In This Issue

FIRST, DO NO HARM

By Gordon Pape, Editor and Publisher

RRSP investors face a tough challenge this year. With stock markets in turmoil and interest rates still near levels not seen since the Great Depression, where should you put your money?

Nothing looks very attractive. Despite the recent rally, the TSX and all the New York indexes are in negative territory after the first two months of 2016. Overseas markets aren’t faring any better. France, Germany, Switzerland, Japan, Hong Kong, and India are all in correction territory with year-to-date losses of over 10%.

On the bond side, short-term yields are approaching zero. According to the Bank of Canada website, as of Feb. 25 the average yield on three to five year Government of Canada bonds was only 0.52%. For five to ten year bonds, it was 0.88%. No one is going to build an RRSP very quickly with returns like that.

In this situation, it’s a good idea to remember the prime rule of the medical profession: “First, do no harm”. Your RRSP is a pension plan, for some people the only one they’ll ever have. That means protecting your assets. It can take years to make up for major losses and they are not tax deductible. So preservation of capital must be a primary goal and the older you are, the more important that becomes.

It’s rarely a good idea to tear an RRSP portfolio apart unless it has been poorly designed and carries a higher degree of risk than is appropriate for a pension plan. Instead, I suggest gradually changing the composition of the plan as needed through careful allocation of new money.

This year, that suggests adopting a very conservative approach. For example, I normally don’t like to hold a lot of cash because it produces a negative return, once inflation is taken into account. But at this moment, keeping some or all of this year’s contribution in cash until the markets settle down is not a bad idea.

Guaranteed Investment Certificates are another almost risk-free option. The returns are low but at least they are positive. Avoid the major banks, which are paying almost nothing for your money right now; RBC is offering just 1.5% for a five-year term. You can do much better at a smaller financial institution where five-year rates are as high as 2.5% (e.g. AcceleRate Financial, Achieva Financial, Hubert Financial, MAXA Financial, Oaken Financial). Just be sure your money is protected by deposit insurance.

Bond funds are another option to consider, although they entail somewhat more risk. The iShares Canadian Universe Bond Index ETF (TSX: XBB), which is on our Recommended List, was showing a year-to-date gain of 0.78% at the time of writing. The five-year average annual compound rate of return to Jan. 31 was 4.69%. Especially important in the context of safety is that when the fund does a rare dip into negative territory, the loss is minimal. Since its launch in late 2000, the worst 12-month period was a decline of 1.91% in the year ending Sept. 30, 2013.

For those who prefer mutual funds, the Phillips, Hager and North Total Return Bond Fund, also on our Recommended List, has a similar record.

Any fund with exposure to the stock markets obviously comes with a higher degree of risk. There’s also more opportunity for gains, of course, but current conditions suggest restricting new purchases to non-registered accounts where a capital loss can be claimed if things turn sour.

If you really want to add equity exposure to your RRSP at this stage, I suggest a global balanced fund to keep the risk to a minimum. The Mawer Balanced Fund, which has been on our Recommended List since February 2012, is an excellent choice. It was showing a four-year average annual compound rate of return of 12.31% to Jan. 31, which roughly corresponds to the period of time we have held it. The MER is a very reasonable 0.93%, not much more than an ETF.

If the Mawer fund is not available to you (not all advisers offer it as it does not pay trailer fees), look at the Fidelity Global Monthly Income Fund B units (FID1222). Despite a much higher MER of 2.29%, its performance record is comparable to that of the Mawer fund. However, it has shown slightly more volatility over time.

The bottom line is that the current circumstances dictate using a low-risk approach when investing your RRSP money this year. There are times to be greedy when choosing your investments. This isn’t one of them.

Follow Gordon Pape on Twitter @GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney

 

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RYAN IRVINE REVISITS THREE STOCKS

Contributing editor Ryan Irvine is back this week to look at how three of his stock picks are progressing. Ryan is the CEO of KeyStone Financial (www.KeyStocks.com) and is one of the country’s top experts in small cap stocks. He is based in the Vancouver area. Here are his updates.

Enghouse Systems Limited (TSX: ESL, OTC: EGHSF)

Originally recommended on March 7/11 (#21109) at C$9.10. Closed Friday at C$54.47, US$40.45.

