I wanted to do a post about this because I think a lot of casual investors (and probably some professional ones) get it wrong. First my completely unofficial definition investment:
investment - The purchase of an asset that is reasonably expected to return more cash value than the initial purchase price.
The first part of the statement is easy. You are buying something. The last part is where people go wrong. They buy things that they believe will return them more money then they bought it for. BUT I purposely said 'reasonably expected' to return more cash value. How does one go about determining what can be reasonably expected to return more cash value? That's the tricky part. Here are some tips:
1. Keep your emotions out of it.
Why did so many people buy Facebook? Because of great valuations? Because of a reasoned analysis given financial statements, growth potential? No. More than likely, most of those people bought it because they use Facebook and know that millions if not billions of others use it as well. Does that mean it's a good investment?
Where emotions come into investing is in terms of morality. I would never invest in a tobacco company. I don't believe in buying a company, regardless of the financial analysis, that sells a product that kills people. Not my thing. There are other business that you would have to search your heart to see if it is comfortable to invest in. Weapons manufacturers, pay-day loan companies, etc.
However, that's where the emotions should end. You should only buy a stock or other investment (house, car, baseball card) if you can reasonably expect to make more money then you put into it.
Please keep in mind I'm talking only about investing. If you WANT to buy a car, buy it but do not think you are 'investing' in that car unless for some reason you think you can make more money then you put into it.
2. Dig
It drives me nuts when people say things like this: 'XYZ company is selling at $25 a share. That's cheap!'. The reason it drives me nuts is 99 out of 100 times, they are not basing that on anything but the price itself.
Let me put it this way. If I offered you a car for the price of $20,000 and gave you no other information , would you give me $20,000 and hope that the car was a new Ferrari rather than a 10 year old Honda Civic? No, you'd ask about the car. You'd want to see that it was in good shape and worth $20,000.
So if I told you I could sell you a stock at $25 a share or another stock at $50 a share, which would you buy given no other information? The $50 stock is a better deal if it is Berkshire Hathaway (which normally sells in the 10s of thousands of dollars range) and the $25 share is Nortel which is de-listed and selling on the over the counter market for around $0.20.
What I am saying is you have to know what you are buying to know what it is worth. An knowing what you are buying means more than the name or the history of the company. It's looking at what do they earn, how steady or risky are those earnings. Then taking that knowledge and deciding if the price is good or bad or whether or not you'd buy the company at any price!
That's largely the point of the analysis I have been doing for the last 6 years and what I have been putting into the blog posts.
One more point here. Just because two companies are in the same industry and have similar histories does not make them equal as investments. A great example is CN Rail and CP Rail. Both are long time railway companies in Canada. Both together have essentially a monopoly on rail transport in Canada. Which would you invest in?
CN has a 5 year average Return on Equity of 19%, CP's is 13 %. CN has had earnings growth over the last 5 years of 6% and have fully recovered to earning above pre-recession values (2007 earnings $4.25/share 2011 $5.41/share). CP has a 5 year earnings growth of -8% and has not recovered from the recession at all.
These two companies look just like Canadian railway companies. They even sell for roughly the same price (CP $83.18, CN $88.40) and if you don't look any deeper than that you might think it doesn't matter which you buy. You might even choose CP since it is more that $5 cheaper.
But look even a little deeper you will see that 83.18 buys you unpredictable and shrinking earnings and a lower return on equity. CN buys you predictable resilient earnings and a great ROE!
Sunday, 29 July 2012
Alimentation Couche-Tard Inc. (TSX: ATD-B)
The Company
As you may or may not have guessed, I'm going through my portfolio alphabetically. The last of the companies that start with 'A' is Alimentation Couche-Tard. ATD (as I will call it from now on since it is a big name to type) basically does convenience stores and gas bars. Out here in Western Canada, we've heard of Mac's stores. In Quebec, they are called Couche-Tard. They also operate under the names Circle K among others. They have some of their own brands they sell in stores. Recently the stock took a jump on the purchase of a chain in Norway called Statoil Fuel and Retail ASA. The purchase of that was complete in June 2012and it caused the stock to reach 52 week highs which it is still staying very close too. Recently (on July 18th), they announced the purchase of 27 stores in Eastern Washington State.
