BCE – Still a Play?

As I’m sure everyone knows a consortium led by Teachers' Private Capital, Providence Equity Partners and Madison Dearborn Partners have made arrangements to acquire all of outstanding common and preferred shares of BCE. The deal is expected to close in the first quarter of 2008 and shareholders have overwhelmingly approved the $42.75 offered for each common share. Despite this fact (at the time writing) BCE is only trading at $39.40. This represents a discount of $3.35 or approximately 7.8%. Additionally, two dividends will be paid before the buyout for a total which will add another $0.73 per share. Combine the capital appreciation and the dividend income and that represents an upside of $4.08 or 10.3% between now and the second quarter of 2008. In my opinion a potential six month return of 10.3% is certainly very attractive in this environment. There is only one obvious risk to this scenario, the takeover does not happen. In my opinion the risk of this is minimal (but does exist) and I’ll probably be making a purchase of BCE in the near future.

A Couple Stocks with Huge Buyback Programs

I just wanted to point readers to these two high quality companies that have initiated massive share buybacks.

1. Cisco (CSCO) – Cisco just increased the amount of their share buyback plan by $10 billion bringing their total buyback program up to $62 billion. With a market cap of 170 billion this buyback represents approximately 36% of their outstanding shares. In further support of the stock David Dreman, a respected and successful value investor has recently been a buyer.

2. American International Group (AIG) – AIG has been aggressively buying back it’s shares over the last year (69 million shares) and will be adding another $8 billion to it’s buyback plan. Supporters of the stock include famous investors Micheal Price and Bruce Kovner who both have positions in AIG.

In my opinion any company that is undertaking massive share buybacks are at least worth taking a look at, as it indicates that the management of the company believes that the shares are fundamentally undervalued and are willing to put their money where their mouth is.

DRIPs

After my last post about DRIPs I received a few e-mail enquiries regarding different aspects of DRIPs so I thought it would be worthwhile to go over the basics.

What is a DRIP?

DRIP stands for Dividend Reinvestment Plan. There are 3 different types of DRIPs however they all work on the same principle, instead of shareholders receiving dividend payouts in cash they receive their dividend payout in the form of more company shares.

3 basic types of DRIPs

Company Run
This type of DRIP is administered directly through the publicly traded company. Fractional shares are permitted in this type of DRIP meaning that if you receive a quarterly dividend of $1 and the share price is $5 you would receive an additional 1/5 of a share. Additionally, many company run DRIPs also provide shareholders some incentive for staying enrolled ie – 3% bonus to the regular dividend. Company run DRIPs also usually offer a Share Purchase Plan which is a plan that allows investors to buy additional shares with no commission.

Transfer Agent-Run
For the shareholder this type of DRIP is the same as a company run DRIP. Transfer Agents are employed by companies to streamline their DRIP process and reduce the administrative costs associated with running a DRIP. Transfer Agents run DRIPs for a many customers and as a result can run offer the same program to multiple companies using the same resources resulting in lower costs.

Brokerage Run
Many brokers will now allow customers to reinvest their dividends at no cost. This type of DRIP is not a “real DRIP”, it is more of a service that the brokers provide to their customers and is often referred to as a “synthetic DRIP”. One benefit of brokerage run DRIPs is that they will allow you to DRIP many companies that do not even have a formal DRIP program. This allows investors to now DRIP virtually every blue chip company on the Canadian and US exchanges. Although synthetic DRIPs have really expanded the number of drippable companies they do have a few drawbacks. The first of which is brokerage run synthetic DRIPs do not allow for fractional share ownership, only full shares will be purchased and the remainder of the dividend will be deposited as cash into the customers trading account ie-company ABC has a $15 quarterly dividend and a $10 share price, this would result in the customer receiving 1 share of ABC and $5 cash instead of 1.5 shares. The second drawback of brokerage run DRIPs is that share purchase plans are not available. If you want to buy additional shares you have to pay the regular commission price of your broker.

I would just like to point out that if you plan to DRIP in a non-registered account it’s very important that you track the purchase price of each share bought through your DRIP as you’ll need to calculate your adjusted cost base if you ever do eventually sell some/all of your shares.

To DRIP or Not to DRIP

I have recently decided to enroll in the DRIP of many of my holdings. For those of you that have followed this blog for a while you’ll know that this is contrary to the opinion I had in March of 2007. However, before I’m labeled hypocritical (or possibly fickle) let me plead my case and explain the rational behind enrolling some of my positions.

My portfolio is now at the point where I won’t be adding many more new names as I plan on only holding between 20 and 25 securities. I believe that 20 to 25 holding will provide me with adequate diversification as well as allow me to keep informed on the names I own. As I’ll only be adding between 3 and 8 more positions I will be concentrating on increasing the amount invested in each of my holdings so I’ve decided that DRIPs would be the most effective method to do that as it would become burdensome and not very cost efficient to make 17 to 25 small additional purchases each year. I have chosen to exclude both TD and CSH.UN from the DRIP simply because I already own enough of them. The dividends and distributions from those names will be paid in cash which will be used to eventually add new positions. It’s important to note though that although I’ve enrolled in the DRIP I wouldn’t hesitate to add to existing positions that I felt were undervalued.

