TransCanada Corp – TRP

"TransCanada is a leader in the responsible development and reliable operation of North American energy infrastructure. Our network of more than 59,000 kilometres (36,500 miles) of pipeline taps into virtually all major gas supply basins in North America. TransCanada is one of the continent’s largest providers of gas storage and related services with approximately 360 billion cubic feet of storage capacity. A growing independent power producer, TransCanada also owns, or has interests in, approximately 7,700 megawatts of power generation."

Investors in TranCanada Corp. all received a pay raise yesterday (albeit a small one). TRP raised their quarterly dividend by 6% and reported fourth quarter net income of $0.70/share (up 27% from last year). While fourth quarter earnings were up 8% from 2006. Year over year net income was 5% to $2.31/share, while earning were up 10% to $2.09/share.

In my opinion TRP is a solid Canadian company that should part of the foundation of any diversified dividend growth portfolio. Here’s why I continue to hold TRP:

-Has paid a dividend for the last 42 years
-Long history of increasing dividends (with the exception of 1999 where they cut it from $1.12 to $0.8)
-The purpose of the dividend cut was "to strengthen its financial flexibility and capture North American energy growth opportunities."
-Current P/E – 17.7X
-2008 Estimated PE – 17X
-2009 Estimated PE – 16X
-ROE – 14.1%
-Current Yield – 3.8%
-5 Year Average Yield – 3.5%
-Current Payout Ratio – 63%
-5 Year Historical Payout Ratio – 54%
-3 year dividend growth rate – 11.66%
-5 year dividend growth rate – 6.73%
-Good growth profile with the proposed 3,456-kilometre (2,148-mile) Keystone Pipeline project.

(Disclaimer: I’m am not a financial advisor. Please do your 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.)

Dividend Reinvestment Plans - DRIPs

If you are unfamiliar with Dividend Reinvestment Plans please read the following posts from November, 2007 “DRIPS” and “To DRIP or not to DRIP”.

I have recently chosen to enroll my entire account in a synthetic DRIP program. In a previous post I had mentioned that I chosen to DRIP some of my holdings however all holdings are now DRIPed and all new holdings will automatically be enrolled in a synthetic DRIP program without me having to notify a broker.

Setting up an automatic DRIPing program is extremely easy and can be done with one five minute phone call to your discount broker. You simply call your discount broker, and tell them which account you’d like to enroll.

I’ve chosen to DRIP my entire account to take advantage of recent declines in the market. Additionally, my portfolio is now at the point where I won’t be adding a lot of new names and as a result won’t require the cash flow from my current holdings to finance the purchase of new names. Additionally, with approximately 20 holdings in my portfolio it’s become inefficient to add small amounts to so many names.

Before enrolling in a DRIP program it’s vital that you understand that all purchases made through a DRIP must be accurately tracked (unless you’re DRIPing within an RRSP) as you’ll eventually be responsible to the taxman for all purchases made. If/when you eventually decide to sell (or the company is bought out) you have to be able to accurately calculate your adjusted cost base in order to calculate your capital gains.

The Facts about Wal-Mart

I discovered a great article by Charles Fishman, “The Wal-Mart You Don’t Know”while doing my daily read over at Million Dollar Journey. The article explores Wal-Mart from the suppliers’ point of view and illustrates the enormous power that Wal-Mart can exert not only on their suppliers but also on the entire global economy. The author argues that:

“The giant retailer's low prices often come with a high cost. Wal-Mart's relentless pressure can crush the companies it does business with and force them to send jobs overseas. Are we shopping our way straight to the unemployment line?”

Here are some aspects of the article that I found interesting.

-“ Wal-Mart is not just the world's largest retailer. It's the world's largest company--bigger than ExxonMobil, General Motors, and General Electric.”

-Last year they sold $255.5 billion worth of goods.

-In 3 months they sells more than number-two retailer Home Depot sells in a year.

-They do “more business than Target, Sears, Kmart, J.C. Penney, Safeway, and Kroger combined.”

-They have approximately 21,000 supplies.

-Wal-Mart is single handedly responsible for about 10% of all Chinese exports to the United States.

-Partly responsible for the low rate of inflation in the U.S.

- “12% of the economy's productivity gains in the second half of the 1990s could be traced to Wal-Mart alone.”

