In my latest article, I told you my little secret about selling any stock at the right time. In fact, it’s not about selling, it’s all about why you buy in the first place. When you purchase a stock, there must be specific reasons, an investment thesis, telling you this stock will help you reach your investing goals. When a company doesn’t comply with your investment thesis, it’s time to let it go.
In order to give you a few examples of reasons to purchase a stock, I’ve listed a brief summary of each investment thesis for all my holdings. Here are 16 companies I believe are buys at the time of writing and meet the 7 Dividend Growth Investing Principles.
Agrium (AGU.TO)
Agrium is the largest global retailer and distributor of crop inputs. It is also the leader of agricultural nutrients providing farmers with all they need to improve production. The company shows a less dependent link to potash prices as it counts on other products such as: seed, nutrients, crop protection, nitrogen and other merchandise & services. It offers a better alternative to Potash (POT) as mentioned previously.
The fact that the ratio of arable land per person is continuously declining puts constant pressure on farmers to become as efficient as possible. The first solution for farmers is to improve their production with additional fertilizer. A second solution is to protect the crops they own and make sure their land is protected from any catastrophe that would affect their production. The company continues its focus towards dividend increases and free cash flow expectations remain the same for the next four years.
Apple (AAPL)
Does this company need an introduction? All I will say is the company’s product ecosystem means its clients buy several Apple products and refresh them regularly. We now see that android users are now switching over to iPhones.
Apple is launching several new services linked to their products. Services like Apple Pay, Apple TV and Apple Music will contribute to create a constant flow of income. The company has always counted on selling its hardware (iPhones, Macs, Tablets, etc) and the introduction to services will help diversify its revenue base. Microsoft (MSFT) successfully created new business segments oriented towards services and I can see AAPL going in the same direction now.
As a dividend growth investor, AAPL shows incredible potential for dividend hikes. Expecting a 10% growth rate for many years is very reasonable. At the same time, I believe there is a lot of room for stock value appreciation as well.
Canadian National Railway (CNR.TO)
I must admit that CNR didn’t blink on my dashboard for a while because its dividend yield is relatively low. At a 1.62% yield, we can’t talk about a “strong” dividend payer. However, after digging further, I realize how strong the company’s fundamentals are. They show incredible metrics (please see chart below). Canadian National Railway owns and operates the largest railway in Canada and also operates in the USA. The company’s transportation activities are well diversified among 7 different industries.
The management team makes sure to use a good part of this cash flow to maintain and improve their railways (their biggest expense) while rewarding shareholders with generous dividend payments. CNR has a very strong economic moat as railways are virtually impossible to replicate. Therefore, you can count on increasing cash flow coming in each year. Plus, there isn’t any better way to transport most commodities than by train.
Coca-Cola (KO)
Coca-Cola’s biggest strength is definitely its brand power. Coke is well known around the world and people seek out this popular drink. Strong from the cash flow generation ability of its carbohydrate drinks, KO is now completing more acquisitions to diversify its product offering. Its non-carbohydrate drinks division represented 26% of its sales in 2015 while it was just 20% back in 2007. The company has successfully reduced its operating costs with more streamlined processes over past years and should be able to use this additional cash flow to support future growth. Finally, KO’s distribution network is powerful enough to support any new product launch.
An investment in Coca-Cola is a purchase of a world class company with one of the strongest dividend growth track records. Management has focused on their cost cutting program and continue to acquire non-carbonated drink companies insuring future growth. With an average of doubling its dividend payment every 10 years, KO is a perfect fit for any core portfolio.
Disney (DIS)
DIS has become more than entertainment parks and Mickey. It is now the largest entertainment business in the world. Walt Disney is divided into five different segments: Media Networks, Parks and Resorts, Studio Entertainments, Consumer Products and Interactive. The Media division (ABC, The Disney Channel and ESPN) leads DIS revenue shares with 44% of the company’s total sales.
Disney has proven analysts wrong by showing revenue growth for its Media division. Many analysts issued concerns over the summer of 2015 with regards to the declining number of cable users. However, ESPN has put its expenses under strict control and keeps showing revenue growth potential. The other divisions will benefit from US consumers spending more, especially with the coming of the new Star Wars trilogy. Finally, Disney is the strongest brand for family entertainment and this competitive advantage is nearly impossible to replicate. The opening of a new theme park, Disney Shanghai, will also contribute to boosting revenues in the years to come. DIS is a strong money making machine generating over $1.3 billion in free cash flow quarterly.
