stock Exchange and Toronto Stock Exchange under the ticker symbol BNS.  BNS has paid dividends since 1833.  It has increased the dividend 42 of the last 45 years.  The dividend was not raised or cut in 2009 or 2010.  This was due to the fact that the world just went through the biggest recession since the Great Depression.

The Bank of Nova Scotia provides various financial services in North America, Latin America, the Caribbean and Central America, and the Asia-Pacific. It offers financial advice and solutions, and day-to-day banking products, including debit and credit cards, chequing and saving accounts, investments, mortgages, loans, and related creditor insurance to individuals and small businesses; and commercial banking solutions comprising lending, deposit, cash management, and trade finance solutions to medium and large businesses, including automotive dealers and their customers. The company also provides a suite of investment and wealth management advice, services, products, and solutions to customers, as well as advisors. Its asset management business focuses on developing investment solutions for retail and institutional investors; and wealth management solutions include private customer, online brokerage, full-service brokerage, pension, and institutional customer services. In addition, the company offers corporate lending; trade finance and cash management; investment banking services comprising corporate finance, and mergers and acquisitions; fixed income and equity underwriting, sales, trading, and research services; prime brokerage and stock lending services; foreign exchange sales and trading services; commodity derivatives; precious and base metals sales, trading, financing, and physical services; and collateral management services for corporate, government, and institutional investor clients, as well as international banking services for retail, corporate, and commercial customers. Further, it provides mobile, Internet, and telephone banking services. The company operates a network of 963 branches and approximately 3,600 automated banking machines in Canada; and approximately 1,800 branches internationally, as well as contact and business support centers. The Bank of Nova Scotia was founded in 1832 and is headquartered in Toronto, Canada  (source:  Yahoo Finance)

This analysis is going to be done using the stock on the Toronto Stock Exchange.  Bank of Nova Scotia was trading $77.00 per share as of June 22, 2018 at the close of the trading day.  The current annual dividend is $3.28 per share.  Therefore, the current yield is  4.26%.  This yield is higher than of the broader market (S&P TSX Composite Index) of 3.0% and greater than the stock's own 5 year average of 4.0%.

Bank of Nova Scotia  has paid a dividend since 1833.  That is longer than Canada has been a country!! The dividend have been raised 8 consecutives years.  The dividend was not raised or cut in 2009 and 2010, which was coming during and shortly after the great recession.

The 5-year and 10-year dividend growth rate 6.8% and 5.8%, respectively. The 10-year dividend growth rate includes the 2 years that BNS did not raise or lower the dividend.  The dividend growth beats the average rate of inflation.

The stock looks great so far.  But, we do not want to buy the stock just because the yield is good.  An analysis of the stock with some key fundamentals and then try to value the stock allows an investor to see if the stock is undervalued or overvalued.

Bank of Nova Scotia grew revenues from $11.876 billion in fiscal year 2008 to $27.155 billion in fiscal year 2017.  That is a CAGR of 9.62% over the last 10 years.  Morningstar has 2017 revenue of $ 26.748 billion as they did not include $407 million in net invested income from the bank's investment in other associated corporations.

The CAGR of 9.62% for Bank of Nova Scotia's over the last 10 years is impressive.  With interest rates were kept low ever since the great recession of 2008.  The interest rates by the Federal Reserve and Bank of Canada only started to be raised in the past year.  With so low interest rates, this is enticing to people to borrow money.  When people borrow money, it means more revenues to the bank from the interest collected on loans, mortgages, credit cards and lines of credit.

Bank of Nova Scotia grew earnings per share (EPS) from $3.05 in fiscal year 2008 to $6.49 in fiscal year 2017. That is a CAGR of 8.75% over the last 10 years.

The EPS CAGR of 8.75% is even more impressive as Bank of Nova Scotia was affected the great recession in 2008-2009. With growing earnings, some of those increased earnings are passed on to investors with increasing dividends.

The long-term debt to equity ratio comes in  0.10.  The interest coverage ratio comes in 2.16.

