Account Activity

      In recent weeks, the market has been going up and down a lot it seems with any major news story.  On top of that, Canada is in the middle of a federal election where there is no front runner and the prospects of a minority government, liberal or conservative, are high.
      
Account Activity

    I had no active trades in my trading account the past several weeks.  I also had around $1400 in my margin account.  So I decided to make another trade in the margin account by using the positive margin account balance, "borrowing" the balance of the trading account and using some margin to make a purchase.

    I purchased 200 shares of TFI International (TFII.TO) on the Toronto Stock Exchange.  TFI International is a large trucking company that operates under various subsidiaries in Canada, United States and Mexico.  

    I purchased 200 shares at $39.20 for a total cost of $7844.95 including commissions.  The reason that I used some margin to purchase a board lot of shares is to sell covered calls against the position.  

   On Sept 26, I sold 2 covered call contracts with October 18, 2019, expiration date and a strike price of $40.00.  I collected a net premium of $88.05 on this transaction for being the seller of the option.

   I purchased the 200 shares of TFI International prior to the ex-dividend date.  TFI International currently pays a quarterly dividend of $0.24 per share, or $0.96 per share annually.  So I will receive the quarterly dividend payment of $48.00 in the middle of October.  

   My plan is to use the premium collected, dividends and capital gain to help pay down debt. I will hold back around $5.00 to more than cover the margin interest per month.  Therefore, the dividend is not going to show up in my dividend tabs for the month.   If option expires than I will sell another covered call or place a limit order to sell at a higher price.

Disclosure: Long 50 shares of TFII.TO inside TFSA

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

Why Diversification Is Important?

         When most of us started to think about investing, we are told to diversify our assets.  New investors tend to gravitate towards mutual funds as they provide instant diversification. A mutual fund is where money from investors is invested by professional money managers according to the mandate, also know as the objective, of the fund.  If you are like me, you try to buy individual stocks.

         Over the past year or so, a company is Canada has been under hot water. This particular company is called Home Capital Group Inc  (ticker symbol HCG ) and trades on the Toronto Stock Exchange. 

      

Home Capital Group Inc. is a holding Company and operates through its principal subsidiary, Home Trust Company. Home Trust is a federally regulated trust company offering deposit, mortgage lending, retail credit and credit card issuing services. Licensed to conduct business across Canada, Home Trust has offices in Ontario, Alberta, British Columbia, Québec, Nova Scotia and Manitoba. (Source : Home Capital Website ) 

    HCG has had a lot of negative events over the last year or so. Some of these are as follows:

• On Feb 10, HCG discloses that the Ontario Securities Commission sent an enforcement notice after the market closed on Feb 9, 2017
• On March 14, HCG discloses that legal and regulatory matters in regards to the issue immediately above.
• On March 27, HCG announces the departure of their CEO which occurred over night. This CEO was in the position less than a year.
• On April 19, 2017 HCG releases a statement on the Ontario Securities Commission intention to pursue an administrative proceeding against the company and 3 individuals. These 3 individuals are Martin K Reid, former President and CEO, Gerald M. Soloway, former President and CEO and currently a director of the Company, and Robert Morton, the Company's Chief Financial Officer.
• On April 24, HCG annouces the pending retirement of Gerald M. Soloway and appoints Robert Blowes as interim CFO.

Click to Enlarge

        The above chart is a one year chart.  The stock as dropped over 50% in value over the past 365 days.  The dividend was increased over this time span.

Click to Enlarge

      

     HCG is down 44.16% since the start of the calendar year.  I recently sold puts at $25 strike price and bought to close for loss of $353.90, which you can read about here.  On April 24, you can see the stock dropped 9.09% during which they announced the pending retirement of the current director Gerald M. Soloway.  

     This stock over the last year  shows why stock market investors need to diversify.  An investor would be out a lot of money if they bought the stock 6 weeks ago or before 6 weeks.  I do believe HCG has to do more to lessen the fears of investors and to right the ship once again. 

    Diversification helps you sleep at night.  I am sure a lot of investors are worried about where the stock price is heading.  Canadian investors can diversify in Canada, although the degree of diversification does not compare to the US Market. 

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.

Company Summary : WestJet

    On February 29th, 1996 a new airline in Canada took flight.  This new airline was called WestJet  based out of Calgary, Alberta.  This company started small with only 3 planes, 5 destinations, and 220 employees. Most employees of WestJet (over 85%) own shares in WestJet though their employee stock purchase plan.  As a result, WestJet refers to their employees as WestJetters because they are actual partial owners of WestJet.

