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Another Dividend Champion Attracts a Takeover

By Chad Fraser on August 26, 2016

At Canadian Edge, we’re dividend investors above all—on the lookout for stocks with growing payouts we can reinvest, driving returns higher over time.

The key phrase here is “over time.” Because for compounding to work its magic, we need stocks we can hold for the long haul. So we’re not explicitly seeking quick, one-time gains … but we’re happy to lock them in when we can.

In the past three months, we’ve grabbed two such gains, as acquirers offered up juicy premiums for two members of Canadian Edge’s Dividend Champions Portfolio.

What’s driving the deals? We’ve had some good luck, to be sure, but both buys had qualities that, in hindsight, were tempting bait for deep-pocketed foreign buyers.

More on that in a moment. First, here’s a look at the latest acquisition.

Whistler-Blackcomb Grabs Some Air

If you watched the 2010 Winter Olympics, you saw a lot of the Whistler-Blackcomb resort, north of Vancouver. It’s North America’s most visited ski area, drawing more than 2 million visitors a year.

Not as well known is that the resort is publicly traded, under the Whistler-Blackcomb Holdings (TSX: WB, OTC: WSBHF) moniker.

That’s about to change: on Aug. 8, WB accepted a C$1.4 billion offer from Vail Resorts (NYSE: MTN). If the deal goes through later this year, as expected, Whistler investors will get cash and Vail shares worth around C$36 per Whistler share.

But it’s not a slam-dunk. WB shareholders, Canadian competition regulators and the British Columbia Supreme Court all need to sign off. Whistler is also in delicate talks with local First Nations about its Renaissance plan, a $345 million investment to add attractions that make the business less reliant on a snowy ski season.

Saying these factors make the deal “likely but not completely certain to succeed,” Canadian Edge chief strategist Deon Vernooy recommended selling the stock on August 8, when it was trading around C$36.63. If you’d bought on his first recommendation 15 months earlier, in May 2015, you would have locked in a 102% total return, in Canadian dollars.

InnVest Checks Out

Vernooy’s Whistler call followed a similar recommendation on May 20, this time on InnVest REIT (TSX: INN-U, OTC: IVRVF), a Canadian hotel operator that, 10 days earlier, had signed a C$2.1 billion takeover deal (or C$7.25 per unit in cash) from Hong Kong-based Bluesky Hotels and Resorts.

That prompted Vernooy to issue a sell call, locking in a 36% total return from his first recommendation nine months earlier.

So can we expect this happy run to continue? There’s reason to believe more deals could be in the offing north of the border.

That’s particularly true of stocks that have the qualities we look for, which usually rank high on acquirers’ lists, too. They include low relative valuations, healthy balance sheets and high-quality operations generating rising cash flow. We also put a lot of weight on the quality of the management team—a factor many investors overlook.

InnVest, for example, was trading at just 10.6 times adjusted funds from operations (a better measure of REIT performance than earnings) when we first recommended it. We expected cash flow to improve from 2016 onward, putting a lift under InnVest’s dividend payout, which already yielded 8.1%.

Even so, the stock didn’t check all our boxes: It was in the midst of a turnaround, had too much debt, and its dividend history was uneven. But that masked some key events happening behind the scenes.

One was a big management upgrade, including a new CEO, chairman of the board and a slate of independent directors. The end result was a team with more skin in the game, with management and the board holding 35% of the issued units.

Underpinning all this was InnVest’s portfolio, which includes 109 hotels in prime tourist areas. That sets the REIT up to keep profiting from the low Canadian dollar, which is drawing in more U.S. tourists while discouraging Canadians from heading abroad.

Low Loonie Will Likely Drive More Deals

The low dollar no doubt played a key role in our two latest tie-ups, handing both acquirers a nice discount on prime Canadian assets.

Indeed, the loonie’s decline against the greenback has corresponded with a spike in foreign investment in Canada. The currency began its swoon from parity with the U.S. dollar in late 2012 and now trades around $0.78 U.S. Meantime, foreign direct investment has risen 16.5% from 2012 through 2014, versus just a 6.9% increase from 2010 through 2012, according to Statistics Canada.

For us, the bittersweet part is that takeovers force us to bid adieu to reliable dividend-payers and seek out others to make our long-term investing strategy work. You can see our latest ideas for new buying—as well as our up-to-the-minute Dividend Champions Portfolio—in the current issue of Canadian Edge.


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