I would of liked to see an higher coverage ratio.

Is the Bank of Nova Scotia profitable?  Let's take a look at couple of fundamentals.

The average Return on Equity over the last 5 years comes in at 15.1%.  The average net margin over the 5 years comes in at 29.1%.

At net margin of 29.1% is great.  Net margin tells me the after everything is accounted for this is the amount of each dollar that is net profit.

Valuation

As of June 22, BNS is trading at P/E ratio that is slightly lower than the stock's own five year overage of 11.9. The current P/E ratio of 11.2 is lower than in industry average and is greatly lower that the broader market, which is the S&P TSX Composite Index
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The stock is currently trading at a price to cash flow (P/CF) of 3.7. This is drastically lower the the stock's own 3 year average of 487.  The current P/CF of 3.7, is lower than the industry's 3-year average of 6.4 and that of the broader market of 9.2.

We do not want to pay any price of a stock.  We now must do valuation exercise to determine a fair value of the stock.  Valuing a stock is not an exact science.  As investors, we want to buy stock much lower than the fair value of a stock which gives us a larger margin of safety.

A dividend discount model will be used.  The dividend discount model analysis is a procedure for valuing a stock's price by discount predicted dividends back to the present day. If the fair value price determined from the dividend discount analysis is higher than the stock's current price, than the stock is considered under valued.

A dividend growth rate of  5% annually for the first 5 years and then at 7% for the following 5 years. and a discount rate of 10%.

The dividend discount analysis gives us a fair value of $107.00.

We looked to look at a independent 3rd party research for fair value to judge if we valued the stock correctly. Ideally, we would like to use more than one 3rd party.

Morningstar rates BNS.TO as a 3-star stock and gives it a fair value of $80.00.

The average of these 2 values gives us a fair value of $93.50

Currently the stock is trading at $77.00 per share.  This indicates that Bank of Nova Scotia shares are possibly 21% undervalued.

A chart that shows the YTD for BNS.TO

Click to Enlarge

Summary:

The Bank of Nova Scotia is one of the best banks in the entire world.  The great part of it is that we can become a part owner of this bank.  As the world's population increases, so will the need for banking services.  The stock is down over 5% year to date.  As the chart shows, there seems to be a line of support around the $76 dollar mark for the calendar year 2018.   The stock could be possibly 21% undervalued.

BNS has been raising its dividend after every second quarter for the past several years. The current yield is very attractive as stock prices have been generally considered overvalued in this bull market.

Disclosure:  Long BNS.TO

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

Stock Analysis - Toronto-Dominion Bank

Individuals get up each day and often "force" themselves to go to jobs.  I say "force" themselves because studies have shown that a vast majority of people hate their jobs.  When at your place of employment, individuals are forced to take breaks and lunch at certain times.  They are forced to show up by a certain time each day.  Some employers have even given workers a hard time if they go to the bathroom when it is not break or lunch time!  You don't think this happens? Well, I personally seen it happen at one of my former jobs.

Most people wonder if there is a better way.  Majority of people decide on keeping the status quo, because it is a lot easier than trying to do something different.

A person can positively change their life with a simple concepts.  These simple concepts are to lower expenses and pay yourself first.  Some people might look at their budget and say there is no way they can find anything to cut.  It is imperative a person has to set themselves up to pay themselves first.  This might be trimming expenses and/or increasing their income.  Their income can be increased through a side hustle or second job.

Wages have been quite stagnant since the 70s.  Wages have gone up mostly only due to inflation.  When you work at a job, every employee of a company sometimes gets a raise of same amount or percentage at the same time.  This type of raise is called a Cost of Living increase.  A real raise to me is when you are called into the manager's office and told you are getting a raise.

With the money you get from paying yourself first, you can save and invest this to make more money.  This will ease your stress and eventually give you more choices in life.  Imagine, leaving the rat race and able to live life on your own terms. 