Background: Enghouse is a leading global provider of enterprise software solutions serving a variety of distinct vertical markets. Its strategy is to build a larger and more diverse software company through strategic acquisitions and profitable growth. Core technologies include contact centre, attendant console, predictive outbound dialer, knowledge management, interactive voice response, and call recording solutions that support any telephony environment, on premise or in the cloud. Enghouse Interactive has thousands of customers worldwide, supported by a global network of partners and more than 700 staff across the company’s international operations.

Stock performance: Enghouse Systems was introduced to the IWB in our February 2011 installment when the stock traded at $9.10. In our latest update in October 2015 with the stock at $55.78, we maintained our near and long-term rating at Hold. The price shot up above $70 in December but has since retreated to about the same level as it was in October.

Recent developments: In December, Enghouse reported that 2015 revenue increased by 27% to a record $279.3 million from $220 million in the previous fiscal year (the company’s fiscal year ends Oct. 31). Income from operating activities was $67.3 million compared to $52.1 million last year, an increase of 29.1%. Net income was $31.4 million ($1.17 per share, fully diluted) compared to $29.7 million ($1.11 per share) in the prior year. Adjusted EBITDA for the fiscal year was $71.9 million ($2.69 per share) compared to $56 million ($2.09 per share) last year, an increase of 28.7%.

Dividend: The company has been a model of consistency, paying regular quarterly dividends since May 31, 2007. It has increased its quarterly dividend in each of the past seven years from $0.025 per share in 2007 to $0.12 per share now. We expect another increase in 2016.

Conclusion: We were very pleased with Enghouse’s 2015 results, which beat estimates on both a revenue and adjusted EBITDA basis. Despite correcting 25% from recent highs, the stock remains up 33% over the last 12 months in a negative climate. Given that rise, it is still not inexpensive, trading at around 17 times next year’s expected adjusted EBITDA. However, we do not see it as tremendously expensive either, given its track record of consistent growth.

Action now: For those who own the stock, we continue to maintain a Hold rating in the near-term (six months or less). However, we recommend that new investors with a two to five year time horizon buy a half position at this price. Enghouse is one of the best combinations of balance sheet strength, management, and historical long-term growth that the Canadian technology market currently offers.

Grenville Strategic Royalty Corp. (TSX-V: GRC)

Originally recommended on July 20/15 (#21527) at $0.90. Closed Friday at $0.67.

Background: Grenville is a royalty company that makes investments in established businesses with revenues of up to $50 million. It generates revenues from royalty payments and buyouts from contracts. The non-dilutive royalty financing structure offered by Grenville competes directly with traditional equity to meet the long-term financing needs of companies on more attractive commercial terms. To date, GRC has announced cash inflows of $23.4 million from $56.9 million invested in the two years since its inception.

Stock performance: We recommended Grenville as a speculative Buy in July 2015 at $0.90. The shares dropped as low as $0.46 in August and were trading at $0.63 at the time of our last review in early November. Since then they have pretty much marked time.

Recent developments: The company released third-quarter results in November. Highlights included:

  • Royalty payments income of $2.3 million, an increase of 14.2% from the second quarter.
  • Total revenue (including gains on contract buyouts) of $4.54 million, an increase of 97% from the second quarter.
  • Adjusted EBITDA from continuing operations of $1.72 million, an increase of 17.5% from the second quarter.
  • Free cash flow of $1.18 million ($0.01 per share), an increase of 26.1% from the second quarter.
  • New royalty streams acquired in the quarter totalling $4.97 million.
  • Four contract buyouts closed since the start of the third quarter, totalling $12.1million ($5.2 million capital gains).

 

On Dec. 9, GRC reported that it has contracted for gross sales royalties from three companies for a total cost of C$9.6 million. They are Steam Plant and CHX Systems Limited (US$2 million); Compression/Generation Services LLC (US$3 million); and Westlake Financial Group Inc. (US$2 million). In exchange for these advances, GRC will receive royalties based on the respective companies’ gross revenues. Following the purchases of these three royalty agreements GRC has approximately $17.8 million of capital available for future investments.

Dividend: The company announced a 40% increase in the dividend to $0.07 per annum. At the current price this results in a very attractive yield of 10.4% and according to management keeps the payout ratio well below the target of 80%.