Financials
Earnings
This is a company I was excited to buy this company back in 2010 when I first analyzed it. It had consistent earnings growth since 2001 with only one year of earnings contraction. This has continued into fiscal 2012 (which ended in April) with an impressive 21% increase in earnings per share. This is an excellent first sign that this is a growing company even though they have been around for over 10 years.
Return on Equity
Cash Flow
Cash flow continues the story. Positive 4 out of the last 6 years. Operating cash flow has grown every year but 2010. The company does have cash coming in .In 2012 there was a large increase in cash from operations (763.8 million vs 608.3 million in 2011) but a small decrease in overall cash mostly due to acquisitions.Debt
The debt equity ratio MSN reports is 0.31 which I believe excludes non-interest bearing items. If you just calculate liabilities over equity, you get 0.98. These figures are from 2011 (which is what MSN has right now). From the annual statements for 2012, the debt/equity value is more like 1.04 with the quick ratio being 0.19 and the current being 0.85.
These numbers are not necessarily ideal (I'd prefer them to be able to pay off their current liabilities with cash and be more equity financed) but they are definitely not out of control.
Shares Outstanding
Shares outstanding had been steadily decreasing since 2007. However they recently announced issuance of up to 7.3 million shares. They currently have 183.5 million shares down from 202.3 in 2007. This issue will apparently be used to pay down some long term debt (which appeals to me) and will only increase the number of shares by about 4%. Given their history of reducing the number of shares over the last few years, and the growth they are experiencing, I'm not concerned about this diluting the earning to the shareholder.
Another note on this, ATD is issuing stock when the stock is near a 52 week high. This seems smart to me. They are getting the best money they can get for this stock and using it to pay down debt.
Financials Conclusion
The financials for ATD look very solid to me. The earnings and ROE are predictable. The debt is under control and seems to be well managed. They have a history of reducing the amount of stock out there. The over all picture looks very good to me.
The Business
Competition
Probably the biggest competition to ATD would be 7-11. To a lesser extent companies like Shoppers Drug Mart in terms of convenience foods and such. I don't see a new player coming in and taking a lot of this business away though. They are an established company with recognizable brands.
Risks
I would see the biggest risk to the company in the short term being a misstep in their growth. For example, building stores in areas that won't make money, or buying another company that isn't doing well and failing to turn it around.
Other than that, the convenience store business has been around as long as I can remember and this is a brand that has been out there.
Expected Cash Flows
Dividends
Normally I do love me some dividends. Cash in my pocket is ALWAYS a good thing. However ATD is a growth play for me for the most part. Given that, the current yield on the stock is 0.6%. That is very small. They pay out roughly 10% of earnings and in 2009 they did decrease their dividend after a down year in 2008 (they made 0.92/share in 2008 as opposed to 0.94 in 2007). Once they recovered their earnings the next year though, the dividend increased past the 2007 level and has gone up since.
This means, there will be a small steady income from this stock that should increase as earnings increase.
Capital Appreciation
This is where I would expect the investment to shine. Earning growth on average over the last 5 years was 21% and the last 10 years was 29%. Using the lower number is probably fine because they are acquiring new stores that will add to the bottom line so earnings can be expected to continue their growth. Actually, let's use a slightly smaller number, say 18%. Given that, the earnings expectation for the next 10 years should look like this:
| Year | Earnings |
| 0 | 2.49 |
| 1 | 2.94 |
| 2 | 3.47 |
| 3 | 4.09 |
| 4 | 4.83 |
| 5 | 5.70 |
| 6 | 6.72 |
| 7 | 7.93 |
| 8 | 9.36 |
| 9 | 11.04 |
| 10 | 13.03 |
Returns Analysis
Initial Rate of Return
The initial rate of return (trailing EPS/price = 2.49/47.40) is 5%. This is a bit low for my tastes but still better than a GIC or bond.Total Dividends
Let's make the assumption that dividends will grow with earnings and use the 18% rate again. This is what that will look like:| Year | Dividend |
| 0 | 0.3 |
| 1 | 0.35 |
| 2 | 0.42 |
| 3 | 0.49 |
| 4 | 0.58 |
| 5 | 0.69 |
| 6 | 0.81 |
| 7 | 0.96 |
| 8 | 1.13 |
| 9 | 1.33 |
| 10 | 1.57 |
| Total | 8.33 |
Total dividends for the 10 years would be about $8.33 which is an annualized return of about 2%. Not great but this is an investment for growth.