One of they ways of investing is via stock market instruments.  Some of these market instruments pay income via dividends, distributions, interest or premiums while others don't.  We are best to give the former more of our attention.  When a stock pays a dividend, that is cold hard cash hitting your brokerage account. Similar for instruments that pay distributions or interest.  An investor can receive premiums from options if they are the seller of an option and not the buyer of the option.

Canada has some great assets that an investor can own.  Toronto Stock Exchange is mostly financials and energy stocks. 

Canada has 5 big banks that are really solid companies and are considered to be some of the best banks in the world.  These banks are Toronto Dominion Bank (TD), Bank of Montreal (BMO), Royal Bank of Canada (RY), Bank of Nova Scotia (BNS) and Canadian Imperial Bank of Commerce (CM).  The Canadian Imperial Bank of Commerce is more commonly known as CIBC.  All these 5 banks trade on both the NYSE and Toronto Stock Exchange.

I recently did an analysis on Royal Bank, which you can read about here.

TD BANK

      Toronto Dominion Bank aka TD Bank is known for their office hours.  Their branches are open late Monday - Friday and also reduced hours on the weekends.  Other banks might have some branches open on Saturday, but the numbers are extremely low.

The Toronto-Dominion Bank, together with its subsidiaries, provides various personal and commercial banking products and services in Canada and the United States. It operates through three segments: Canadian Retail, U.S. Retail, and Wholesale Banking. The company offers personal deposits, such as checking, savings, and investment products; financing, investment, cash management, international trade, and day-to-day banking services to small, medium, and large businesses; financing options to customers at point of sale for automotive and recreational vehicle purchases through auto dealer network; credit cards; investing, advice-based, and asset management services to retail and institutional clients; and property and casualty insurance, as well as life and health insurance products. It also provides capital markets, investment banking, and corporate banking products and services, including underwriting and distribution of new debt and equity issues; providing advice on strategic acquisitions and divestitures; and trading, funding, and investment services to companies, governments, and institutions, as well as offers telephone, Internet, and mobile banking services. The company offers its products and services under the TD Canada Trust, TD Bank, and America's Most Convenient Bank brand names. It offers personal and business banking products and services to approximately 15 million customers through a network of 1,128 branches and 3,157 automated teller machines in Canada; and to approximately 8 million retail customers through a network of 1,270 stores. The company was founded in 1855 and is headquartered in Toronto, Canada. (Source: Yahoo Finance)

TD Bank currently pays annual dividend of $2.68 per share.  The current yield is 3.49%.  The dividend payout ratio is currently 47.3% based on the current dividend and the trailing twelve months of $5.65 per share.

The 5-year dividend CAGR comes in at 10.2%.  This is greater than 6.8% CAGR of their Canadian peers.

TD is currently yielding better than the broader market, which is S&P TSX Composite Index.  The current yield is slightly better than the stock's own 5 year average.

Now, I will go into looking at some fundamentals of the stock.

TD revenues grew from $14.669 billion in 2008 to $36.149 billion in 2017.  This is a compound annual growth rate, or CAGR, of 10.54%.  This is a great CAGR for revenues.

TD makes money via a lot of different mediums. The have a lot of branches in the United States besides Canada.  TD bank goes above and beyond for their customers.  Besides their branches being open M-F, most of them are open on both Saturday and Sunday.  During the week, most branches are open to 8pm.  Majority of the TD's competition in both Canada and United States do not open on weekends or late on week nights.

TD earnings per share grew from $4.87 in 2008 to $5.54 in 2018.  This is a CAGR of 1.44%.  When revenues have such a large CAGR compared to this, this means a further investigation is required.  So looking at a 10 year chart of TD.TO, we see a 2:1 stock split on Feb 3 2014.  So, I take a look at Morningstar for TD, and notice the earnings are basically half of what's in the 2008 annual report.
So, therefore factoring in the 2:1 stock split, the revenues grew from $2.44 in 2008 to $5.54 in 2018.  This represents a CAGR of 9.54%.

This is quite what I expected.  The big 5 Canadian Banks are known as some of the best banks in the entire world.

