In This Issue

GROWTH FUNDS SAVE RRSP PORTFOLIO

By Gordon Pape

There are two main objectives in RRSP management. The first is to preserve capital – any losses in an RRSP account cannot be replaced and cannot be claimed as capital losses. The second is to achieve a reasonable growth rate, certainly better than you would receive by simply stashing the money in a GIC.

When I created the IWB RRSP Portfolio in February 2012 I tried to balance off both these goals. The portfolio was given a heavy weighting in bonds and defensive securities with a view to minimizing risk. To that I added three growth-oriented mutual funds covering the Canadian, U.S., and international equity markets.

That combination paid off for us in the very unusual market conditions that have prevailed since we last reviewed the portfolio in February, although not in the way we might have expected. The defensive components of the portfolio all slipped back after interest rates took a sharp, sudden jump in May on fears the U.S. Federal Reserve Board was poised to start winding down its quantitative easing program. But we were able to post a modest gain over the period thanks to strength from our three mutual funds.

The securities in the RRSP Portfolio were chosen from the Recommended Lists of our three newsletters: the IWB, The Income Investor, and Mutual Funds/ETFs Update. The portfolio is composed of a mixture of ETFs, mutual funds, common stocks, and REITs. This means that readers who wish to replicate it must have a self-directed RRSP with a brokerage firm. The initial value was $25,031.92. These are the securities we chose and how they have performed since the last review.

iShares DEX Universe Bond Index Fund (TSX: XBB). Bonds were battered by the interest rate jump and this ETF, which replicates the total Canadian bond universe, suffered accordingly. Although we continued to receive healthy monthly distributions, the share price fell from $31.06 to $29.65, or 4.5%. As a result, we are now in what amounts to a break-even position on this fund.

Fidelity Canadian Large Cap Fund (FID231). This mutual fund has been one of the driving forces of our portfolio. At the time of our last review, the B units had a net asset value (NAV) of $31.33. That’s now up to $37.60, a gain of 20% in a little more than six months. Considering the fact that the TSX has been stuck in the doldrums all year, that’s a remarkable performance. We now have a total return of 28% from this fund since the portfolio was launched.

Beutel Goodman American Equity Fund D units (BTG774). This has been another powerhouse for us. Last February the units had an NAV of $8.81; it’s now up to $10.25 for a gain of 16.3% since then. The total return since the portfolio started is 33.9%.

Mawer International Equity Fund (MAW102). This mutual fund has not been as robust as the two previous ones and has been fading a bit recently. Still, the units managed to post a gain of 7.4% since February which is not bad in the current climate. Total return to date is 22.5%.

Brookfield Renewable Energy Partners LP (TSX: BEP.UN, NYSE: BEP). This was one of the defensive securities that lost value when rates spiked. It’s down 9.2% since our last review and as a result the total return to date has fallen back to 5.1%.

Brookfield Infrastructure Partners LP (TSX: BIP.UN, NYSE: BIP). The shares of this limited partnership also retreated although not by as much as those of Renewable Energy. We saw a slippage of 5.8% since February, however the big gains we enjoyed previously plus the on-going healthy distributions have left us with a total return to date of just over 34%.

Firm Capital Mortgage Investment Corp. (TSX: FC). This MIC was hit hard when rates moved higher, losing 10.8% since our last review. Only the monthly distributions of $0.078 per share have kept us in the black here.

Boardwalk REIT (TSX: BEI.UN). REITs were also hurt by rising rates. As a result, Boardwalk suffered the biggest loss of the period, dropping 14.1% in value. We still have a decent gain since the portfolio’s inception, but the big decline is a concern.

Interest. We invested the accumulated distributions in an ING Direct high interest savings account paying 1.35%. That provided $6.77 in interest since February.

Here is how the RRSP Portfolio stood at the close of trading on Sept. 5. Commissions have not been factored in and Canadian and U.S. currencies are treated at par.

IWB RRSP Portfolio (a/o Sept. 5/13)

Security
Weight
%
Original
Price
Shares
Book
Value
Current
Price
Market
Value
Total
Payments
% Gain/
Loss
XBB
27.4
$31.33
240
$7,512.00
$29.65
$7,116.00
$401.72
+ .01
FID231
19.2
$29.97
167
$5,004.99
$37.60
$6,279.20
$125.97
+28.0
BTG774
15.5
$7.83
479
$3,750.57
$10.25
$4,909.75
$113.81
+33.9
MAW102
5.2
$31.36
40
$1,254.40
$37.99
$1,519.60
$16.83
+22.5
BEP.UN
10.2
$27.43
91
$2,496.13
$27.44
$2,497.04
$125.58
+ 5.1
BIP.UN
12.2
$29.39
85
$2,498.15
$37.04
$3,148.40
$200.60
+34.1
FC
4.7
$13.51
93
$1,256.43
$12.36
$1,149.48
$135.59
+ 2.2
BEI.UN
5.6
$54.75
23
$1,259.25
$56.50
$1,299.50
$65.90
+ 8.4
Interest
$6.77
Totals
100%
$25,031.92
$27,918.97
$1,192.77
+16.3

Comments: The total value of the portfolio is $29,111.74. That’s up by 3.5% since February – not a spectacular gain but not bad considering the losses incurred by our defensive securities. Since inception, we are showing a total return of 16.3%.

Changes: With interest rates likely to continue to rise as the economy improves, we need to reposition some of our assets. We’ll start by selling our entire position in XBB for $7,116. Add the distributions we have received of $401.72 and that gives us $7,517.72 to reinvest.

I believe it is important to retain a fixed-income component in an RRSP but clearly we need to minimize risk. The best way to do this is to shift the money into short-term bonds. My choice is the iShares DEX Short Term Corporate Universe + Maple Bond Index Fund (TSX: XSH). It invests primarily in bonds that mature in five years or less, although there are a few longer term issues in the mix. The bonds may be issued by Canadian companies or by foreign corporations in Canadian currency (the Maple Bonds). This is one of the few bond ETFs to show a profit year to date, albeit a small one. It pays monthly distributions of between $0.05 and $0.06 per unit.

The units closed on Sept. 5 at $19.64. We will buy 300 shares at that price for an investment of $5,892. That leaves us with $1,625.72 still to invest.

Much as I admire the Mawer organization, I feel we should be getting more out of our international equity fund. Accordingly, we will sell our units in Mawer International Equity for $1,536.43, including distributions. Combined with the proceeds remaining from the XBB sale, we now have $3,162.15 in cash.

We’ll replace the Mawer fund with one that few people know about: Black Creek International Equity (A units). It’s run by veteran Richard Jenkins of Black Creek Investment Management and distributed through the CI organization.