     WestJet is in it's 21th year of business.  It had grown tremendous over that time.

Some of the highlights of 2016 are7 as follows:

• 12th consecutive year of profitability
• The 4th Quarter of 2016 was the 47th consecutive profitable quarter.
• Returned appromiately  $193.2 million  dollars to shareholders via dividends and buybacks.

      Since 2010, WestJet has returned approximately $942.5 million to shareholders via dividends and stock buybacks.  WestJet share price as of March 24 is $22.63 per share.  The current annual dividend rate is $0.56 per share per year. Therefore, the current yield is 2.47%.  The dividend payout ratio based on the previous 4 quarters of net income is 22.76%. With a dividend payout ratio low, I believe WestJet will continue to pay dividends and buyback shares in the foreseeable future.

    WestJet has grown its revenue from $3.427 billion in 2012 to $4.123 billion in 2016.  This represents a compound annual growth rate (CAGR) of approximately 4.73% over the last 5 years.  Due to the nature of the airline industry and its related costs, is a good number.  

    WestJet available seat miles  as grown over the last 5 years.  Available seat miles (ASM) is a measure of an airline's passenger carrying capacity.  ASM is equal to the number of seats available multiplied by the miles flown. WestJet's ASM has grown from  approximately from 22.064 billion in 2012 to 29.298 billion in 2016.  This represents a CAGR of 7.35% over the last 5 years.  WestJet has added more planes to its fleet and added more destinations to its operations as it continues to grow.

    WestJet has increased its diluted earning per share from $1.78 per share in 2012 to $2.45 per share in 2016.  This represents a CAGR of 8.31%.  A CAGR for EPS of 8.31% over the past 5 years is quite impressive, when you take into account the recession in its home province of Alberta.  WestJet operates in 4 cities in Alberta which are Grande Prairie, Fort McMurray, Edmonton, and Calgary.  Grande Prairie and Fort McMurray are smaller cities, so flights to and from these cities involved flying from bigger airport. 

  In 2016, WestJet had an operating margin of 10.7%. Their revenue increase 2.3% Y/Y.  This increase was operating margin was driven by increase an increase in ancillary revenue which was partially offset by lower guest revenue resulting from downward pressure on their fares due to the economic downturn of the energy sector (Source:  WestJet 2016 Annual Report).   

Conclusion:

    WestJet has remain profit despite their home based province of Alberta being in the worse recession since the company was founded in 1996. Alberta has been in a recession for over 2 years.  My previous employer had approximately 98% of their business dealing with the energy industry.  As the demand was not there, my company had several round of layoffs and eventually closed its doors in late 2016.  Due to oil currently trading less than $50 per barrel, I foresee Alberta remaining in a recession in 2017.  The government of Alberta recently tabled its budget in the past 2 weeks, and they predict the price of oil to remain below $60 into 2021. 

   WestJet has expanded its destinations both nationally and internationally over the past years.  This means the company can reduce their flights in markets were the demand is not strong.  People from all over Canada work in the oil patch in Alberta, in which most of them working in Fort McMurray.  Although Alberta is in a recession, the rest of Canada is not. Therefore WestJet still has a lot of potential passengers to use their services.

   On October 28,  I purchased 140 shares of Westjet Airlines (WJA.TO) at $22.39 per share for a total cost of $3140.04 including commissions. 

6 month chart

            

   

     WestJet had traded between $20 and $24 over the last 6 months.  I am possibly thinking taking profits if the stock rises a bit here and buying back in a lower price than $22.39.

     I have never worked for WestJet, but I am happy to be a shareholder. I flew across Canada on WestJet and the their customer service was excellent.

Disclosure:  Long WJA.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.

How Oil Prices Affect The Economy

                                                        

     We all use petroleum products in our daily lives in one form or another. This consists of things such as products made out of plastic, gasoline for your vehicle, heating oil or natural gas to heat your place of residence,

     Crude oil prices of been mentioned more frequently as of late due to the fall in oil prices latterly.
As indicated in the following 1 hour chart, the price of a barrel of crude oil for WTI crude oil has falling a lot.

Click to expand

    This chart shows the price of oil fell approximately $7.00 per barrel over a 15 day period.  The price fell to a low of around $47.10 per barrel before heading upwards to around $48.50 at the time of the screen capture.  This massive decrease is due to oversupply in the market as the United States has increased their production, although OPEC has cut production.

    A commercial vessel carrying oil has been hijacked in the past views days off the coast of Somalia.  This has happen in the past couple of days, so this event is likely what has caused the upward movement for the price per barrel after hitting a low of approximately $47.10.