The long-term debt to equity ratio comes in at 0.129.  The interest coverage ratio comes in at 5.02.  An interest coverage ratio of 5.02 looks good.  This ratio is an indication of a company's ability to pay interest on its outstanding debt.  The higher the interest coverage ratio the better.

Now, we look at the profitability of TD.  The average annual net margin over the last 5 years is 25.45%.  Net margin is basically, when everything is account for, this is the amount of profit for each dollar.  The average annual return on equity for the last 5 years is 14.19.

Now, we will look at the valuation by using a dividend discount model. We will use a discount rate of 10% and a dividend growth rate of 7%.  The dividend growth rate of 7% is on the conversative side.  North America did not have a major recession since 2009. The only recession we had was due to low oil prices, which did not  cause havoc across the entire economy.

The Dividend Discount model gives us a fair value of $95.59.

The P/E ratio is in line with the stock's own 5 year average and is lower than that of the broader market.

The price to cashflow is 10.6 is way about the average 3-year P/CF of TD and is greater than that of the broader market.

I do not want to solely rely on the dividend discount analysis fair value of $95.59. So, Morningstar has a fair value of $79.00.

If you have another fair value estimate from a different research, it give an even better estimate.  With the 2 fair values, we take the average which gives us a fair value of $87.30. 

The stock is currently trading at $76.74.  The shares are potentially 14% undervalued.

CONCLUSION

With the stock possibly 14% undervalued and trading at P/E of 13.58 for trailing twelve months.  TD is a solid company and has rewarded shareholders with increasing dividends in the past several years.

The stock has risen the last  while and has shown resistance at around $70 in the past six months.  This stock would be great buy on a dip.

Disclosure: Do not own TD currently.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

Royal Bank Stock Anaylsis

In Canada, we have some of the best financial institutions in the world. These companies are collective known as the big 5 banks. These 5 banks are Bank of Nova Scotia (BNS), Royal Bank of Canada (RY), Toronto Dominion Bank (TD), Canadian Imperial Bank of Commerce (CM), and Bank of Montreal (BMO). These banks trade on the Toronto Stock Exchange and the New York Stock Exchange.

Every time the banks report earnings, I often hear people complain about the banks making so much money. I just filter out this "negative" view by people. The positive is that the banks can be great investments as the increased earnings often mean dividend increases for their shareholders.

In Canada, any bank is not allowed to have a shareholder larger than 10% of the company .A shareholder can be a mutual fund, an individual or a corporation such as a holding company.

Royal Bank of Canada (RY)

Royal Bank of Canada, aka Royal Bank, operates in traditional banking, insurance, wealth management, investor and treasuries services, and capital markets. Royal Bank is truly a global bank and his the largest of the 5 big banks by market capitalization. Royal Bank operates in Canada, the United States, and in 35 other countries serving their 16 million plus clients.

Royal Bank grew total revenue from $21.582 billion in 2008 to $40.669 billion in 2017. That is a compound annual growth rate (CAGR) of 7.29%.

This CAGR of revenues is impressive considering this includes the great recession at the start of this period. Royal Bank did not escape the financial crisis unscathed so this is quite impressive.

With the world's population increasing along with more and more people realizing that they have to take a more proactive approach to their finances, should keep the revenues flowing in. See, the baby boom generation and definitely the generation before that, could go work a job and stay at that job for their entire working years. Fast forward to people starting their work careers in the 1970s and beyond, job security has become a myth. Also in the 1970s, people started becoming responsible for their own retirement instead of receiving a pension from the company they worked for. People now have more jobs during their working lifetime and some have more than one job at a time.

Royal Bank grew earnings per share from $3.38 in fiscal year 2008 to $7.56 in fiscal year 2017. This represents a CAGR of 9.36%.