This fund, which invests in countries around the world except the U.S. and Canada, has an outstanding record since it was launched in September 2008, just as the market crash was gaining momentum. Over the three years to July 31 it posted an average annual compound rate of return of 13.4%, about double the category average. In the most recent 12-month period it was ahead almost 40%.

We will buy 150 units of the fund at the current NAV of $18.12 for a cost of $2,718, leaving us with cash of $444.15. The code for the front-end load units (try to get them at zero commission) is CIG11118. We are adding this fund to the IWB Recommended List.

My feeling is the defensive stocks in the portfolio have been oversold so we will retain those positions for now. If we do not see an improvement in performance, we will do another overhaul at the time of our next review in February.

The ING savings account continues to pay 1.35% so we will leave our cash reserves there.

Here is what the revised portfolio looks like. Note that the bond portion now represents only about 21% of the current market value, down from 30% originally. The total weighting of the growth-oriented mutual funds has been increased to about 49%, up from 40% at the time the portfolio was launched. This revised balancing should better suit the current financial and economic conditions.

IWB RRSP Portfolio (revised Sept. 5/13)

Security
Weight
%
Original
Price
Shares
Book
Value
Current
Price
Market
Value
Total
Payments
XSH
20.8
$19.64
300
$5,892.00
$19.64
$5,892.00
0
FID231
22.2
$29.97
167
$5,004.99
$37.60
$6,279.20
$125.97
BTG774
17.3
$7.83
479
$3,750.57
$10.25
$4,909.75
$113.81
CIG11118
9.6
$18.12
150
$2,718.00
$18.12
$2,718.00
0
BEP.UN
8.8
$27.43
91
$2,496.13
$27.44
$2,497.04
$125.58
BIP.UN
11.1
$29.39
85
$2,498.15
$37.04
$3,148.40
$200.60
FC
4.0
$13.51
93
$1,256.43
$12.36
$1,149.48
$135.59
BEI.UN
4.6
$54.75
23
$1,259.25
$56.50
$1,299.50
$65.90
Cash
1.6
$450.92
Totals
100%
$24,875.52
$28,344.29
$767.45

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BANKS RUNNING INTO HEADWINDS

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We are joined this week by contributing editor Tom Slee who is our resident expert on the banks. With third-quarter results now out, he looks at the implications for investors going forward. Tom managed millions of dollars in pension money during his career and is an expert in taxation. Here is his report.

Tom Slee writes:

As a rule, interest rates surge late in the economic cycle. That’s good news for banks. More expensive money normally reflects buoyant markets, brisk business activity, and increasing loan demand.

The trouble is, these are not normal times. The current jump in rates is not powered by a strong recovery. It results from bond market distortions caused by the U.S. Federal Reserve Board. If anything, the move handicaps banks as mortgage activity slows. We have the odd situation where bank executives are trying to reassure investors. Even more important, tighter money could actually snuff out a still fragile recovery. It’s the last thing we need.

To put it bluntly, higher interest rates without meaningful economic growth and rising consumer confidence are likely to undermine rather than drive bank earnings. There are several reasons for this.

First and foremost, because this current rate adjustment is artificial it’s badly skewed. Central banks are keeping a firm lid on short-term rates for the foreseeable future while yields in the long end are allowed to rise. This hurts the banks in two ways. They earn a great deal of their interest income from loans, such as commercial lines of credit and home equity debt, pegged to Prime. These margins will remain thin. At the same time, a lot of mortgage borrowers are going to defer commitments as long rates move up, especially now that they have become accustomed to record low-cost financing.

Another problem is that because of slack loan demand many banks have been awash in cash and buying bonds, so much so that we have an aberration in the system. According to the U.S. Federal Deposit Insurance Corporation (FDIC), securities made up 21% of lenders’ assets as at the end of March. A great many of these holdings have plummeted in value and billions of dollars in unrealized losses are going to be reflected in the various capital calculations.

Bruce Thompson, Bank of America’s chief financial officer, thinks that the Bank will need three years of net interest income to replace lost capital.
There is also the fact that banks have gradually become substantial bond traders for their own account and been able to generate significant profits. We have been accustomed to seeing these earnings. Now, heading into a fixed-income bear market, bond trading is bound to become less profitable. There may even be net losses. As you can see, there are lots of uncertainties.

U.S. bankers worried

CEO Jamie Dimon of JPMorgan Chase told a Fortune Global Forum: “The return to more normal interest rates is going to be scary and kind of volatile”. It’s not the sort of forecast you expect from a leading banker. We have been warned.

In fact, U.S. bank executives are concerned right now with new regulations as well as rising interest rates. They are strenuously complaining about expense controls, sound balance sheet rules, and credit loss provisions, the sort of standards we take for granted here in Canada. American bankers feel that all this red tape is hampering their operations but it’s all long overdue as far as investors are concerned. In any event, the U.S. banking industry is showing signs of strength despite all the rules.

Industry top-line growth remains sluggish but banks have been gradually easing their lending standards and introducing higher fees in order to improve profit margins. Mortgage business has slackened recently as the refinancing boom fizzles although this is being partially offset by increased loan interest rate spreads. Wall Street analysts feel that U.S. banks, like their Canadian counterparts, are likely to struggle for a while but then grow more rapidly in 2014 and beyond.

Looking ahead, rising interest rates and increased loan demand should drive earnings as the recovery gains momentum. There are also other revenues coming on stream. Analysts expect to see more income from prepaid cards, higher minimum balances, and innovative credit cards. Cost-cutting continues and there have been more than half a million lay-offs during the last five years.

It all sounds promising but we have to keep one thing in mind. The American banking system is quite different to our tightly-knit, controlled Canadian banking industry. These are not defensive income stocks, although some of them fall into that category. There are bank failures, something that we rarely see in this country. During the second quarter of 2013 alone, 12 American federally insured banks failed. Last year there were 51 bank failures and that is just the tip of the iceberg. As of March 31, the FDIC had 612 U.S. banks on the “problem list”.

I am not saying that American banking stocks are speculative, merely suggesting that you should tread carefully when assessing these companies. It’s a sprawling, diverse industry with a lot of pitfalls. There are about 7,300 insured banks in the U.S. and hundreds of them are publicly traded. As a matter of fact, investment houses tend to group them in sections such as Banks – Southwest or Banks – Major Regional. It’s easy to choose a stock that is really a special situation or heavily dependent on a unique regional economy.

My feeling at this stage in the cycle is that we should stay with a group of the largest banks that make up what is known as the Diversified Financial Services sub-industry. These institutions are extremely well capitalized and we should see them returning excess equity to shareholders in dividends and repurchase programs next spring when the Fed’s stress tests are complete. In addition, their substantial international and investment earnings could pick up the slack if the American recovery falters. Equally important, these major players have continuing analyst coverage. We will be able to keep close tabs on the progress.