Gluskin & Sheff (GS.TO)
Gluskin Sheff & Associates Inc provides discretionary investment management services to high net worth private clients and institutional investors in Canada and abroad.
The company evolves in a highly profitable market and has become appealing for other big players looking at a takeover. I also like the fact that private clients tend to be more loyal the than average. In 2014, GS made an acquisition (Blair Franklin) instead of being bought out by a bigger player. I still think it can happen in the future. In the meantime, private wealth management is where the money is at for any financial. Many analysts see this stock over the $20-24 range. We are definitely at a good time to add to this growth stock. Our DDM valuation puts the stock price at $24.45.
Helmerich & Payne (HP)
An investment in HP is first and foremost an investment in the return of the energy sector. Within such a cyclical sector, it’s important to identify leaders that will be able to survive and grow during rough times. The same company will be in the best position to rebound once the cycle starts another growth phase.
HP benefits from a very good standing among its high-quality book of clients. This enables the company to charge a premium for its services and show better operating margins than its peers.
Management has shown a conservative approach by keeping its debt level very low (debt-to-equity ratio stands at 0.11 at the moment) while not building new rigs unless it has solid orders to back them. Since 2004, the company has given up on speculative building, requiring client demand for each build.
Finally, HP owns the largest and most modern rig fleet, and is well positioned among drilling contractors.
Johnson & Johnson (JNJ)
Think of a powerful engine that is continuously being fueled to turn even faster. This is exactly what JNJ is in your portfolio. The pharmaceutical division represents 40% of JNJ’s total revenue and is mainly concentrated around immunology, oncology & psoriasis drugs. This is the powerful engine turning full speed and generating strong profits. Then, Johnson & Johnson has an impressive brand portfolio of personal care goods. Most of its brands are either #1 or #2 in their markets and their products are being sold around the world. These are the kind of products that are being bought by consumers week after week, month after month. This part of JNJ’s business model brings continuous cash flow fueling its R&D department to insure a strong drug pipeline. This is why Johnson & Johnson is always the leader in their various fields of business. This is also the reason why JNJ has been paying and increasing its dividend for over 50 years.
SNC Lavallin (SNC.TO)
When I purchased SNC, they were stuck in the middle of some very heavy legal problems. The dust seems to have settled now and it is more likely that the company will avoid being banned from contracting with the Canadian Government for 10 years.
The company has a solid book of orders and trades under its real value. The dividend payment is not at risk and the stock price is so low that it makes it a good candidate for a takeover. Last year we saw another engineering firm coming out of a similar criminal charge nightmare, WSP Global (WSP.TO), previously known as Genivar. WSP Global made a major purchase last year (Parsons Brinkerhoff for $1.3B) and the stock is up by 77% over the past two years. Not so long ago, nobody would have considered this scenario possible for Genivar. I hope a similar situation will happen with SNC.
I’m not the only one thinking SNC can be a great buy. Quebec’s Caisse de Depot (which manages the pension plan for the Quebec population) is actively buying the stock and SNC’s new management has also made several stock purchases.
I believe the moment charges will be settled, investors will look at the SNC $12B order book and forget about the past. After all, even with the current shadow over its head, the company continues to win contracts around the world. Their expertise is among the most solid in the world in their field. The problem came from greedy management looking to cut corners. This must be punished, but there are solid engineers working at SNC and the company should survive this storm.
Lockheed Martin (LMT)
One of the reasons why I like LMT so much is that it evolves in a quasi monopoly. They obviously have lots of competitors, but LMT has become THE defense company the U.S. government goes to when it comes down to jet fighters for example. Lockheed Martin has done what BlackBerry did a few years ago by controlling the market. Fortunately for them, it is a lot harder to copy an F35 than a smartphone!
LMT clients are closely bonded to them for several reasons. First, the trust between both the client and the company is quite important in this case. We are talking about military defense, you will not change your supplier in a heartbeat! Second, the switching cost for their clients would be incredibly high. Lockheed Martin benefits from several long-term contract guaranteeing a steady income flow. Those contracts are not easily broken. Plus, LMT owns a unique experience in military defense products and services.
It seems LMT is surfing through the perfect storm. As conflicts are rising around the globe, the Congress accepted Lockheed Martin to seek out for international opportunities. This means the company could enlarge its international sales by doing business offshore.
Lowe’s (LOW)
LOW is the 2nd largest home-improvement retailer in the world showing $61 billion in revenue over the past 12 months. Lowe’s use its strong position in the U.S. to generate sufficient cash flow to find growth opportunities around the world. This is how they purchased Rona (RON) in 2016. Once this acquisition is fully integrated within its business model, LOW is more likely to continue with its appetite for other players.