Future Price
I'm going to use a PE ratio of 12 for this one. Over the last 4 years, it has traded in the 10-12 range but it has historically gone quite a bit higher than that and is currently at 19. Given that the earnings in 10 years is projected to be $13.03 and the stock trades in a price/earnings range of 12, the price should be about 156.39. This equates to a return of 12%. Add the 2% return from dividends you get 14% return.ROE Analysis
The ROE analysis is a little less exciting. The analysis is based a return on equity of 16%. This is possibly conservative because the 5 year average is 18% (the 10 year is 14%) but the last 4 years have all been 18 and 19% . Here's the table:| Year | Earnings | Dividend | Retained Earning |
| 0 | 2.49 | 0.30 | 2.19 |
| 1 | 2.84 | 0.28 | 2.56 |
| 2 | 3.25 | 0.32 | 2.92 |
| 3 | 3.72 | 0.37 | 3.35 |
| 4 | 4.25 | 0.43 | 3.83 |
| 5 | 4.87 | 0.49 | 4.38 |
| 6 | 5.57 | 0.56 | 5.01 |
| 7 | 6.37 | 0.64 | 5.73 |
| 8 | 7.28 | 0.73 | 6.56 |
| 9 | 8.33 | 0.83 | 7.50 |
| 10 | 9.53 | 0.95 | 8.58 |
Under this analysis we get a total dividend of $5.60 and a price of 114.65 (9.53 * 12 P/E) for a total annualized return of 9.7%.
Returns Conclusion
This is often my dilemma. Do I buy into the EPS analysis that gives me a 14% return or the ROE analysis that gives me a 9.7% return. Both are pretty good returns but at 9.7% I'd probably pass an move on. I suspect the value will be somewhere in between. Say 12%. Still not bad at this price. I would make this a mild buy in my portfolio but definitely hold on to what I have as there is a lot of potential there for continued growth in earnings.Current Holdings:
ATD is currently the golden child of my portfolio. I got in in December of 2010 and again in January of 2011 for a total of 88 shares at an average price of 26.13. Total investment was $2,299.78. The current value of this stock is $4,171.20 with a total dividend so far of $26.40. My total return is 83% on this stock. I'm very happy with that.
Now do I want to buy more? I think I will wait for a drop and see. If no drop happens, I'll ride with my current investment and re-assess later. If it drops into the $40 range, I might come in again.
Saturday, 28 July 2012
AGF Managment Limited (TSX: AGF-B)
The Company
AGF Managment Limited is a global wealth management company operating in 3 segments: investment management and advisory services (selling mutual funds and giving personal financial planning) plus the distribution of AGF investment products, trust company operations and 'other'.They have a family of mutual funds but also manage assets for institutional investors. The trust business operates as a complementary business offering GIC's, loans and mortgages.
So they are mostly in the investment side of the financial market.
They announced the sale of the trust company on June 6th to allow the company to concentrate on investment management.
Financials
Earnings
AGF has not had a loss in the last 12 years (the years I have numbers for) which is one of those things that always makes me want to look further. However, they do not have consistent earnings growth. The income has ranged from $0.80 a share to $1.93. This is a predictable company, in that we can probably assume consistent profits for the next 10 years however that's it. We cannot predict what they will be except that they will be in this range.
On a short-term note, profits so far this year are down 21% which if this continues for the last half of the year will result in a EPS at the end of the year of $0.96. Essentially they are blaming the global economy for this. I do not believe that once the global economy comes back on track though, that this will be a consistent growth company but rather a steady profits company.
Return on Equity
Cash Flow
In the last 7 years (the years I have numbers for) they have had positive cash flow from operations in all years but the last one. In 4 out of those 7 years, they had positive cash flows over all. The operating cash flow so far this year appears to be positive but they did sell off that trust business.