Over the 10 period from 2008 to 2017, interest rates in Canada and the United States were extremely low. This leads to more and more people borrowing money due to the lower interest rates. The Federal Reserve Bank, aka The Fed, determines the rate of interest that bank charges on its loans and mortgages in the United States. The Fed announces quarterly that they will increase or decrease the rate by a percentage or leave the rate the same. Similarly in Canada, the Bank of Canada does the same. These rates are a starting point, meaning the rates of interest are higher on loans and mortgages. If an individual or company has a fixed rate loan or mortgage, their rate does not change. In Canada, their mortgage interest rate will change when the mortgage is renewed at the end of the 1yr, 3yr or 5yr term.

With positive earnings, an dividend growth investor looks for a share of the profits via dividends.

Royal Bank has increased their dividend for the past 8 years. Prior to this the bank did not raise or lower their dividend during the financial crisis.

The 5 year dividend growth rate comes in at 8.30%. This is well above the rate of inflation.

The current dividend payout ratio is 48.14%. This is near ideal payout ratio of 50%. It means the dividend is easily covered.

The current yield of the stock is 3.75%. This is on par for the stock's own 5 year average and greater than the broader market over the same time. The broader market here is the S&P TSX Composite Index.

The long-term debt ratio of Royal Bank comes in at 0.125. The interest coverage ratio comes in at 5.17.

The profitability of Royal Bank over the last 10 years have been mostly above 20% yearly but dipped below 20% for a few years due to the financial crisis. The latter was expected as the economy was not doing that great. The annual average annual net margin is 26.84% and the average annual return on equity is 18.82%, over the last 5 years

The margin is excellent as expected for a bank. Banks make huge margins due to the ability to take savers money via deposits and turn around and loan that out at a higher interest rate. Another source of income comes from insurance premiums. Unless a major catastrophe occurring like a damaging hurricane, the float can be reinvest to make more income.

Now, let's look at the valuation.

The stock is currently trading at a P/E of 12.8. This is slightly higher the 5 year industry average and the stock's own 5 year average of 12.5.

Investors are currently paying approximately 6 times cash flow, which is roughly equivalent to the 3 year average P/CF of 5.2.

Valuing a stock is not an exact science. The exact intrinsic value of a stock cannot be determined. An investor can use some tools to help them determine a fair value of a stock making assumptions of where they think the company is going in the future.

I am now going to do a dividend discount model analysis for my valuation. I going to assume a 10 year dividend growth rate of 6.5% and going to use a discounted rate of 10%.

The dividend growth rate of 6.5% is reasonable as a recession is likely to occur in the next 1.5 to 3 years, so people will not borrow money easily. The Fed and the Bank of Canada have been slowly raising interest rates over the last year to slow the economy.

The Dividend Discount Analysis results in a fair value of $114.41

I do not want to rely on just this for valuation. Morningstar currently rates it as a 3-star stock and a fair valuation of $107.00

We take the average of these 2 valuations, to get a fair price of $110.71.

The stock is currently trading at $100.27, which means this stock is approximately 10% undervalued.

Summary:

Royal Bank is a solid company that has greatly awarded investors in the the past. The stock is currently yield about 3.6% and the dividend was increased roughly 8% over the last year. Royal Bank has been raising their dividend every 2 quarters in recent years. The stock appears to be roughly 10% undervalued. I will monitor this stock for a future investment.

Disclosure: - Do not own RY.TO currently, but owned it in the past.
                   - Long BMO.TO, CM.TO, BNS.TO

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk

Analysis of WestJet

           

         Is it often said one of the worse types of companies to invest in are the airline stocks.  In fact, Richard Branson once said "The quickest way to become a millionaire is to be a billionaire and start an airline".  The airlines as an investment has garnered a lot of attention recently as in the past year Berkshire Hathaway has invested heavily in airlines in the United States. Berkshire Hathaway is the holding company which is ran by Warren Buffett and Charlie Munger.

        In Canada, currently we have 4 airlines which are Air Transat, Porter Airlines, WestJet Airlines, and the Air Canada.  I am going to talk about WestJet Airlines in this article.



        WestJet Airlines (ticker symbol WJA.TO) was started in 1996 by Clive Beddoe and a team of partners with just 3 planes.  WJA.TO is headquartered in Calgary, Alberta, Canada.  The company has grown tremendously since its inception. Often people who work for airlines belong to a union, but this has not been the case for WestJet as most of their workers own shares in the company.