Here are the positions that I’ve decided to DRIP:
TRP
C
GWO
POW
WAG
L
UNS
JNJ
MMM
PFE
EIT.UN
ATD.B

Bell Aliant (BA.UN)

I recently took the opportunity to sell (commission free) my very small amount of BA.UN. I was able to do this through Bell Aliants “Small Unitholder Selling Program”. Bell has decided to allow unitholders who own less than 100 units to “sell all, but not less than all, of their Units without incurring brokerage charges.” You might be wondering why BA.UN would go out of their way and absorb the cost of this initiative...well the answer is easy, money. Bell is anticipating that this initiative will save them money by reduce the administrative burden and cost associated with having so many unitholders. It takes the same amount of administrative resources to issue distributions, annual report etc...to a unitholder with 5 units as it does to one with 200. Well your next question might be “who would buy only 5 units of BA.UN?” well...the answer is nobody. However, thousands and thousands of BCE shareholders were issued units of BA.UN when it was spun off last year. If I remember correctly you received around 7 shares of BA.UN for every 100 shares of BCE that you owned. This resulted in thousands of people receiving a very small amount of BA.UN.

Here’s why I decided to take advantage this offer:

1. BA.UN is an insignificant portion of my portfolio (less than half a percent)
2. Like thousands of others I acquired my shares when they were spun off of BCE.
3. Although I believe the distribution is stable I invest for the long term and don’t see any growth in the landline business.

If you’re interested in selling your units the offer is open until January 17,2008. The official press release by BA.UN can be found here.

Questrade – Recently Closed My Account

I’ve recently closed my Questrade account for a few reasons. The first and most important one is that my big bank now offers me the same commission rates as Questrade in addition to all the other great features that Questrade lacks. Additionally, I’ve been very unimpressed with their customer service. I’ve only called fours times however, each time I felt very rushed by the representative and on one occasion they would not stay on the phone to verify that I could indeed login again and I was told to call back if it didn’t work. That wouldn’t normally bother me except that it took nearly 30mins to talk to a rep in the first place. Additionally, on their website they claim that it’s 1-2 days for an electronic funds transfer from Questrade to your bank account. However, my experience is that it takes approximately a week. After waiting on the phone for about 30mins I was told that it was 1-2 business days after it’s processed at Questrade but there was no guarantee on the processing time. Personally, I wouldn’t even trade through Questrade if there were absolutely no trading fees. After my multiple dealings with them I don’t trust them and don’t have any confidence in their customer services or technology. That being said Questrade might be an option for individuals that don’t qualify for discounted rates at one of the big banks and don’t mind extremely sub-par customer service.

I would like to note that this is only my opinion and it could be that my experiences are not typical of other Questrade customers. I know that some Questrade representatives read this blog so please feel free to comment.

Dividend Growing Stocks VII – Walmart (WMT)

“Wal-Mart Stores, Inc. is the world's largest retailer. They are engaged in the operation of mass merchandising stores, which serve their customers primarily through the operation of three segments, which are the Wal-Mart Stores segment, the SAM'S Club segment and the International segment.”

-Current PE – 15X
-2008 Estimated PE – 14.3X
-2009 Estimated PE – 12.9
-ROE – 21%
-ROI – 13%
-Current Yield – 1.95%
-5 Year Average Yield – 1%
-Dividends Paid Since 1973
-Current Payout Ratio – 26%
-5 Year Historical Payout Ratio – 21%
-3 year dividend growth rate - 14.63 %
-5 year dividend growth rate – 20.80%
-22% of their revenue is from international operations

Like many other large caps the earnings have been growing while the share price remains relatively stable and over the last 10 years WMT has been seen it’s PE contract from 28X to 15X.

I don’t currently own WMT however it is one I would eventually like to add to my portfolio.

25 Stocks to Avoid

I recently read an article by Jon Markman over at MSN Money Central. In his article he explains his rational for avoiding the following 25 stocks.

To read the entire article please click here.