Debt
AGF has a quick ratio of 0.008 and a current ratio of 1.12. In looking at their balance sheet, the 'assets classified as discontinued operations' is by far the largest. This appears to be the result of the sale of the trust business.
Their debt equity ratio 3.45 which is high. If you exclude non-interest bearing liabilities (as MSN does) the debt equity ratio is a nicer 0.46.
Shares Outstanding
The shares outstanding were stable around the 89 million mark with a jump to 95 million last year. It looks like this may have been the result of stock options exercised. They do have approval to repurchase shares and have done so.
Financials Conclusion
I'm not thrilled with the financials of this company. The earnings are always positive but not predictable in their growth pattern. ROE is all over the place. The operating cash flow is usually good. The quick and current ratios aren't great and the debt equity is quite high in my opinion (although the 0.46 isn't bad when removing the non-interest bearing liabilities).
Having said all that, I'm not writing this company off completely either. They may be (and actually it turns out are) a pretty good income play.
The Business
Competition
AGF's competition would be other mutual fund companies like Investors Group, the banks which have their own products, etc.
Risks
Essentially, their business will be affected by the global economy and has been. The short term, this will probably continue to affect their profits.
Expected Cash Flows
Dividends
This is where this company looks great. They pay out a dividend of $1.08 per share. They have never paid out more then they've made but I suspect 2012 will be the first year they do as their trailing EPS is 1.07 so unless they grow instead of shrink income in the next 2 quarters, they will have paid out more than they've made.
They have also increased their dividend every year since 2005. This last year they just increased their dividend by a penny and given the year they are having, I suspect next year it might actually go down.
Capital Appreciation
Honestly, I wouldn't expect much in the way of capital appreciation. The earnings do not grow consistently. If one had this stock (and I do), the best case scenario would be to get out when the market sees one outstanding year. That probably won't happen for a few years.
Returns Analysis
Initial Rate of Return
The current price is $11.82 and the trailing EPS is 1.07 so the Initial rate of return is 9%. This is respectable but if the decrease of 21% in profits holds up for the rest of the year, the EPS will be about $0.96 which is an initial ROR of 8%. Still respectable.
Total Dividends
I cannot do my usual analysis here because ROE and earnings growth are not predictable. SO I could assume that the dividends will remain the same for the next 10 years. This would be conservative in my opinion since even though, in the short term, I would expect them to lower dividends to avoid paying out more then they make, in the longer term, the economy will recover and so will their profits. So if we say they contine to pay out $1.08 for the next 10 years, that's a total dividend of $10.80 on an initial investment of $11.82 for year over year return of 9.6%Future Price
I don't expect much in the way of a change in future price. I suppose I could take the 52 week high and assume at some point in the future it would reach that point and I could get out. If it did reach 18.15 again, the dividend yield would be 5.7% and I may rethink this. For now it's an income play at 9.6%.ROE Analysis
Due to the lack of predictability of ROE, I don't feel ok doing this analysis.Returns Conclusion
AGF, in my opinion, is a pure income play. I fully expect them to reduce their dividend to at least $0.90 a share. This would be a dividend yield of 7.6% which is still respectable. After that, once the world economy gets back in gear (which I optimistically believe is inevitable), that dividend should increase with profits coming back above the $1.10/share mark.Current Holdings:
I currently hold 300 shares of AGF-B which I purchased at an average cost of $11.41 (total investment $3423). My expected annual dividend should be about $324 assuming that they do not lower their dividend rate. If they lower it to 0.90 then I will make $270 next year. I am fairly comfortable at this level of investment on this one. I don't expect the price to go anywhere although I'd enjoy a brief manic phase in the market to take it up to $14-15 but not holding my breath. I may invest another $600 in the near future...
Friday, 27 July 2012
ATCO (TSX: ACO.X)
The Company
ATCO is essentially an energy play but a very diversified one. They do pipelines, electricity generation and transmission, natural gas, structures and logistics. They are a world wide company(five continents based in Calgary but with manufacturing facilities in North and South America and Australia.