-Last year, 7.5 cents of every dollar spent in any store in the United States (other than auto-parts stores) went to the retailer.

This article is definitely worth a read and can be viewed by following this link.

Johnson & Johnson (JNJ) - A Sliver of Good News

Well it’s been a pretty dismal couple of weeks for the markets with many companies (particularly financials) releasing earning reports that surprised even the bearish of analysts. However, despite all the doom and gloom there are a few positive results out there.

Yesterday Johnson & Johnson announced record sales of $16 billion (a 16.6% increase from Q4 2006) and a 10.8% increase in fourth quarter EPS. Excluding special items their fourth quarter EPS was $0.88 beating the analyst consensus of $0.86 a share. Although these aren’t blockbuster results they are exactly what I’d expect from JNJ, consistent and steady. Even more importantly I think it’s important to look at where the growth is coming from:

CONSUMER SEGMENT
U.S Sales: Up 37.6% to $1.63 billion from $1.18 billion
International Sales: Up 57.9% to $2.18 billion from $1.38 billion
Total Growth: Up 48.5%

(The huge increase in this sector is partially a result of the acquisition of Pfizer’s consumer division.)

PHARMACEUTICAL SEGEMENT
U.S Sales: Up 2% from last year's $3.87 billion
International Sales: Up 17.8% to $2.45 billion from $2.08 billion a year ago
Total Growth: Up 7.5%

MEDICAL DEVICES & DIAGNOSTICS SEGMENT
U.S Sales: 6.8% to $2.66 billion from $2.49 billion
International Sales: Up 15.4% to $3.09 billion from $2.68 billion
Total Growth: Up 11.3%

The results are certainly indicative of where the growth is for JNJ (international) and also one of the reasons I originally initiated a position in JNJ.

The company also gave guidance for 2008 and indicated that their EPS would be in the range of $4.39 - $4.44. This represents an increase of 5.8% to 7% not bad considering it looks like we're heading into a recession.

(Disclaimer: I currently have a position in JNJ but am not a financial advisor. Please do your 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)

Warren Buffet’s Holdings as of September 30, 2007

As Warren Buffet is arguably the worlds most successful investor I think it’s worth the time to periodically check his holdings to see where he’s deployed his capital. The below chart lists his holdings as of September 30, 2007. Although, this information is around 4 months old Warren Buffet is a very long term investor and has been quoted as saying “Our favourite holding period is forever” as such I don’t think the composition of his portfolio would have changed in any significant way since September.

Canadian Bank Yields & Payout Ratios

I came across these numbers yesterday in an article entitled “Could U.S. bank dividend contagion spread north?” by Rob Carrick from the Globe and Mail. Rob Carrick calculated the below figures based on the stock prices at the close of January 16th, 2008 and on the estimated earnings per share for 2008. Please click here to view Rob Carricks’ entire article.

Bank of Montreal (BMO)
Yield: 5.09%
Payout Ratio: 46.7%

National Bank of Canada (NA)
Yield: 5.06%
Payout Ratio: 39.3%

Cdn. Imperial Bank of Commerce (CM)
Yield: 5.03%
Payout Ratio: 38.7%

Royal Bank of Canada (RY)
Yield: 4.11%
Payout Ratio: 41.7%

Bank of Nova Scotia (BNS)
Yield: 4.00%
Payout Ratio: 40.0%

Toronto-Dominion Bank (TD)
Yield: 3.43%
Payout Ratio: 36.2%

Brookfield Asset Management (BAM.A)

“Brookfield is a global asset manager focused on property, power and other infrastructure assets with approximately US$90 billion of assets under management. We own and manage one of the largest portfolios of both premier office properties and hydroelectric power generation facilities as well as transmission and timberland operations, located in North and South America and Europe.”

In my opinion BAM.A is the perfect candidate for a long term hold as they are in relatively recession resistant, renewable areas that will continue to grow in the future. Their five primary areas interest are:

1. Property - $35 billion of property assets under management in North and South America, Europe and Austraila

2. Power – invested primarily in high quality, long life hydroelectric power facilities located primarily in north east North America as well as Brazil.