The outlook

My feeling is that banks are going to have a relatively rough passage over the next few quarters. I am not suggesting that they are going to incur operating losses. However, their crucial loan growth, the industry’s lifeblood, is like to remain tepid until the underlying economy picks up steam. Everything depends on whether the recovery has traction.

The outlook is mixed. According to the Conference Board, U.S. GDP should grow 1.5% in real terms this year while here in Canada we are likely to see an increase of about 1.7%. Those are tepid numbers. In 2014, however, the Board looks for a more robust 2.8% growth in the U.S. and 2.5% in this country. Not everybody agrees. TD Bank CEO Ed Clark thinks that “2014 is going to be a tough revenue year”.

Some of the difficulties are already apparent in the Canadian banks’ third-quarter earnings. Our media greeted these as an earnings bonanza but when you scratch the surface there is not much to cheer about. Many analysts had downgraded their forecasts, especially in the case of TD Bank, so the bar was low. It looks as though total industry cash operating income was up a modest 4% year-over-year. The numbers were good enough to support some modest dividend increases but these came with disappointing guidance.

You’ll find updates on my bank recommendations elsewhere in this issue.

 

TOM SLEE’S UPDATES

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Bank of Nova Scotia (TSX, NYSE: BNS)

Originally recommended on Jan. 17/11 (#21102) at C$56.83, US$57.34. Closed Friday at C$60.03, US$57.67.

Scotiabank turned in a solid performance despite some difficult international markets. Cash operating earnings, excluding unusual items of $1.32, were up 15% from $1.15 a year ago and slightly ahead of the $1.30 consensus forecast. A 3.3% dividend increase to $2.48 annually was in line with expectations. Canadian banking earnings jumped an impressive 14% year-over-year but a lot of that was due to the ING acquisition.

One of the main reasons we have BNS on our Buy List is the bank’s overseas exposure. This time, though, the International Banking segment produced lacklustre numbers. Good loan growth was offset by higher loss provisions and increased expenses. I should point out that about 40% of this business is in Mexico and the Caribbean, areas that reflect the spluttering U.S. economy. This is a case of battling headwinds until the recovery has real traction.

Nevertheless Scotiabank remains my first choice amongst the Canadian banks because of the balanced growth opportunities abroad and improving numbers from the ING business here at home.

Action now: Scotiabank remains a Buy with a target of $65. I will revisit the stock if it dips to $53.

National Bank (TSX: NA, OTC: NTIOF)

Originally recommended on April 11/11 (#21114) at C$76.69, US$80.22. Closed Friday at C$82.91, US$79.74.

National Bank reported third-quarter earnings of $2.22 per share, a 12% improvement over $1.98 a year ago and well ahead of the $2.06 consensus forecast.

The story here was a $186 million trading profit while Wealth Management income of $58 million was up 26% year-over-year. Most encouraging, there was an 8% growth in personal and commercial loans. Another plus is that National has acquired TD’s Institutional Services Unit, a move that should add as much as $0.12 a share to the bottom line next year.

A year ago we put National on Hold at $77 because of possible reaction to the Quebec election. That proved to be a good move and the stock subsequently dropped into the $72 range. Now, however, investors are more receptive to NA.

Action now: National Bank is reinstated as a Buy with a target of $90. I will revisit the bank if it drops to $75.

TD Bank (TSX, NYSE: TD)

Originally recommended on Feb. 12/07 (#2706) at C$69.85, US$59.59. Closed Friday at C$92.16, US$87.55.

TD Bank earned a $1.60 a share in its third quarter versus an expected $1.53 but down substantially from $1.78 the year before. The numbers were a mixed bag. TD’s insurance and wealth division essentially broke even compared to a $360 million profit in 2012 because of flood losses and poor auto experience. Wholesale banking earnings were $147 million, well below the $200 million analysts were expecting. On the plus side, personal and commercial banking in Canada as well as the U.S. turned in strong earnings and the bank announced a 5% dividend increase to $3.40 per share annually.

The insurance loss was a shock and a reminder of why for many years banks were expressly forbidden from offering insurance. With natural disasters occurring more frequently, investors are bound to factor this exposure into the stock price going forward. For now TD is back on track and expected to earn about $7.75 a share in 2013 and $8.50 or so next year.

Action now: TD Bank remains a Buy with a target of $100. I have set an $80 revisit level.

JPMorgan Chase & Co. (NYSE: JPM)

Originally recommended on Feb. 3/13 (#21305) at $47.85. Closed Friday at $52.56. (All figures in U.S. dollars.)

Looking south, the U.S. bank that I particularly like right now is JPMorgan Chase, an industry leader with assets of nearly $2.4 trillion and operations in more than 50 countries. It functions with four business segments, Consumer Banking, Corporate Banking, Commercial Banking, and Asset Management. Annual revenues exceed $106 billion and last year JPM reported net income of $21.3 billion.

In June, the bank announced a second-quarter profit of $6.1 billion or $1.60 per share, up 32% year-over-year and a lot better than the $1.44 consensus forecast. Investment earnings of $2.8 billion surged 19% from the second quarter of 2012, driven by increased underwritings as U.S. financial markets revived. Mortgage applications jumped 37% to $67 billion. It was an excellent performance and JPM is now set to make about $5.90 a share in 2013 with an increase to $6.25 next year.

There is one cloud on the horizon. JPM has been receiving a lot of bad press recently and that is likely to continue for a while. The Justice Department is probing the bank’s trading practices and there are lawsuits pending.

However, it’s worthwhile keeping in mind Chase’s strong balance sheet and enormous income when any settlements are announced.

Action now: JPMorgan Chase remains a Buy with a $65 target. I have set a $42 revisit level.

Rogers Communications (TSX: RCI.B, NYSE: RCI)

Originally recommended on April 23/07 (#2716) at C$42.10, US$37.41. Closed Friday at C$43.02, US$41.34.

Rogers continues to perform well and meet forecasted earnings. Second-quarter profit of $0.96 per share was up from $0.91 the previous year and free cash flow came in at $453 million. Wireless results beat expectations and there were 42,000 net subscriber additions. Cable earnings jumped 7%. As a result, Rogers should earn about $3.50 this year but the 2014 forecast is a little uncertain.

Rogers’ stock jumped on Tuesday in the wake of the surprising weekend news that U.S. wireless giant Verizon has no plans to enter the Canadian market at this time. The share price had been overshadowed by concern that Verizon might enter the Canadian market next year. That would have been a game changer. Regardless of the terms of entry, Verizon would have towered over our three telecoms. According to the Bank of Montreal, Verizon already has 115 million subscribers and earns about US$34 billion from the business. By comparison, there are 25 million wireless subscribers in all of Canada generating a total of $8 billion in earnings. Rogers feels strongly that we cannot support another major player. The government, however, seems determined to allow more competition.