Financials
Earnings
I have earnings numbers since 1997 and they have never had a loss. Over those years, only 3 years have the profits decreased (2003, 2005 and 2010). This puts it in the category of companies that I would feel is fairly predictable. The 5 year average growth is 7% and the 10 year growth is 8%. Now when I look at that, I don't really care about the rate of growth over those two time periods. The stock should just be priced accordingly based on that growth rate. I do like that the growth seems consistent. They have currently only reported for the first quarter of 2012 but posted an 11% growth over the same quarter last year.
Return on Equity
I have this number for the last 10 years. The 5 year average is 14% and the 10 year is the same. Looking at the year after year numbers, it is never below 11% nor above 16%. This strikes me as again being very consistent and predictable. Love that!
Cash Flow
This is a new one for me to be thinking about. I have largely ignored cash flow in favor of earnings and return on equity but I am thinking cash flow should be looked at to see that earnings are not just a fluke.
ATCO has posted increasing cash flow from operations 7 out of 10 years. Each drop is recovered from and then some in the next year. Their operating cash flow is in the 1.5 billion dollar range as of last year. As one would expect with a company like this, there is a large capital expense which results in high financing and investing costs. This has resulted in a negative cash flow 4 out of 10 years. However net cash flow over the 10 years is about $470 million and as of last year they have $768 million in the bank (a total of $1.6 billion in current assets). I don't believe cash flow is a big issue with this company.
Debt
Their quick ratio (cash/current liabilities) is 0.77 and the current ratio (current assets/current liabilities) is 1.6. The quick ratio is not ideal but I'm ok with it being close to one given that the current is higher than 1 by a fair bit. They aren't necessarily awash with cash though.
Their debt equity ratio is 2.21 (according to MSN) so they are highly leveraged. This looks to be about average for them as well. This is one risk factor I will have to consider. However, the fact that they have been profitable every year for the last 15 years tells me that they are managing it ok.
If you calculate the debt equity using the total liabilities (MSN seems to use the rule that you only include interest bearing liabilities), you get 3.6. This is high for me but again, they make money every year so it may be OK.
Shares Outstanding
Another thing I like to look at, what is the pattern in the number of shares outstanding. I'd prefer this number stay the same or shrink. This increases value for the investors. If the company is growing, the number of shares going up is OK but it does dilute the earnings. In ATCO's case, the number of shares is fairly stable in the 57 to 59 million. So this is not exciting nor depressing.
Expected Returns
Returns come in two forms. Capital Appreciation and Dividends. Dividends can be more predictable then capital appreciation but not always.
Dividends
ATCO does not pay a spectacular dividend but it is a respectable 1.7% yield and has grown every year since 2002 (the years I have numbers for). The growth in the dividend is something I very much like.
The second thing I look at with dividends is the payout ratio. This is how much of their earnings are they paying out as dividends and how much are they retaining. In ATCO's case, they are paying out roughly 20% of their earnings as dividends. This gives a nice cushion if earnings drop in a year to at least maintaining the dividend and makes this value more predictable.
Capital Appreciation
This is where the analysis becomes more mathematical but it isn't that difficult. The last year's earnings per share were $5.64 per share and have grown an average of 7% in the last 5 years and 8% for the last 10 years. So given that, we can project forward their earnings for the next 10 years. Let's use the 7% figure to be conservative. The future value interest factor on 7% for 10 years is 1.96% which means the expected earnings per share in 10 years is about $11.09.
| Year | Earnings |
| 0 | 5.64 |
| 1 | 6.03 |
| 2 | 6.46 |
| 3 | 6.91 |
| 4 | 7.39 |
| 5 | 7.91 |
| 6 | 8.46 |
| 7 | 9.06 |
| 8 | 9.69 |
| 9 | 10.37 |
| 10 | 11.09 |
Returns
This is the first point in the analysis where you would look at price. The reason for this is simple. The idea here is you don't buy a share unless you would be willing to buy the business if money weren't an issue. So up to now, we've looked at the business. What is the business making (earnings) and what is it doing with it (return on equity and dividends)? How stable is the business and how predictable are the earnings and returns on those earnings? There is no point in looking at the price unless you can value what you are buying at that price. Imagine if you were offered to buy a product each from two salesman. One offers you to be able to buy his product for $100 and the other for $20. Unless you know what the product is and what it is worth to you, there is no way to evaluate the offer. If the first product is a Ferrari and the second a bag of M&M's, the analysis is very different then if the first is a movie ticket and the second is a dinner out at a nice restaurant. You need to know what you are buying before you buy it.