3. Timber - have 2.5 million acres of high quality timberlands under management

4. Infrastructure – over 11,000 kilometers in Northern Ontario and South America. Over $3 billion transmission assets under management.

5. Equities & Fixed Income - significant experience value investing in real estate and a broad range of other industries and geographic regions.

-Current PE – 17.9X
-ROE – 22.91%
-Current Yield – 1.6%
-5 Year Average Yield – 1.9%
-Current Payout Ratio – 28%
-5 Year Historical Payout Ratio – 78%
-3 year dividend growth rate – 18.95%
-5 year dividend growth rate – 11.6%

I’ve been watching this one for a while and it has finally started to come down to reasonable levels (I’m sure partly because of their 50% ownership of BPO). However, I believe that BPO is also starting to look attractive at these levels as well. I don’t currently have a position in BAM.A but it is one that I will continue to watch closely.

(Disclaimer: I’m am not a financial advisor. Please do your 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)

40 Year Mortgages are now in Canada

Well it’s official 40 year mortgages have been in Canada for about 6 months now. On June 20, 2006 Wells Fargo became “the first lender to offer nationwide to Canadian consumers a mortgage with a 40-year amortization". Since then virtually all of the major mortgage players in Canada are offering similar products. The timing seems impeccable given what’s currently happening in the United States mortgage market. Now everyone, even those who probably shouldn’t have a mortgage, can afford to buy a house in Canada. Although I disagree with 40 year mortgages in principle and under no circumstances would consider one for myself I’m not complaining as I currently have a significant amount of my portfolio in Canadian financial companies and any chance they get to increase earnings is fine by me. The disadvantages of 40 year mortgages are obvious (from the borrowers point of view) but just to drive the point home here is a little example of how much a 40 year mortgage would actually cost you.

Amount Borrowed: $300,000
Mortgage Rate: 6%
Amortization Period: 40 Years
Payment Frequency: Monthly

Given the above scenario you would have paid a whopping $784,926.71 over the 40 years with $484,926.41 of that being interest. Now if you were to take the same mortgage and amortize it over 25 years you would only be paying $575, 828.93 with only $275,828.3 of that being interest. By amortizing over 25 years you would only pay an extra $280 monthly on your mortgage but save over $209,000 in additional interest payments.

If you want a little more information on the subject Ellen Roseman from the Toronto Star wrote a great article that you can view by clicking here.

CIBC A History of Screw Ups and a Time to Buy?

CIBC certainly seems to be unique among the big 5 Canadian banks. They have made themselves unique by the fact that they can’t seem to be able to avoid screwing up. They seem to have an innate ability to identify and then participate in risky market shenanigans. Let’s briefly take a look at some of the more recent debacles.

Dec 22, 2003
Canadian Imperial Bank of Commerce agreed to pay 80 million dollars to settle US charges that it aided Enron's financial fraud and pledged to assist a federal criminal investigation

August 2005
They took a $2.5 billion after-tax charge against its profit in the third quarter ended July 31, 2007 to cover the payment and other Enron issues.

After taking this huge write down in 2005 CIBC was adamant about avoiding “risky investments”. Just 2 short years later they announced that they would incur approximately $1 billion in charges due to their exposure to the U.S sub-prime mortgage market. However, many analysts now believe that CIBC will need to write down a further $2 billion. As a potential investor a $3 billion dollar write down while at the same time having a mandate of “avoiding risky investments” is unacceptable. The market seems to agree with me and the stock has been hammered down to about $67/share from it’s 52 week high of $107. In response to their latest disaster there has been some major changes in senior management at CIBC including a new Risk Officer, Chief Financial Officer and Chief Executive Officer.

This stock has been punished and deserved it. However, I think there is some real hidden value here and in my next post I’ll talk a little bit about why I’ll most likely be initiating a position in CM in the near future.

About Warren Buffet

I don’t think there is anyone out there who doesn’t know who Warren Buffet is however, just in case I’m wrong I’ll give you a quick bio with a few of the lesser known facts.