Now Verizon says it has put Canada on the back burner. Regardless of that decision I think that the Canadian industry now has a different tone. The government has made it clear that it welcomes competition so the days of three telecoms having the market to themselves are almost certainly numbered. Verizon may renew its interest. Norway’s Telenor and Britain’s Vodafone have already been mentioned as possible invaders. They know that Ottawa is receptive. Therefore Rogers will be inclined to hunker down and conserve cash at least until there is less uncertainty. Dividend increases will be postponed indefinitely.

Action now: Rogers becomes a Hold.

Alimentation Couche-Tard (TSX: ATD.B, OTC: ANCUF)

Originally recommended on March 4/13 (#21305) at C$52.85, US$51.40. Closed Friday at C$61.99, US$59.85.

Alimentation Couche-Tard reported good first-quarter 2014 earnings and the stock traded above our $62 target and is still around that level.

Action now: The stock remains a Buy with revised target of $70. I will provide a full update on the company next time.

– end Tom Slee

GORDON PAPE’S UPDATES

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Saputo Inc. (TSX: SAP, OTC: SAPIF)

Originally recommended on Sept. 26/11 (#21135) at C$40.58, US$41.02. Closed Friday at C$47.64, US$45.86.

Saputo shares have pulled back from their May highs, despite improved profits and a dividend increase. The reason: although the latest quarterly results looked positive, they missed analysts’ expectations.

The dairy giant’s results for the first quarter of fiscal 2014 showed revenue of almost $2.2 billion, up 28% from the same period last year. Net earnings were $136.7 million ($0.69 a share, fully diluted) compared to $121.8 million ($0.60 a share) a year ago. That an improvement of 15% year-over-year.

You would have expected the markets to greet such results warmly. Not at all! Analysts had been looking for earnings of $0.74 a share, so the actual results constituted a big miss.

The reasons for the shortfall cited by the company were increased competition and the resulting need to spend more money on promotion.

Revenue from the Canadian and international operations was almost flat compared to a year ago. The big gain was in the U.S. when revenue increased more than 80% to just over $1 billion thanks to the acquisition of Morningstar, which was completed last January. In a research report, RBC Capital Markets analyst Irene Nattel and associate Martin Gravel referred to Morningstar as a “shining star” and said: “The combination of Morningstar and SAP’s cheese-focused U.S. business should lead to potential leveraging of the Morningstar platform and opportunity for synergies and operating efficiencies”.

The company announced a 9.5% increase in the quarterly dividend to $0.23 a share ($0.92 annually) effective with the Sept. 16 payment. Investors were also told that a portion of the Sept. 16 dividend, estimated at $0.0086 per share, will not qualify for the Canadian dividend tax credit. However, that’s only a small fraction (about 4%) of the payment so it should not be a cause for concern.

Action now: Buy. The pull-back offers an entry opportunity.

Gibson Energy (TSX: GEI, OTC: GBNXF)

Originally recommended on Oct. 1/12 (#21234) at C$23.03, US$23.26. Closed Friday at C$22.79, US$21.52 (Aug. 30).

We’ve also see a retreat in Gibson Energy’s share price in recent months, from a high of $27.37 in May to Friday’s close on the TSX of $22.79. The company’s second-quarter financial results missed estimates for the first time since it went public in 2011, disappointing investors.

Cash from operations for the quarter ending June 30 was $80.5 million compared to $56.1 million for the same period in 2012. That looks like strong growth but analysts had been expecting better. Weak results from the Environmental Services segment were the main reason for the shortfall.

Gibson reported a net loss of $5.3 million for the quarter ($0.04 a share, fully diluted) compared to a profit of $9.5 million ($0.09 per share) for the same quarter last year. For the first half of the current fiscal year, the company earned $40.5 million ($0.33 a share), down from $49.6 million ($0.49 a share) last year.

The company increased its expected 2013 growth capital spending forecast by 6% from $235 million to $250 million. For 2014, growth capital spending is now expected to increase by 50% from a minimum of $200 million to a minimum of $300 million. The increased capital costs relate primarily to expansion of Gibson’s Hardisty and Edmonton terminals.

The Hardisty work will provide a connection to a new rail terminal for crude oil shipments. Gibson already has contracts in place to support this expansion.

The Edmonton terminal is being expanded under a new agreement with Statoil. That work will cost $80-$90 million.

As well, the company is building a new 500,000 barrel oil tank at Hardisty and has long-term contracts in place to support it.

Although Gibson fell short in its latest result, this remains a long-term growth story with excellent prospects. As well – and unusual in a company of this type – the shares offer an excellent yield of 4.8% on a quarterly dividend of $0.275 per share ($1.10 annually). So we are being rewarded while we wait for a turnaround in the share price.

Action now: Buy. Remember that this stock is best-suited to investors who can tolerate some risk.

YOUR QUESTIONS

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What to do with $100,000?

Q – I’m a 76-year-old female and just sold my condo. I got $100,000 and, with this high market, I am at a loss as to what I should invest it in. I’m hoping to build it into something more than 1.5%. Any suggestions? – M.G.

A – At your age, you don’t want be taking a lot of risk with your money. One possibility would be to put the cash into an annuity, which would guarantee a life income. Another is to invest in a portfolio of high-quality corporate bonds with terms of no more than five years, which you would hold to maturity. This would provide decent cash flow while protecting you against loss from bond market fluctuations, since you would not be selling before the maturity dates.

These are just a couple of options. You really should consult with a financial adviser who can provide appropriate guidance based on your specific situation. A fee-for-service adviser who does not sell any products would be the best choice. – G.P.

HOUSEKEEPING

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The following have been deleted from our on-line Recommended List. This notice is for record-keeping purposes only.

Cameco Corp. (TSX: CCO, NYSE: CCJ). Recommended by Gordon Pape on July 21/08 at C$38.77, US$38.73. Sold Aug. 20/12 at C$22.31, US$22.54.

Orvana Minerals Corp. (TSX: ORV, OTC: ORVMF). Recommended by Ryan Irvine on Jan. 25/10 at C$1.09, US$1.03. Sold Dec. 17/12 at C$0.77.

Talison Lithium (TSX: TLH, OTC: TLTHF). Recommended by Glenn Rogers on July 16/12 at C$3.99, US$3.68. Sold Aug. 27/12 at C$6.47, US$6.50.

Tim Hortons (TSX, NYSE: THI). Recommended by Gordon Pape on July 20/09 at C$28.88, US$25.91. Sold Aug. 13/12 at C$50.94, US$51.38.

 

That’s a wrap for now. We will be back on Sept. 16.