Initial Rate of Return
The initial rate of return is the last earnings per share value (or the trailing eps) divided by the price. This is a good initial look at whether or not the company is returning enough value for the investment. In ATCO's case, the current price (as of July 7th , 2012 at 8:08 am central time) is about $75.42 and the trailing EPS is $5.87. That is essentially the money the company is making per share. That is an initial rate of return of 7.8%. This is pretty good given the return on a bond or GIC.
Total Dividends
Total dividends are pretty easy to calculate. Basically, the current dividend is $1.41 per share. Over the next 10 years they will be growing this pretty much along with earnings at 7%. So next year the dividend should be 1.22, the year after 1.31 and so forth. By my calculation, this puts total dividends
The following table shows the dividends:
| Year | Dividend |
| 0 | 1.14 |
| 1 | 1.22 |
| 2 | 1.31 |
| 3 | 1.40 |
| 4 | 1.49 |
| 5 | 1.60 |
| 6 | 1.71 |
| 7 | 1.83 |
| 8 | 1.96 |
| 9 | 2.10 |
| 10 | 2.24 |
| Total | 17.99 |
So you can expect $17.99in dividends over the next 10 years in total. That's an average return of 2.1% per year from dividends alone. That's the result of the growing dividend year.
Future Price
The other part of the calculation is what will the price be in 10 years. That's a major part of the return. How do you calculate that? Well, stocks trade as a multiple of earnings. That's the price earnings ratio. ATCO has traded since 2002 in the range of 9 to 14 time earnings. I think 14 is quite high, 9 is low so let's use 11 as the value. If the EPS in 10 years is expected to be $11.09 then the price should be about $122.04. That is a profit of $46.57 if you sold it at this price. This is an annualized return of 4.9%. Add that to the return on dividends of 2.4% and you get 7.3% return at the current price.
| Year | Earnings |
| 0 | 5.64 |
| 1 | 6.03 |
| 2 | 6.46 |
| 3 | 6.91 |
| 4 | 7.39 |
| 5 | 7.91 |
| 6 | 8.46 |
| 7 | 9.06 |
| 8 | 9.69 |
| 9 | 10.37 |
| 10 | 11.09 |
ROE Analysis
There is another analysis that can be done on this. That is the return on equity. Earnings that remain in the company are re-invested in the company's operations and earn more money. In the case of ATCO, they have a return on equity on average of 14%. Money paid out is not invested in the business (unless the investors turn it around).
This analysis gives a different way of looking at what the earnings will be 10 years from now by calculating what the company can do with the returns. It also can come up with different dividend totals given how the earnings growth is calculated. The following table shows this pattern:
So the current year they had 5.64 in dividends and had a retained earnings of 4.50. Essentially this 4.50 gets re-invested in the company and the expected return on this is 14%. This results in increased earnings the next year of 4.5 * 0.14 = $0.63. Since they payout about 20 % of what they they make, the dividend should be $1.27 and a retained earnings of $5. This continues for 10 years resulting in an EPS at year 10 of 16.26 and a total dividend over the 10 years of 21.37 (we don't count the year 0 dividend as it is already paid out.
So the price at the end of the period would be the earnings of 16.26 times the PE of 11 we used before for a total of $178.88. The capital gain would be $103.46. That plus the dividend total of 21.37 makes a total dollar value return of 124.83 with a return on investment of annualized of 10.3%.