- Born in 1930, Nebraska, Omaha
- Arguably the world’s most successful investor.
- 2nd richest man on the planet with an estimated net worth of over $52 billion.
- At 11 he bought his first stock. He purchases 6 shares of Cities Service preferred stock [3 shares for himself, 3 for his sister, Doris]
- At 13 he filed his first income tax return, deducting his bicycle as a work expense for $35.
- Received a Bachelor of Arts/Science from the University of Nebraska Lincoln, Science
- Was rejected from Harvard grad school for “being too young”
- Received a Masters of Science from Columbia where he studied under his mentor and investing legend Benjamin Graham.
- Bought control of textile firm Berkshire Hathaway 1965. Today Berkshire Hathaway is a huge holding company that owns controlling interests in a multitude of stocks.
- If you had invested $10,000 (U.S.) in Berkshire Hathaway when Warren Buffet took control in 1965 you would have more than $50-million today. Had you invested the same amount in the S&P 500 index during the same period you would have just under $500,000.

Click here if you would like more complete bio.

Dividend Growing Stocks VIII – Manulife Financial (MFC)

“Manulife Financial is a leading Canadian-based financial services group serving millions of customers in 19 countries and territories worldwide. Operating as Manulife Financial in Canada and Asia, and primarily through John Hancock in the United States, the Company offers clients a diverse range of financial protection products and wealth management services through its extensive network of employees, agents and distribution partners. Funds under management by Manulife Financial and its subsidiaries were Cdn$399.0 billion (US$400.5 billion) as at September 30, 2007.”

-Current PE – 14.2X
-2008 Estimated PE – 12.5X
-2009 Estimated PE – 11.11X
-ROE – 16.32%
-Current Yield – 2.5%
-5 Year Average Yield – 1.7%
-Current Payout Ratio – 30%
-5 Year Historical Payout Ratio – 24%
-3 year dividend growth rate – 28.17 %
-5 year dividend growth rate – 30.10%
-Well diversified internationally with a strong presence in the emerging asian markets.
-“Manulife Financial is one of two publicly traded life insurance companies in North America whose rated life insurance subsidiaries hold Standard & Poor's Rating Services' highest "AAA" rating and Moody's Investor Services' second highest "Aa1" rating, both representing financial strength.”

Disclosure: I don’t currently own MFC however, it is certainly one that I would like to eventually add to my portfolio. I will be keeping a close eye on this name over the next few months.

Bottom Line vs. Top Line

I’ve received a few e-mails from readers asking the difference between top line and bottom line growth. I thought it would be appropriate to post my answer here as these are very common terms that most companies use in both their reports and in conference calls and interviews. For example, you’ll often hear statements such as “although bottom line growth slowed a little more than expected this quarter we were very pleased with the top line growth and are on target to blah blah blah...”

Simply put, the bottom line is a company’s income after all expenses have been deducted. If you take a look at an income statement the reasoning behind the term “bottom line” will become obvious as net income is literally the bottom number on the statement. Other terms for the bottom line are “net income” or “net profit”.

Top line growth refers to the “gross sales” or “gross revenue” of a company. For example, if a company increased their sales or revenue by 20% then they are said to have experienced top line growth. You probably would have guessed this by now but, the revenue section of an income state is at the top of the document and thus the term “top line growth”.

Hope this helps.

Portfolio Update as of Jan 1, 2008

-up 0.7% from last month
-up 8.7% in 2007
-CDN 66%
-U.S. 31%
-International 4%

TRP - 4.46%
CSH.UN - 4.67%
GWO - 4.91%
PFE - 4.83%
POW - 4.41%
WAG - 3.44%
L - 2.80%
UNS - 2.87%
GZ - 2.67%
TD - 13.25%
EIT.UN - 2.46%
JNJ - 5.73%
MMM - 3.67%
C - 2.65%
ATD.B - 3.32%
BCE - 5.81%
O'Shaughnessy’s Global Fund - 3.65%
American Growth Fund - 0.90%
CDN Value Fund - 3.39%
Small Cap Growth Fund - 4.19%
Chou Associates Fund - 9.52%
Money Market Fund - 6.39%

The only change in my portfolio over the last month was that my very small position in BA.UN was sold through the “Small Unitholder Selling Program”. My strategy of buying out of favour, high quality, dividend growth companies will remain the same in 2008 as it was in 2007.. I don’t anticipate initiating many new positions in 2008 however, I will be keeping a close eye on U.S financials and suspect that I’ll be making some acquisitions in this sector later in the year.