Best regards,

Gordon Pape

In This Issue

GROWTH FUNDS SAVE RRSP PORTFOLIO

By Gordon Pape

There are two main objectives in RRSP management. The first is to preserve capital – any losses in an RRSP account cannot be replaced and cannot be claimed as capital losses. The second is to achieve a reasonable growth rate, certainly better than you would receive by simply stashing the money in a GIC.

When I created the IWB RRSP Portfolio in February 2012 I tried to balance off both these goals. The portfolio was given a heavy weighting in bonds and defensive securities with a view to minimizing risk. To that I added three growth-oriented mutual funds covering the Canadian, U.S., and international equity markets.

That combination paid off for us in the very unusual market conditions that have prevailed since we last reviewed the portfolio in February, although not in the way we might have expected. The defensive components of the portfolio all slipped back after interest rates took a sharp, sudden jump in May on fears the U.S. Federal Reserve Board was poised to start winding down its quantitative easing program. But we were able to post a modest gain over the period thanks to strength from our three mutual funds.

The securities in the RRSP Portfolio were chosen from the Recommended Lists of our three newsletters: the IWB, The Income Investor, and Mutual Funds/ETFs Update. The portfolio is composed of a mixture of ETFs, mutual funds, common stocks, and REITs. This means that readers who wish to replicate it must have a self-directed RRSP with a brokerage firm. The initial value was $25,031.92. These are the securities we chose and how they have performed since the last review.

iShares DEX Universe Bond Index Fund (TSX: XBB). Bonds were battered by the interest rate jump and this ETF, which replicates the total Canadian bond universe, suffered accordingly. Although we continued to receive healthy monthly distributions, the share price fell from $31.06 to $29.65, or 4.5%. As a result, we are now in what amounts to a break-even position on this fund.

Fidelity Canadian Large Cap Fund (FID231). This mutual fund has been one of the driving forces of our portfolio. At the time of our last review, the B units had a net asset value (NAV) of $31.33. That’s now up to $37.60, a gain of 20% in a little more than six months. Considering the fact that the TSX has been stuck in the doldrums all year, that’s a remarkable performance. We now have a total return of 28% from this fund since the portfolio was launched.

Beutel Goodman American Equity Fund D units (BTG774). This has been another powerhouse for us. Last February the units had an NAV of $8.81; it’s now up to $10.25 for a gain of 16.3% since then. The total return since the portfolio started is 33.9%.

Mawer International Equity Fund (MAW102). This mutual fund has not been as robust as the two previous ones and has been fading a bit recently. Still, the units managed to post a gain of 7.4% since February which is not bad in the current climate. Total return to date is 22.5%.

Brookfield Renewable Energy Partners LP (TSX: BEP.UN, NYSE: BEP). This was one of the defensive securities that lost value when rates spiked. It’s down 9.2% since our last review and as a result the total return to date has fallen back to 5.1%.

Brookfield Infrastructure Partners LP (TSX: BIP.UN, NYSE: BIP). The shares of this limited partnership also retreated although not by as much as those of Renewable Energy. We saw a slippage of 5.8% since February, however the big gains we enjoyed previously plus the on-going healthy distributions have left us with a total return to date of just over 34%.

Firm Capital Mortgage Investment Corp. (TSX: FC). This MIC was hit hard when rates moved higher, losing 10.8% since our last review. Only the monthly distributions of $0.078 per share have kept us in the black here.

Boardwalk REIT (TSX: BEI.UN). REITs were also hurt by rising rates. As a result, Boardwalk suffered the biggest loss of the period, dropping 14.1% in value. We still have a decent gain since the portfolio’s inception, but the big decline is a concern.

Interest. We invested the accumulated distributions in an ING Direct high interest savings account paying 1.35%. That provided $6.77 in interest since February.

Here is how the RRSP Portfolio stood at the close of trading on Sept. 5. Commissions have not been factored in and Canadian and U.S. currencies are treated at par.

IWB RRSP Portfolio (a/o Sept. 5/13)

Security
Weight
%
Original
Price
Shares
Book
Value
Current
Price
Market
Value
Total
Payments
% Gain/
Loss
XBB
27.4
$31.33
240
$7,512.00
$29.65
$7,116.00
$401.72
+ .01
FID231
19.2
$29.97
167
$5,004.99
$37.60
$6,279.20
$125.97
+28.0
BTG774
15.5
$7.83
479
$3,750.57
$10.25
$4,909.75
$113.81
+33.9
MAW102
5.2
$31.36
40
$1,254.40
$37.99
$1,519.60
$16.83
+22.5
BEP.UN
10.2
$27.43
91
$2,496.13
$27.44
$2,497.04
$125.58
+ 5.1
BIP.UN
12.2
$29.39
85
$2,498.15
$37.04
$3,148.40
$200.60
+34.1
FC
4.7
$13.51
93
$1,256.43
$12.36
$1,149.48
$135.59
+ 2.2
BEI.UN
5.6
$54.75
23
$1,259.25
$56.50
$1,299.50
$65.90
+ 8.4
Interest
$6.77
Totals
100%
$25,031.92
$27,918.97
$1,192.77
+16.3

Comments: The total value of the portfolio is $29,111.74. That’s up by 3.5% since February – not a spectacular gain but not bad considering the losses incurred by our defensive securities. Since inception, we are showing a total return of 16.3%.

Changes: With interest rates likely to continue to rise as the economy improves, we need to reposition some of our assets. We’ll start by selling our entire position in XBB for $7,116. Add the distributions we have received of $401.72 and that gives us $7,517.72 to reinvest.

I believe it is important to retain a fixed-income component in an RRSP but clearly we need to minimize risk. The best way to do this is to shift the money into short-term bonds. My choice is the iShares DEX Short Term Corporate Universe + Maple Bond Index Fund (TSX: XSH). It invests primarily in bonds that mature in five years or less, although there are a few longer term issues in the mix. The bonds may be issued by Canadian companies or by foreign corporations in Canadian currency (the Maple Bonds). This is one of the few bond ETFs to show a profit year to date, albeit a small one. It pays monthly distributions of between $0.05 and $0.06 per unit.

The units closed on Sept. 5 at $19.64. We will buy 300 shares at that price for an investment of $5,892. That leaves us with $1,625.72 still to invest.

Much as I admire the Mawer organization, I feel we should be getting more out of our international equity fund. Accordingly, we will sell our units in Mawer International Equity for $1,536.43, including distributions. Combined with the proceeds remaining from the XBB sale, we now have $3,162.15 in cash.

We’ll replace the Mawer fund with one that few people know about: Black Creek International Equity (A units). It’s run by veteran Richard Jenkins of Black Creek Investment Management and distributed through the CI organization.

