The Dividend Champions: Portfolio Update
Editor’s Note: Last month, we inaugurated a new format for our weekly Maple Leaf Memo e-letter. The feature article that typically precedes our portfolio updates is now being published in a separate email under the Income Without Borders banner, while updates on our portfolio holdings will go out under the Canadian Edge Weekly banner. So please be sure to look out for both emails in your inbox.
WestJet Airlines (TSX: WJA, OTC: WJAVF) reported on Monday that its load factor for May was substantially higher than the previous year and at an all-time May record of 81.4%. The total number of passengers transported was also a record of 1.8 million, up 10% from a year ago.
Last year, investors were concerned that airline capacity was expanding at a faster rate than passenger growth, which resulted in lower load factors. However, this situation has now improved considerably, with the WestJet year-to-date load factor at 81.7%, on an 8.4% rise in traffic and a 6.9% increase in capacity.
WestJet has an outstanding track record of managing its business profitably, and we believe that the market may have been too concerned about overcapacity. The share price reflects the improvement in operating conditions, as the stock has climbed 42% since its February low.
Although the gap has narrowed, WestJet is still trading below our fair-value estimate of C$24/US$19, on a forward P/E ratio of 9.4 times and a dividend yield of 2.6%.
North West Company (TSX: NWC, OTC: NWTUF) announced solid first-quarter results, with earnings per share increasing by 12.5% compared to a year ago, while the dividend was 6.9% higher.
Revenues climbed 6%, boosted to some degree by the favorable conversion of profits from foreign operations into Canadian dollars. Costs were well controlled, resulting in a net income increase of 13%. Excluding the positive impact of the foreign-exchange benefit, net income increased by 8.9%.
The international division fared very well, with a 20% jump in EBITDA (earnings before interest, taxation, depreciation and amortization in U.S. dollars), as sales improved and operating costs moved lower. Management remains optimistic about operations in the Caribbean and Pacific, though it noted that proliferation of the Zika virus is reducing Caribbean tourism.
The Canadian operation increased sales by 4.5%, but higher staffing costs and store improvements resulted in a somewhat meager 1.9% EBITDA increase. Management’s outlook for Canadian operations remains stable.
North West’s balance sheet is sound, with a debt-to-capital ratio of 36% and healthy operating and free cash flow. The company is in the process of ramping up its capital-expenditure program to accelerate its store-improvement program, which will place some strain on the balance sheet. However, we are comfortable that the dividend is safe and expect continued mid-single digit growth over the next two years.
The company’s valuation is at a premium to its Canadian peers, but justified given its competitive positioning in niche markets and high levels of profitability. North West’s dividend yield is an attractive 4.1%, and we estimate the stock’s fair value at C$32, or US$25.
Stock Talk
Richard Bryan
where do I find DIVIDENDS CHAMPIONS PORTFOLIO?
Deon Vernooy
Richard, go to the “Portfolio” tab on the menu and select “Dividend Champions.” You can also find the portfolio in the latest issue of the Canadian Edge which is available under the “Issue Archives” tab. Deon
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Jeff
Several of the Dividend Champions have been down for long periods of time. These include Blue Ribbon, Canoe, and Artis. What do you see as the prospects for share price of these issues in the near and long term? Are they good buys at the current relatively low prices?
Ari Charney
Hi Jeff,
The three securities that you cited are not Dividend Champions–they’re actually constituents of our Legacy Portfolios, for which we provide continuing coverage for longtime subscribers.
Blue Ribbon and Canoe are both closed-end funds (CEF) that, like mutual funds, consist of diversified portfolios of stocks.
Unlike mutual funds, CEFs employ leverage to enhance their returns, as well as their payouts. Blue Ribbon can borrow up to 25% of assets, while Canoe can borrow up to 20% of assets.
While such leverage can boost returns when the market goes up, it can also take a bite when the market heads down, like during last year’s drop in the S&P/TSX Composite Index.
Also unlike mutual funds, because CEFs trade on an exchange, their price performance can deviate markedly from the actual performance of the underlying portfolio, which is tracked based on net asset value (NAV).
Blue Ribbon trades at a 3.7% discount to NAV, while Canoe trades at a 15.3% discount to NAV. These discounts can narrow and widen over time, and many funds can trade at persistent discounts to NAV.
Right now, both funds trade at somewhat wider discounts than their historical average, which is about a 3.0% discount for Blue Ribbon and a 12.5% discount for Canoe.
From a U.S. investor standpoint, future returns depend on the performance of the broad Canadian market, the general direction of the exchange rate, and each management team’s skill in selecting stocks and deploying leverage.
When it comes to management, both funds have been a mixed bag, perhaps owing in part to the fact that both are focusing on distributing high income. Both have generally lagged the broad market on a total-return basis, which includes the reinvestment of distributions. But the difference over each time period is usually fairly narrow. If, however, you don’t reinvest your dividends, then the gulf is significantly wider.
If you’re looking to get out of these funds, both offer annual redemptions that allow you to liquidate your units closer to the NAV than the market price. For Blue Ribbon’s redemption, units must be tendered by the last business day of October, and they’ll be redeemed toward the end of November at NAV less brokerage costs. Canoe usually has its unitholders tender in mid-November, with an early- to mid-December redemption at 95% of the NAV.
As for Artis, it’s one of the REITs that has substantial exposure to Alberta, so it’s taken a hit from the oil shock. Management is looking to diversify away from the province, by investing in other areas, including in the U.S., where it already has a foothold. For instance, the firm recently purchased a $260 million portfolio of office properties in Wisconsin.
In Canadian dollar terms, the REIT’s units have staged a big recovery from the five-year low hit in mid-January. But the unit price is still about 8.1% below its trailing five-year average. Bay Street analysts forecast a consensus 12-month target price of $14.40, which is about 6.3% above the current unit price.
Best regards,
Ari
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