     In the past week, Royal Dutch Shell sold out of their oil sands assets in northern Alberta.  The buyer of these assets was Canadian Natural Resources Ltd. The value of this transaction is approximately 8.5 billion dollars.

      As of the previous week, the utilization of drilling rigs is down across the 4 provinces stretching from BC to Manitoba.  Most of the drillings rights are located in Alberta, which is currently at 35% utilization.  The Canadian Association of Oilfield Drilling Contractors states that each operating rig corresponds to approximately 135 jobs in the communities. With the price of oil, companies are very hesitant to hire extra staff or even to operate at all.  This has effected the lives of lots of people in western Canada.  Also, the people from across the country are not able to fly in or out of the Prairies, which means less money circulating in the eastern provinces. 

     The optimism in the western Canadian oil patch has subsided. This will keep investors and potential oil patch workers returning to the industry.  The oil patch affects the western Canadian provinces, with the greatest impact felt in Alberta.  When the price of oil remains low, the amount of oil patch workers is reduced. This results in hotels, restaurants, and tourist destinations to cut back on staff.

    I had investments in the oil industry.  Enerplus, is an oil and gas producer with assets in the United States and Canada.  Enerplus (Ticker Symbol ERF) trades on both the Toronto Stock Exchange and NYSE.  Enbridge, is an energy supplier that has assets in both Canada and United States. Enbridge (ENB) transports energy through their pipelines, solar panels, wind turbines etc.  ENB trades on both sides of the border.

EDIT:  A major component of the oilfield is oilfield service companies.  These companies service the entire oilfield in different types of services and processes required when drilling oil. A previous company I worked for has closed down during the last few months after layoffs over a 18 month span. The company made parts for the oilfield.  I am unable to name the company that I work for, due to privacy issues.

Disclosure:  I do not own shares in Royal Dutch Shell or Canadian Natural Resources Ltd.  I   have never owned shares in either of these companies.

Disclosure: Long  ERF and ENB

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.

Enerplus Earnings Release

    

 Enerplus was established in 1986. This company is an energy producer in North American that currently has a portfolio of high quality oil and natural gas assets. The company tries to develop their properties which they hope, in turn, create values the their many investors.
      Enerplus is headquartered in Calgary, Alberta and trades on both the Toronto stock Exchange and the New York Stock Exchange.  The company used to be a Canadian Royal Land Trust, but changed their corporate structure to a corporation.  In 2006 on Halloween, Canadian Finance minister Jim Flaherty changed the tax rules for the income  trust model. The rules would change in 5 years where income trusts would be taxed more after 2011. The income trust did not have to pay taxes by paying out 90% of their earnings to shareholders, who paid the taxes at the individual level. So Enerplus, along with most income trusts, switched to a corporation setup.
       When I started my investment in Enerplus, it was paying $2.16 annual dividend. The yield on this high. The price of Natural Gas has fallen a lot shortly after I owned the stock. As Enerplus is a producer, this greatly affected their bottom line.  The company was losing as Natural Gas fell in value. On April 19, 2012 the price of Natural Gas closed at $1.93 on the NYMEX, which is the New York Mercantile  Exchange. As the company was not as profitable, Enerplus felt it was in there best interest to cut the dividend by 50% to $1.08 per year.

Now to the Earnings Release

Some Operational Highlights

• Daily production averaged near 104000 BOE, which was on par with their previous quarter.
•  Averaged increase of 700 barrels per day over the second quarter
• Natural gas production was roughly the same despite low natural gas prices and maintenance on pipeline in the Marcellus region
• Looking for full year production to come in around 103000 BOE per day.

Financial Highlights

•   Funds flow quarter over quarter at $213 million or $1.04
• Dividends paid out represented 26% of funds flow during the quarter.
• Average realized price on crude oil sales was $86.49 per barrel in Canadian dollars, which is down 9% from the second quarter.
• Average selling price for natural gas was $3.22 per Mfg in Canadian dollars, which represent a 20% reduction quarter over quarter.

      Enerplus has various hedges in place to protect themselves in the near future against possible declines in the price of natural gas or crude oil. These hedges and the positive earnings report, pushed the stock higher on Friday by 10.13 %, or $1.54 a share to close at $16.74 per share. 
       At the current price, I will not be averaging down my shares.  I would consider averaging down my shares if the price of Enerplus falls near or below $15.00 a share. I currently have the DRIP turned on, but missed it last month. So this month I will start to averaging down via DRIP when Enerplus pays their monthly dividend.

Note: BOE stands for Barrel of Oil Equivalent

Disclosure: Long ERF (Toronto Stock Exchange)

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