This fund, which invests in countries around the world except the U.S. and Canada, has an outstanding record since it was launched in September 2008, just as the market crash was gaining momentum. Over the three years to July 31 it posted an average annual compound rate of return of 13.4%, about double the category average. In the most recent 12-month period it was ahead almost 40%.

We will buy 150 units of the fund at the current NAV of $18.12 for a cost of $2,718, leaving us with cash of $444.15. The code for the front-end load units (try to get them at zero commission) is CIG11118. We are adding this fund to the IWB Recommended List.

My feeling is the defensive stocks in the portfolio have been oversold so we will retain those positions for now. If we do not see an improvement in performance, we will do another overhaul at the time of our next review in February.

The ING savings account continues to pay 1.35% so we will leave our cash reserves there.

Here is what the revised portfolio looks like. Note that the bond portion now represents only about 21% of the current market value, down from 30% originally. The total weighting of the growth-oriented mutual funds has been increased to about 49%, up from 40% at the time the portfolio was launched. This revised balancing should better suit the current financial and economic conditions.

IWB RRSP Portfolio (revised Sept. 5/13)

Security
Weight
%
Original
Price
Shares
Book
Value
Current
Price
Market
Value
Total
Payments
XSH
20.8
$19.64
300
$5,892.00
$19.64
$5,892.00
0
FID231
22.2
$29.97
167
$5,004.99
$37.60
$6,279.20
$125.97
BTG774
17.3
$7.83
479
$3,750.57
$10.25
$4,909.75
$113.81
CIG11118
9.6
$18.12
150
$2,718.00
$18.12
$2,718.00
0
BEP.UN
8.8
$27.43
91
$2,496.13
$27.44
$2,497.04
$125.58
BIP.UN
11.1
$29.39
85
$2,498.15
$37.04
$3,148.40
$200.60
FC
4.0
$13.51
93
$1,256.43
$12.36
$1,149.48
$135.59
BEI.UN
4.6
$54.75
23
$1,259.25
$56.50
$1,299.50
$65.90
Cash
1.6
$450.92
Totals
100%
$24,875.52
$28,344.29
$767.45

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BANKS RUNNING INTO HEADWINDS

We are joined this week by contributing editor Tom Slee who is our resident expert on the banks. With third-quarter results now out, he looks at the implications for investors going forward. Tom managed millions of dollars in pension money during his career and is an expert in taxation. Here is his report.

Tom Slee writes:

As a rule, interest rates surge late in the economic cycle. That’s good news for banks. More expensive money normally reflects buoyant markets, brisk business activity, and increasing loan demand.

The trouble is, these are not normal times. The current jump in rates is not powered by a strong recovery. It results from bond market distortions caused by the U.S. Federal Reserve Board. If anything, the move handicaps banks as mortgage activity slows. We have the odd situation where bank executives are trying to reassure investors. Even more important, tighter money could actually snuff out a still fragile recovery. It’s the last thing we need.

To put it bluntly, higher interest rates without meaningful economic growth and rising consumer confidence are likely to undermine rather than drive bank earnings. There are several reasons for this.

First and foremost, because this current rate adjustment is artificial it’s badly skewed. Central banks are keeping a firm lid on short-term rates for the foreseeable future while yields in the long end are allowed to rise. This hurts the banks in two ways. They earn a great deal of their interest income from loans, such as commercial lines of credit and home equity debt, pegged to Prime. These margins will remain thin. At the same time, a lot of mortgage borrowers are going to defer commitments as long rates move up, especially now that they have become accustomed to record low-cost financing.

Another problem is that because of slack loan demand many banks have been awash in cash and buying bonds, so much so that we have an aberration in the system. According to the U.S. Federal Deposit Insurance Corporation (FDIC), securities made up 21% of lenders’ assets as at the end of March. A great many of these holdings have plummeted in value and billions of dollars in unrealized losses are going to be reflected in the various capital calculations.

Bruce Thompson, Bank of America’s chief financial officer, thinks that the Bank will need three years of net interest income to replace lost capital.
There is also the fact that banks have gradually become substantial bond traders for their own account and been able to generate significant profits. We have been accustomed to seeing these earnings. Now, heading into a fixed-income bear market, bond trading is bound to become less profitable. There may even be net losses. As you can see, there are lots of uncertainties.

U.S. bankers worried

CEO Jamie Dimon of JPMorgan Chase told a Fortune Global Forum: “The return to more normal interest rates is going to be scary and kind of volatile”. It’s not the sort of forecast you expect from a leading banker. We have been warned.

In fact, U.S. bank executives are concerned right now with new regulations as well as rising interest rates. They are strenuously complaining about expense controls, sound balance sheet rules, and credit loss provisions, the sort of standards we take for granted here in Canada. American bankers feel that all this red tape is hampering their operations but it’s all long overdue as far as investors are concerned. In any event, the U.S. banking industry is showing signs of strength despite all the rules.

Industry top-line growth remains sluggish but banks have been gradually easing their lending standards and introducing higher fees in order to improve profit margins. Mortgage business has slackened recently as the refinancing boom fizzles although this is being partially offset by increased loan interest rate spreads. Wall Street analysts feel that U.S. banks, like their Canadian counterparts, are likely to struggle for a while but then grow more rapidly in 2014 and beyond.

Looking ahead, rising interest rates and increased loan demand should drive earnings as the recovery gains momentum. There are also other revenues coming on stream. Analysts expect to see more income from prepaid cards, higher minimum balances, and innovative credit cards. Cost-cutting continues and there have been more than half a million lay-offs during the last five years.

It all sounds promising but we have to keep one thing in mind. The American banking system is quite different to our tightly-knit, controlled Canadian banking industry. These are not defensive income stocks, although some of them fall into that category. There are bank failures, something that we rarely see in this country. During the second quarter of 2013 alone, 12 American federally insured banks failed. Last year there were 51 bank failures and that is just the tip of the iceberg. As of March 31, the FDIC had 612 U.S. banks on the “problem list”.

I am not saying that American banking stocks are speculative, merely suggesting that you should tread carefully when assessing these companies. It’s a sprawling, diverse industry with a lot of pitfalls. There are about 7,300 insured banks in the U.S. and hundreds of them are publicly traded. As a matter of fact, investment houses tend to group them in sections such as Banks – Southwest or Banks – Major Regional. It’s easy to choose a stock that is really a special situation or heavily dependent on a unique regional economy.

My feeling at this stage in the cycle is that we should stay with a group of the largest banks that make up what is known as the Diversified Financial Services sub-industry. These institutions are extremely well capitalized and we should see them returning excess equity to shareholders in dividends and repurchase programs next spring when the Fed’s stress tests are complete. In addition, their substantial international and investment earnings could pick up the slack if the American recovery falters. Equally important, these major players have continuing analyst coverage. We will be able to keep close tabs on the progress.