        When people decide to take a trip, they often go on the websites of airlines or to travel agencies to look for a deal.  This makes it harder for the airlines to be profitable and remain profitable over time. Why would some one choose a specific airline over another one if they can save money?  If the savings is not significant, the traveller will choose the airline in which they find the service better.  WestJet believes just because fares are cheaper does not mean poor quality service.

         Personally, I have travelled on both WestJet Airlines and Air Canada, and the service was the same. My very first time on a plane was with WestJet in 2003.  I flight was from Moncton, New Brunswick to Grande Prairie, Alberta and I had to change planes for the final leg of the trip in Edmonton, Alberta.  The last leg of the trip was the airplane get circling the airport and it was late at night.  The lights on the runaway in Grande Prairie were not working, so we went back to Edmonton and were put up in a hotel.  I basically told them, I absolutely refuse to share a room as I do not know anyone. I was allowed to stay in a room with 2 beds by myself without a hassel.

       When deciding on an investment, we have to do research such as pouring over annual reports doing a quantitative analysis and then doing a qualitative analysis.  Quantitative analysis is pouring over the numbers.  Investors can get information from annual reports or from online sites such as google finance or Morningstar.

         WestJet revenues have grown revenues from 2.151 billion in 2006 to 4.123 billion in 2016.  This represents a compound annual growth rate, CAGR, of  7.50% . 

        This CAGR for revenue of 7.50% for an airline is quite impressive. Over the 10 year period, WestJet has added routes to more destinations and increased frequency of some routes when the time is warranted.   The company has aggressively repurchased shares over this time.  In 2010, WestJet actually issued more shares but have aggressively bought back shares afterwards. Over the 10 year span, the amount of shares outstanding have declined by around 8%.


        WestJet earnings per share have grown from $1.47 in 2007 to $2.45 in 2016.  This represents CAGR of  5.84%. 

        With a bottom-line growth of almost 6 percent for this airline is quite impressive and even more impressive that this includes the great financial recession of 2008-2009 and the fact Alberta is in a recession for the past 3 years due to lower oil prices.
  
        WestJet did not pay a dividend until 2010 and actually the first dividend payment date was January of 2011.  The dividend has grown from $0.20 per share per year to $0.56 per year in 2016.  This represents of CAGR of 18.72% over last 6  years.  A dividend growth rate of 18.72% is impressive for any company and even more impressive for an airline.  The dividend payout ratio for 2016 is 22.4%, so the company has room to grow the dividend in the future.

    Let's turn to the balance sheet.  The long term debt to equity ratio is 0.92. The interest coverage ratio is  9.48.

Currently, WestJet is trading at a P/E ratio of 10.7.  That is well below the broader market. This is also below the stock's own 5 year average of 11.4.  Investors are paying less for WestJet's cash flow than, over average, over the last 3 years.  The current dividend yield of 2.4% for the stock is higher than it's 5 year average of 1.5%.

Valuation

Now we will at the valuation. For a valuation we will use dividend discounted model. I used a dividend growth rate of 12% for the next 5 years then leveling off after that to a 7% growth rate after that. I am using a dividend discount rate of 10%.  With these numbers I have come $24.81

According to Questrade's Market Intelligence, they have Morningstar fair value at $25.00.

If we take a average of these numbers, we get a price of $24.90.

Right now, WestJet is at $22.93 as of Friday's close.  So the company appears to be approximately 9% undervalued.

Conclusion:

As only 2 numbers were used to get an approximation of the average price the stock is worth, I would take this with a grain of salt. The low price of a barrel of crude right now lowers the operating expenses of this company. So for a larger margin of safety, I would not be a buyer at these levels.

Also I do believe WestJet has some headwinds in the future with increase competition and possibility of lower load factors for a couple of years with people tightening their purse strings in fear of recession across North America.

Disclosure:    Currently do not own any shares of WJA.TO in any accounts.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.