The current PE value for ATCO is 12.8 so higher than the value we used for analysis. It is at it's 52 week high so currently this is not a buy. However I hold some ATCO right now. Should I selll?
| Year | Earnings | Dividend | Retained Earning |
| 0 | 5.64 | 1.14 | 4.50 |
| 1 | 6.27 | 1.27 | 5.00 |
| 2 | 6.97 | 1.41 | 5.56 |
| 3 | 7.75 | 1.57 | 6.18 |
| 4 | 8.61 | 1.74 | 6.87 |
| 5 | 9.58 | 1.94 | 7.64 |
| 6 | 10.65 | 2.15 | 8.49 |
| 7 | 11.84 | 2.39 | 9.44 |
| 8 | 13.16 | 2.66 | 10.50 |
| 9 | 14.63 | 2.96 | 11.67 |
| 10 | 16.26 | 3.29 | 12.97 |
| Total | 21.37 |
So the current year they had 5.64 in dividends and had a retained earnings of 4.50. Essentially this 4.50 gets re-invested in the company and the expected return on this is 14%. This results in increased earnings the next year of 4.5 * 0.14 = $0.63. Since they payout about 20 % of what they they make, the dividend should be $1.27 and a retained earnings of $5. This continues for 10 years resulting in an EPS at year 10 of 16.26 and a total dividend over the 10 years of 21.37 (we don't count the year 0 dividend as it is already paid out.
So the price at the end of the period would be the earnings of 16.26 times the PE of 11 we used before for a total of $178.88. The capital gain would be $103.46. That plus the dividend total of 21.37 makes a total dollar value return of 124.83 with a return on investment of annualized of 10.3%.
Returns Conclusion
So the expected returns on investment of ATCO at the current price is between 7 and 10%. How risky are these numbers? Well it is fairly predictable that the earnings are growing at a rate of 7-8% over the last 10 years so I suspect that the first analysis is probably the best. The dividends make up a small portion of the return (about 2%) but they are paid out year after year so that at least is money in your hands.The current PE value for ATCO is 12.8 so higher than the value we used for analysis. It is at it's 52 week high so currently this is not a buy. However I hold some ATCO right now. Should I selll?
Current Holdings:
I currently own 40 shares of ATCO at an average cost of $58.47. At that investment, my dividends from the company are yielding a respectable 2.24%. I said in my introduction that I would only sell if the fundamentals changed since investing (my initial investment was about a year and a half ago) or if the market was offering me an outrageous price. Currently the price is high but not outrageous. The expected returns over the next year are pretty good but not spectacular and the dividend is nice. It's not an exciting investment from the standpoint of big movements but it is a steady earning.
I shall hold.
BUT, what about buying more? At this price, the return isn't attractive. In order to make a 15% return on this, I would have to buy at range of $34-49. For a 10% return, more like $53-77. I think a 10% return is pretty good with this company as it does tend to be predictable and solid.
So for now it's a hold but not a buy.
UPDATE:
Right after I posted, I got a news flash about ATCO's second quarter earnings. Up 20% from last year! Cash flow from operations up as well.
The full news release is here:
Thursday, 26 July 2012
Introduction
Hi Reader,
Thought I'd write a quick message to introduce myself and why I am blogging. First, my name is Mike. During the day I am an independent IT consultant specializing in .net development. For the last 6 years, I have been investing inside my corporation as a way of building up a set of assets that I hope will serve me well in my retirement. I think I can sum up my investment philosophy in the following points:
1. I only invest in companies that consistently make money. I prefer that they have had consistent growth in earnings per share over the last 10 years but I will look at companies with relatively flat earnings that pay a great dividend.
2. I only really invest in companies that I understand at least at a basic level. For example, I like the company CNR because at a basic level I understand what they do. They transport item x from point a to point b via railways. Would I be able to run this business, no but I understand the basics of what they do.
3. I like companies that pay a dividend. It's not necessary that it be a big one because sometimes, if the company can get a good return off their retained earnings, it is better to leave the earnings in the company's hands. If the income is flat, better be paying out a dividend, otherwise the return on the retained earnings effectively goes down every year.
4. I don't like alot of debt. I prefer that the company be mostly equity financed. This reduces the fixed costs of interest. Leverage is great at magnifying gains, but it also magnifys losses. The exception would be banks (deposits are a liability after all) or companies that have just made an acquisition (although I'd prefer an acquisition be done with cash).