The outlook

My feeling is that banks are going to have a relatively rough passage over the next few quarters. I am not suggesting that they are going to incur operating losses. However, their crucial loan growth, the industry’s lifeblood, is like to remain tepid until the underlying economy picks up steam. Everything depends on whether the recovery has traction.

The outlook is mixed. According to the Conference Board, U.S. GDP should grow 1.5% in real terms this year while here in Canada we are likely to see an increase of about 1.7%. Those are tepid numbers. In 2014, however, the Board looks for a more robust 2.8% growth in the U.S. and 2.5% in this country. Not everybody agrees. TD Bank CEO Ed Clark thinks that “2014 is going to be a tough revenue year”.

Some of the difficulties are already apparent in the Canadian banks’ third-quarter earnings. Our media greeted these as an earnings bonanza but when you scratch the surface there is not much to cheer about. Many analysts had downgraded their forecasts, especially in the case of TD Bank, so the bar was low. It looks as though total industry cash operating income was up a modest 4% year-over-year. The numbers were good enough to support some modest dividend increases but these came with disappointing guidance.

You’ll find updates on my bank recommendations elsewhere in this issue.

 

TOM SLEE’S UPDATES

Bank of Nova Scotia (TSX, NYSE: BNS)

Originally recommended on Jan. 17/11 (#21102) at C$56.83, US$57.34. Closed Friday at C$60.03, US$57.67.

Scotiabank turned in a solid performance despite some difficult international markets. Cash operating earnings, excluding unusual items of $1.32, were up 15% from $1.15 a year ago and slightly ahead of the $1.30 consensus forecast. A 3.3% dividend increase to $2.48 annually was in line with expectations. Canadian banking earnings jumped an impressive 14% year-over-year but a lot of that was due to the ING acquisition.

One of the main reasons we have BNS on our Buy List is the bank’s overseas exposure. This time, though, the International Banking segment produced lacklustre numbers. Good loan growth was offset by higher loss provisions and increased expenses. I should point out that about 40% of this business is in Mexico and the Caribbean, areas that reflect the spluttering U.S. economy. This is a case of battling headwinds until the recovery has real traction.

Nevertheless Scotiabank remains my first choice amongst the Canadian banks because of the balanced growth opportunities abroad and improving numbers from the ING business here at home.

Action now: Scotiabank remains a Buy with a target of $65. I will revisit the stock if it dips to $53.

National Bank (TSX: NA, OTC: NTIOF)

Originally recommended on April 11/11 (#21114) at C$76.69, US$80.22. Closed Friday at C$82.91, US$79.74.

National Bank reported third-quarter earnings of $2.22 per share, a 12% improvement over $1.98 a year ago and well ahead of the $2.06 consensus forecast.

The story here was a $186 million trading profit while Wealth Management income of $58 million was up 26% year-over-year. Most encouraging, there was an 8% growth in personal and commercial loans. Another plus is that National has acquired TD’s Institutional Services Unit, a move that should add as much as $0.12 a share to the bottom line next year.

A year ago we put National on Hold at $77 because of possible reaction to the Quebec election. That proved to be a good move and the stock subsequently dropped into the $72 range. Now, however, investors are more receptive to NA.

Action now: National Bank is reinstated as a Buy with a target of $90. I will revisit the bank if it drops to $75.

TD Bank (TSX, NYSE: TD)

Originally recommended on Feb. 12/07 (#2706) at C$69.85, US$59.59. Closed Friday at C$92.16, US$87.55.

TD Bank earned a $1.60 a share in its third quarter versus an expected $1.53 but down substantially from $1.78 the year before. The numbers were a mixed bag. TD’s insurance and wealth division essentially broke even compared to a $360 million profit in 2012 because of flood losses and poor auto experience. Wholesale banking earnings were $147 million, well below the $200 million analysts were expecting. On the plus side, personal and commercial banking in Canada as well as the U.S. turned in strong earnings and the bank announced a 5% dividend increase to $3.40 per share annually.

The insurance loss was a shock and a reminder of why for many years banks were expressly forbidden from offering insurance. With natural disasters occurring more frequently, investors are bound to factor this exposure into the stock price going forward. For now TD is back on track and expected to earn about $7.75 a share in 2013 and $8.50 or so next year.

Action now: TD Bank remains a Buy with a target of $100. I have set an $80 revisit level.

JPMorgan Chase & Co. (NYSE: JPM)

Originally recommended on Feb. 3/13 (#21305) at $47.85. Closed Friday at $52.56. (All figures in U.S. dollars.)

Looking south, the U.S. bank that I particularly like right now is JPMorgan Chase, an industry leader with assets of nearly $2.4 trillion and operations in more than 50 countries. It functions with four business segments, Consumer Banking, Corporate Banking, Commercial Banking, and Asset Management. Annual revenues exceed $106 billion and last year JPM reported net income of $21.3 billion.

In June, the bank announced a second-quarter profit of $6.1 billion or $1.60 per share, up 32% year-over-year and a lot better than the $1.44 consensus forecast. Investment earnings of $2.8 billion surged 19% from the second quarter of 2012, driven by increased underwritings as U.S. financial markets revived. Mortgage applications jumped 37% to $67 billion. It was an excellent performance and JPM is now set to make about $5.90 a share in 2013 with an increase to $6.25 next year.

There is one cloud on the horizon. JPM has been receiving a lot of bad press recently and that is likely to continue for a while. The Justice Department is probing the bank’s trading practices and there are lawsuits pending.

However, it’s worthwhile keeping in mind Chase’s strong balance sheet and enormous income when any settlements are announced.

Action now: JPMorgan Chase remains a Buy with a $65 target. I have set a $42 revisit level.

Rogers Communications (TSX: RCI.B, NYSE: RCI)

Originally recommended on April 23/07 (#2716) at C$42.10, US$37.41. Closed Friday at C$43.02, US$41.34.

Rogers continues to perform well and meet forecasted earnings. Second-quarter profit of $0.96 per share was up from $0.91 the previous year and free cash flow came in at $453 million. Wireless results beat expectations and there were 42,000 net subscriber additions. Cable earnings jumped 7%. As a result, Rogers should earn about $3.50 this year but the 2014 forecast is a little uncertain.

Rogers’ stock jumped on Tuesday in the wake of the surprising weekend news that U.S. wireless giant Verizon has no plans to enter the Canadian market at this time. The share price had been overshadowed by concern that Verizon might enter the Canadian market next year. That would have been a game changer. Regardless of the terms of entry, Verizon would have towered over our three telecoms. According to the Bank of Montreal, Verizon already has 115 million subscribers and earns about US$34 billion from the business. By comparison, there are 25 million wireless subscribers in all of Canada generating a total of $8 billion in earnings. Rogers feels strongly that we cannot support another major player. The government, however, seems determined to allow more competition.