Speaking of its business model, this is what seduced me about Lowe’s. Lowe’s doesn’t only focus on selling you home renovation and improvement products, it also uses its experienced sales-force to provide you with additional advice. This good advice builds a stronger bond between the customer and the company, and it also leads to several cross-selling opportunities. The company has also successfully built a solution-based segment within its stores.
The solution-based segment offers a variety of packages for customers or entrepreneurs who want to renovate their kitchen, bathroom, build a patio, etc. This model offers great margins and also brings more contractors on board with them. By offering a complete solution from start to finish, Lowe’s makes sure to “capture” the customer for all its project purchases.
Telus (T.TO)
Telus offers residential phone, internet, TV and mobile phone services. Back in 2008, Telus also bought Emergis, a leading electronic healthcare solutions provider and then created Telus Health Solutions. Considering the number of wireless subscribers, Telus is the 3rd largest provider in Canada. Interesting enough, T gets 49% of its revenue from Wireline and 51% from Wireless.
Telus is the perfect example of a solid dividend growth company. Telus has shown one of the strongest dividend growth performances over the past ten years on the Canadian stock market. The stability of the Canadian market doubled with T.TO’s ability to generate high profits from its customers opens the door for higher dividend payments. The company is also currently grabbing good market share in the cable industry, hurting its competitor Shaw Communications (SJR.B.TO). With the recent SRJ purchase of Wind Mobile, we continue to believe Telus will continue to steal more clients from Shaw.
3M Co (MMM)
3M produces products like Scotch tape, projector systems, Post-it notes, Tartan track, and Thinsulate. This is a conglomerate that produces products for many industries and for both personal and business use, and their manufacturing, research, and sales offices are all over the world.
3M Company is definitely more diversified than a balanced mutual fund. It is present in various consumable product areas and the bulk of its sales come from business-to-business transactions. Roughly 50% of its products are consumable, which implies a very high rate of repeat business year after year. The company also allocates between $1 and $2 billion per year for acquisitions providing external growth on top of what is coming out of its own R&D department. MMM also benefits from top-of-the-line technology enabling it to control costs like no other company.
Royal Bank (RY.TO)
Royal Bank provides various financial services to individuals as well as commercial and institutional clients. Their services range from regular banking, investments, insurance, brokerage, mortgages, loans, etc. RY recently purchased City National, a private & commercial bank for wealthy clients based in Los Angeles.
I consider RY a very interesting play as its capital market and wealth management sectors provide a strong and consistent revenue stream aside from traditional banking. They do an awesome job generating strong profits from capital markets and their wealth management division generates revenues from over 15 million clients. Their recent purchase in LA will increase their US revenues.
Emera (EMA.TO)
As long as EMA is using this cash flow to generate more projects, we should see consistent sales growth. Notably, 2 projects (a participation in Maritime Link and an undersea power cable) should be operating in 2017. Surprisingly enough, the budget is actually being followed to the letter and there shouldn’t be any excess spending (maybe we should hire EMA’s management to oversee a few Government handled projects?).
The future looks bright for EMA as it shows several projects for the next decade. Both revenues and EPS have grown steadily over the past five years and the dividends have followed accordingly. EMA is definitely a strong utility to hold. Management expects the TECO acquisition should boost EPS by 5% in 2017 and growing to more than 10% by the third full year of operation (2019). EMA restated its dividend growth target of 8% through 2019 and expects to keep this pace past 2019. EMA continues to be a strong holding for any Canadian dividend growth investor.
Union Pacific (UNP)
Union Pacific is a transportation company focused on railroads. Its Union Pacific Railroad covers 23 states across the western 2/3 of the USA. UNP shows a great diversification in terms of sectors: 10% for Automotive, 17% Agricultural products, 17% Chemicals, 20% Intermodal, 19% Industrial products and 17% Coal.
The reason to purchase UNP today is simple; go past the short-sighted challenging environment and look at the big picture. Low oil prices will only last for so long and trucking industry will not remain as fierce competitors over the long run. In the meantime, the management team is doing fabulous work to continue improving the company’s productivity with longer and faster trains all the while controlling costs. This is a strong dividend payer with a relatively good yield (2.40%).
I know… this was a very long article, but I hope it will give you a few buying ideas for the new year!
Disclaimer: all stocks mentioned in this article are part of our Dividend Stocks Rock Portfolios.
FYI…Union Pacific isn’t a Canadian company.
oops! typo! thx, I’ll edit that right away!
Mike