5. I like predictability. Earnings growth every year for 10 years is a good sign of predictability. ROE being consistent and high (around 15%) is great and makes valuing the company fairly easy.
6. I like a business that is not a fad but a stable business that isn't subject to the whims of fashion or trend. CNR is another great example of this.
7. I believe in buy and hold forever. The only reasons I can see to sell are: the fundamentals changing the valuation or the stock being overbalanced in the portfolio. Having said that, if the market is offering an outrageous price and as a result the predicted returns are lower that 10%, then it might be time to get out until the market leaves it's manic phase.
8. I don't look alot at qualitative analysis like the personalities of management. Probably should but I think the numbers are a more arbitrary view into how the company is run.
Why am I blogging?
Well, over the years I've analyzed companies on my own. I've written an application I use to calculate expected returns on a company at a current price. I based this analysis on a book I read years ago called Buffettology. This book is, in my opinion, one of the best around in terms of teaching you how to analyze the value of an investment.
Anyway, I think it might be of value to me to write down my thoughts on the companies I am seriously thinking of investing in. Or for that matter, when I revisit companies I already own to see if somethings changed, or if there was a flaw in my decision to by.
So, that's why I'm here. I think I am going to start by adding the companies I already own and analyzing why I hold them (and possibly finding some I shouldn't).
You might be able to tell, this blog is more for my own consumption but if you find value or want to comment, please feel free. Discussion on these topics is always interesting!
Mike
Thought I'd write a quick message to introduce myself and why I am blogging. First, my name is Mike. During the day I am an independent IT consultant specializing in .net development. For the last 6 years, I have been investing inside my corporation as a way of building up a set of assets that I hope will serve me well in my retirement. I think I can sum up my investment philosophy in the following points:
1. I only invest in companies that consistently make money. I prefer that they have had consistent growth in earnings per share over the last 10 years but I will look at companies with relatively flat earnings that pay a great dividend.
2. I only really invest in companies that I understand at least at a basic level. For example, I like the company CNR because at a basic level I understand what they do. They transport item x from point a to point b via railways. Would I be able to run this business, no but I understand the basics of what they do.
3. I like companies that pay a dividend. It's not necessary that it be a big one because sometimes, if the company can get a good return off their retained earnings, it is better to leave the earnings in the company's hands. If the income is flat, better be paying out a dividend, otherwise the return on the retained earnings effectively goes down every year.
4. I don't like alot of debt. I prefer that the company be mostly equity financed. This reduces the fixed costs of interest. Leverage is great at magnifying gains, but it also magnifys losses. The exception would be banks (deposits are a liability after all) or companies that have just made an acquisition (although I'd prefer an acquisition be done with cash).
5. I like predictability. Earnings growth every year for 10 years is a good sign of predictability. ROE being consistent and high (around 15%) is great and makes valuing the company fairly easy.
6. I like a business that is not a fad but a stable business that isn't subject to the whims of fashion or trend. CNR is another great example of this.
7. I believe in buy and hold forever. The only reasons I can see to sell are: the fundamentals changing the valuation or the stock being overbalanced in the portfolio. Having said that, if the market is offering an outrageous price and as a result the predicted returns are lower that 10%, then it might be time to get out until the market leaves it's manic phase.
8. I don't look alot at qualitative analysis like the personalities of management. Probably should but I think the numbers are a more arbitrary view into how the company is run.
Why am I blogging?
Well, over the years I've analyzed companies on my own. I've written an application I use to calculate expected returns on a company at a current price. I based this analysis on a book I read years ago called Buffettology. This book is, in my opinion, one of the best around in terms of teaching you how to analyze the value of an investment.
Anyway, I think it might be of value to me to write down my thoughts on the companies I am seriously thinking of investing in. Or for that matter, when I revisit companies I already own to see if somethings changed, or if there was a flaw in my decision to by.
So, that's why I'm here. I think I am going to start by adding the companies I already own and analyzing why I hold them (and possibly finding some I shouldn't).
You might be able to tell, this blog is more for my own consumption but if you find value or want to comment, please feel free. Discussion on these topics is always interesting!
Mike
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