25 COMPANYS JON MARKMAN SAYS TO AVOID

1. Merrill Lynch (MER, news, msgs)
2. Lehman Bros. (LEH)
3. Bear Stearns (BSC)
4. Bank of America (BAC)
5. Citigroup (C)
6. Washington Mutual (WM)
7. KeyCorp (KEY)
8. Wachovia (WB)
9. Moody's (MCO)
10. McGraw-Hill (MHP)
11. YRC Worldwide (YRCW)
12. JB Hunt Transport Services (JBHT)
13. Con-Way (CNW)
14. Knight Transportation (KNX)
15. Old Dominion Freight Line (ODFL)
16. McClatchy (MNI, news, msgs)
17. The New York Times (NYT)
18. Gannett (GCI)
19. Arctic Cat (ACAT)
20. Bed Bath and Beyond (BBBY)
21. Williams-Sonoma (WSM)
22. La-Z-Boy (LZB)
23. Stanley Furniture (STLY)
24. Bassett Furniture Industries (BSET)
25. News Corp. (NWS)

Of course you should do your own research as it's been my experience that the best buying opportunities are often when everyone else says don't buy (however sometimes they're right)

PFIZER (PFE)

For those of you that track my portfolio and keep me honest during my monthly nest egg updates (thank you)...and...I forgot to mention that I topped up my position in PFE last week bringing it back to approximately 5% of my portfolio.

Citi Group – C

I initiated a half position in C on Monday and plan on holding this name indefinitely.

“Citigroup is organized into four major business groups: Global Consumer; Markets and Banking (M&B); GlobalWealth Management; and Alternative Investments. The Citigroup Global Consumer business includes banking services, credit cards, loans and insurance. The M&B business is in about 100 countries and advises companies, governments, and institutional investors on the best way to realize their strategic objectives. The GlobalWealth Management division at Citigroup is comprised of The Citigroup Private Bank, Smith Barney (private wealth management), and Citigroup Investment Research,and serves both private and institutional clients.”

Here are my reasons for buying:
-As a general rule I’ve found that the best time to buy large multinational blue chips is when everyone else hates them.
-S&P credit rating = AA (second highest rating)
-Moodys credit rating = Aa1 (second highest rating – very little credit risk)
-Currently 45% of their revenue is generated outside of the United States and their current focus is to increase this number to 60%.
-They have the world’s largest credit card operation.
-In my opinion they are extremely well positioned to expand their international operations.

PE – 8.7X
Estimated 2007 PE – 9.7X
Estimated 2008 PE – 7.7X
Current dividend yield – 6%
5 year avg. dividend yield – 2.9%
5 year avg. dividend growth – 24.1%
3 year avg. dividend growth – 9.26%
Payout ratio – 47%
ROE – 17.9
Price/Book – 1.4X

Other Facts:
-S&P recently downgraded them from 5 stars (strong buy ) to 3 stars (hold). However, they have a 12 month $45 price target and rate them a low risk investment. From my purchase price this represents a total one year return of 26% (20% capital gains + 6% dividend). If I was an analyst I would find it hard to rate a company that I believed would return 26% in 12months with limited risk a hold…
-Argus recently reduced their 1 year target price to $55 from $60 but are maintaining a buy rating.

As I mentioned above I’ve initiated a half position in C and am going to take a wait and see approach from here. However, if the stock declines significantly from here I will be doubling down.

(Disclaimer: I’m not your boss or your spouse so do you own research and make your opinions on when to buy or sell. Nothing I say should be bastardized or construed in any way to be advice.)

ZED - Sold & Lesson Learned

I recently sold my position in ZED for about a 30% loss. If you’ve been following this blog for any length of time you’ll know that ZED accounts for only 0.4% of my portfolio so selling at a 30% loss will certainly not affect my portfolio in any meaningful way. However, my brief foray into speculative, cyclical, micro-caps has taught me a couple valuable lessons.

1.I should stick to large companies that I’m able to properly analyze. Before buying ZED I used the same techniques that I use for large caps. However, with small caps the earnings are often much more volatile and the accuracy of earning estimates is often low as there are usually very few analysts following each name.

2.I have been developing and using a value oriented dividend growth based investment strategy for the past 8 years that has been working successfully for me. I should stick with what I know and continue to invest in what I’m comfortable and successful at.

Retirement Nest Egg at the Close of Oct 31, 2007

-down 1% from last month
-up 7.6% in 2007
-CDN 69%
-U.S. 27%
-International 4%

TRP - 4.52%
CSH.UN - 5.08%
GWO - 5.23%
PFE - 3.49%
POW - 4.55%
BA.UN - 0.41%
WAG - 3.52%
L - 3.69%
UNS - 2.88%
GZ - 2.41%
TD - 13.9%
EIT.UN - 2.75%
JNJ - 5.49%
MMM - 3.68%
ATD.B - 3.83%
O'Shaughnessy’s Global - 3.97%
American Growth Fund - 0.96%
CDN Value Fund - 3.74%
Small Cap Growth Fund - 4.4%
Chou Associates Fund - 10.15%
Money Market Fund - 11.37%

No huge changes from last month. I initiated a position in WAG and unloaded ZED for a loss which I’ll talk about more on Monday. The decrease in my portfolio is largely due to the weakness of the US dollar. I’ll also start including the amount of Canadian, American and International exposure that I have for each network update. I’m currently sitting with about 11% of my portfolio in cash and am watching quite a few stocks but am closely watching C,BAC, TOC, IIC, BMO, WMT as well as opportunities to add to my existing positions on weakness.