Now Verizon says it has put Canada on the back burner. Regardless of that decision I think that the Canadian industry now has a different tone. The government has made it clear that it welcomes competition so the days of three telecoms having the market to themselves are almost certainly numbered. Verizon may renew its interest. Norway’s Telenor and Britain’s Vodafone have already been mentioned as possible invaders. They know that Ottawa is receptive. Therefore Rogers will be inclined to hunker down and conserve cash at least until there is less uncertainty. Dividend increases will be postponed indefinitely.

Action now: Rogers becomes a Hold.

Alimentation Couche-Tard (TSX: ATD.B, OTC: ANCUF)

Originally recommended on March 4/13 (#21305) at C$52.85, US$51.40. Closed Friday at C$61.99, US$59.85.

Alimentation Couche-Tard reported good first-quarter 2014 earnings and the stock traded above our $62 target and is still around that level.

Action now: The stock remains a Buy with revised target of $70. I will provide a full update on the company next time.

– end Tom Slee

GORDON PAPE’S UPDATES

Saputo Inc. (TSX: SAP, OTC: SAPIF)

Originally recommended on Sept. 26/11 (#21135) at C$40.58, US$41.02. Closed Friday at C$47.64, US$45.86.

Saputo shares have pulled back from their May highs, despite improved profits and a dividend increase. The reason: although the latest quarterly results looked positive, they missed analysts’ expectations.

The dairy giant’s results for the first quarter of fiscal 2014 showed revenue of almost $2.2 billion, up 28% from the same period last year. Net earnings were $136.7 million ($0.69 a share, fully diluted) compared to $121.8 million ($0.60 a share) a year ago. That an improvement of 15% year-over-year.

You would have expected the markets to greet such results warmly. Not at all! Analysts had been looking for earnings of $0.74 a share, so the actual results constituted a big miss.

The reasons for the shortfall cited by the company were increased competition and the resulting need to spend more money on promotion.

Revenue from the Canadian and international operations was almost flat compared to a year ago. The big gain was in the U.S. when revenue increased more than 80% to just over $1 billion thanks to the acquisition of Morningstar, which was completed last January. In a research report, RBC Capital Markets analyst Irene Nattel and associate Martin Gravel referred to Morningstar as a “shining star” and said: “The combination of Morningstar and SAP’s cheese-focused U.S. business should lead to potential leveraging of the Morningstar platform and opportunity for synergies and operating efficiencies”.

The company announced a 9.5% increase in the quarterly dividend to $0.23 a share ($0.92 annually) effective with the Sept. 16 payment. Investors were also told that a portion of the Sept. 16 dividend, estimated at $0.0086 per share, will not qualify for the Canadian dividend tax credit. However, that’s only a small fraction (about 4%) of the payment so it should not be a cause for concern.

Action now: Buy. The pull-back offers an entry opportunity.

Gibson Energy (TSX: GEI, OTC: GBNXF)

Originally recommended on Oct. 1/12 (#21234) at C$23.03, US$23.26. Closed Friday at C$22.79, US$21.52 (Aug. 30).

We’ve also see a retreat in Gibson Energy’s share price in recent months, from a high of $27.37 in May to Friday’s close on the TSX of $22.79. The company’s second-quarter financial results missed estimates for the first time since it went public in 2011, disappointing investors.

Cash from operations for the quarter ending June 30 was $80.5 million compared to $56.1 million for the same period in 2012. That looks like strong growth but analysts had been expecting better. Weak results from the Environmental Services segment were the main reason for the shortfall.

Gibson reported a net loss of $5.3 million for the quarter ($0.04 a share, fully diluted) compared to a profit of $9.5 million ($0.09 per share) for the same quarter last year. For the first half of the current fiscal year, the company earned $40.5 million ($0.33 a share), down from $49.6 million ($0.49 a share) last year.

The company increased its expected 2013 growth capital spending forecast by 6% from $235 million to $250 million. For 2014, growth capital spending is now expected to increase by 50% from a minimum of $200 million to a minimum of $300 million. The increased capital costs relate primarily to expansion of Gibson’s Hardisty and Edmonton terminals.

The Hardisty work will provide a connection to a new rail terminal for crude oil shipments. Gibson already has contracts in place to support this expansion.

The Edmonton terminal is being expanded under a new agreement with Statoil. That work will cost $80-$90 million.

As well, the company is building a new 500,000 barrel oil tank at Hardisty and has long-term contracts in place to support it.

Although Gibson fell short in its latest result, this remains a long-term growth story with excellent prospects. As well – and unusual in a company of this type – the shares offer an excellent yield of 4.8% on a quarterly dividend of $0.275 per share ($1.10 annually). So we are being rewarded while we wait for a turnaround in the share price.

Action now: Buy. Remember that this stock is best-suited to investors who can tolerate some risk.

YOUR QUESTIONS

What to do with $100,000?

Q – I’m a 76-year-old female and just sold my condo. I got $100,000 and, with this high market, I am at a loss as to what I should invest it in. I’m hoping to build it into something more than 1.5%. Any suggestions? – M.G.

A – At your age, you don’t want be taking a lot of risk with your money. One possibility would be to put the cash into an annuity, which would guarantee a life income. Another is to invest in a portfolio of high-quality corporate bonds with terms of no more than five years, which you would hold to maturity. This would provide decent cash flow while protecting you against loss from bond market fluctuations, since you would not be selling before the maturity dates.

These are just a couple of options. You really should consult with a financial adviser who can provide appropriate guidance based on your specific situation. A fee-for-service adviser who does not sell any products would be the best choice. – G.P.

HOUSEKEEPING

The following have been deleted from our on-line Recommended List. This notice is for record-keeping purposes only.

Cameco Corp. (TSX: CCO, NYSE: CCJ). Recommended by Gordon Pape on July 21/08 at C$38.77, US$38.73. Sold Aug. 20/12 at C$22.31, US$22.54.

Orvana Minerals Corp. (TSX: ORV, OTC: ORVMF). Recommended by Ryan Irvine on Jan. 25/10 at C$1.09, US$1.03. Sold Dec. 17/12 at C$0.77.

Talison Lithium (TSX: TLH, OTC: TLTHF). Recommended by Glenn Rogers on July 16/12 at C$3.99, US$3.68. Sold Aug. 27/12 at C$6.47, US$6.50.

Tim Hortons (TSX, NYSE: THI). Recommended by Gordon Pape on July 20/09 at C$28.88, US$25.91. Sold Aug. 13/12 at C$50.94, US$51.38.

 

That’s a wrap for now. We will be back on Sept. 16.

Best regards,

Gordon Pape