Conclusion: GRC had a solid third quarter with continued sequential growth in royalty payment income, EBITDA, and free cash flow. The highlight since the start of the third quarter seems to be contract buyouts, with GRC announcing four buyouts for total proceeds of $12.1 million, including $5.2 million in capital gains. Management is of the opinion that buyouts will be an ongoing, albeit intermittent, component of total portfolio return. Recent and expected cash inflows from buyouts, along with continued growth in regular royalty payments and a solid financial position, prompted the company to declare the 40% increase to the dividend.

Although regular royalty payments are continuing to grow, the current free cash flow run rate from royalties would not be sufficient alone to fund the dividend payment, and management has factored ongoing contract buyouts into the payout ratio. In our view, this strategy is overzealous and we would have preferred if management funded dividends with continuing free cash flow derived from regular royalty payments while directing capital gains from buyouts back into the royalty portfolio for future growth. Although buyouts have the potential to be highly profitable and do provide substantial upside, we must also recognize the fact that these events will be intermittent, are difficult to quantitatively factor into our analysis, and therefore, in our opinion, should not be relied on.

Nevertheless, we believe that GRC can fully invest its existing cash balance of $17.8 million over the next 12 months and should, at that time, be able to fully fund the new $0.07 dividend with cash flow from royalty payments. We also don’t see any significant near-term threat to the dividend, considering how well capitalized the company is currently.

Overall, we continue to be very positive on the company, as GRC has a significant amount of embedded growth through the investment of its existing cash. Grenville remains very well diversified with royalty streams in 26 companies spanning multiple industries, risk categories, and geographies, including an approximate 60% weighting to the United States.

Action now: We continue to view GRC as a promising investment over the next one to three years but also emphasize that the company is still at a relatively early stage in its development and is higher risk. We rate it as a speculative Buy in its current range.

Merus Labs International Inc. (TSX: MSL, NDQ: MSLI)

Originally recommended on March 28/15 at C$2.72, US$2.13. Closed Friday at C$1.90, US$1.41.

Background: Merus Labs International is a specialty pharmaceutical company that acquires and licenses pharmaceutical products and then sells them into select international markets. Merus Labs currently has products in the area of urology/women’s health, oncology, anticoagulants, and anti-infective.

Stock performance: We recommended buying a half position in Merus in March of 2015 at C$2.72. The company’s shares subsequently rose to the $3.30 range but have been hit over past six months along with the entire Pharma/Biotech sector and the market generally, despite executing its stated acquisition strategy.

Recent developments: On Feb. 11, the company released financial results for the first quarter of fiscal 2016 (to Dec. 31). Revenue jumped 50% to $15.9 million from $10.6 million in the same period of fiscal 2015. The company incurred a net loss of $0.9 million compared to a net loss of $0.2 million for the prior year period. More importantly, earnings before interest, taxes, depreciation and amortization (EBITDA) was $7.5 million and adjusted EBITDA, which adds back non-cash share based compensation expense, foreign exchange, and investment expenses, was $8.5 million. For the same period last year, EBITDA, and adjusted EBITDA were $7.5 million and $7.6 million, respectively.

On Feb. 1, Merus reported that it has entered into an agreement with UCB to acquire rights to Elantan, Isoket, and Deponit in Europe and select other markets. Upon closing the acquisition on Feb. 4, the company provided the following update:

  • Transaction value at closing was approximately $142 million.
  • Final metrics equate to 2.8 times revenue and approximately 6.1 times expected forward EBITDA.
  • Net debt at closing was approximately $157 million, less than three times expected forward EBITDA.
  • Acquisition benefits include established prescription products with proven safety and efficacy, predictable future cash flows, and no patent cliff.
  • The transaction leverages the existing commercial platform, with over 80% of revenue in countries where Merus’s existing products are currently sold.
  • Products are currently sold in 20 European countries plus Mexico, Turkey, and South Korea.
  • A variety of formats are available, including tablet, spray, patch, and injectable presentations.
  • An opportunity exists to launch the products in certain new markets and to expand formulations in existing markets.

The company believes the acquisition of the UCB nitrate portfolio is a very strong strategic fit, adding product diversity, improving cost of capital, and significantly increasing cash flow. Management believes it is a transformational deal for Merus, as the company’s 4.5% borrowing cost provides the capacity to do more transactions later in the year.

On February 23, Merus announced that it has entered into an agreement with Sanofi S.A. to acquire the rights to Surgestone (50% of overall sales), Provames (33% of overall sales), Speciafoldine, and Tredemine in France.

Surgestone and Provames are used in a variety of women’s health indications, Speciafoldine is used to treat macrocytic anemia, while Tredemine is a World Health Organization recognized essential medicine to treat tapeworm. Highlights of this deal include:

  • Merus acquired the product rights for a one-time payment of ?22.5 million. Net revenue for the products in 2016 is expected to be approximately ?6.3 million.
  • At current exchange rates, the products are expected to generate approximately $5.6 million in annual EBITDA, reflecting an EBITDA margin of almost 60%.
  • The acquisition is expected to be funded with one-third debt and two-thirds equity. That will lower Merus’s overall leverage to approximately 2.8 times, right within the company’s stated leverage target range of 2.5 to 3.0.
  • All closing conditions under the purchase agreement, other than payment of the purchase price, have been satisfied. The acquisition is expected to close during the second week of March.

Revised guidance for adjusted EBITDA during the fiscal year ending Sept. 30, 2016 (post-deal) is expected to be in the range of $47 million to $50 million. Management reports that the acquisition pipeline remains robust and they continue to look at a wide spectrum of opportunities including legacy products and growth assets.

Dividend: This stock does not pay a dividend.

Conclusion: Merus’s first-quarter results were strong in absolute terms and essentially in line with our estimates. However, they were sequentially soft because gross sales for one of Merus’s core EU assets, the small-molecule anti-coagulation drug Sintrom, were unusually strong in the fourth quarter of 2015 on transient shifts in inventory stockpiling. Sales for that drug look to have normalized in the first quarter of fiscal 2016 as analysts expected. (Sales for urinary incontinence drug Emselex were transiently lumpy in the second to fourth quarters of 2015 for the same reason).

From a valuation basis, Merus remains relatively attractive, trading at around an eight times EV/EBITDA multiple to this year’s projected EBITDA and a 6.1 times EV/EBITDA multiple to the 2017 consensus adjusted EBITDA estimate of $59.6 million. This is a discount to its peer group, which trades at an average EV/EBITDA multiple of 10.

A number of analysts believe Merus’s low cost of capital at 4.5% is key. They believe that this will enable the company to continue to execute on its M&A strategy and separates it from peers (by a wide margin). Whereas other specialty pharma companies have seen their credit spreads blow out in recent months, Merus appears locked in with access to cheap capital. Of course, this is only part of the equation, as the company has to target the right cash flowing products and balance debt with cash flow. The company appears to be doing a decent job in terms of the latter, but the long-term success of the “transformational” acquisition will depend on the accretive cash flows produced from the acquired products and this will bear out over time.

Action now: We would like to see more growth from cash flow long term, but the company appears to offer value again after the recent market sell-off. For a mid-term fair value over the next 12 months, if we apply a peer equivalent multiple of 10 times Enterprise Value/EBITDA, the stock should have upside to the $2.75 range. As such, we maintain our Buy rating.

 

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GORDON PAPE’S UPDATES

AT&T (NYSE:T)

Originally recommended on May 13/12 (#21218) at $33.59. Closed Friday at $37.13. (All figures in U.S. dollars.)

Background: AT&T is the largest telecom company in the U.S. with more than 120 million wireless customers. It provides services in some 225 countries and territories and employs 243,000 people.

Stock performance: Dull. The shares are slightly higher than when I first recommended AT&T in 2012, but not by a lot. The story here is primarily stability and yield. If you’re after capital gains, look elsewhere.

Recent developments: AT&T released its fourth-quarter and year-end results in late January but the markets just yawned despite some decent numbers. This is a company that can’t get any respect!

Consolidated fourth-quarter revenue came in at $42.1 billion, an increase of 22% from the previous year. The big jump was mainly due to the acquisition of DirecTV. Operating income was $7.5 billion and operating income margin was 17.9%. Net income was $4 billion ($0.65 per share) compared to a net loss of $4 billion (-$0.77 per share) in the year-ago quarter. Stripping out one-time items, earnings per share for the quarter were $0.63 compared to $0.56 in 2014, an improvement of 12.5%. Free cash flow was $3.1 billion.

For the full year, operating revenue was $146.8 billion versus $132.4 billion in 2014, up 10.8% for the year. Net income was $13.3 billion ($2.37 per share), more than double the previous year’s $6.4 billion ($1.24 per share). Full-year free cash flow was $15.9 billion compared to $9.9 billion in 2014, a 60% increase. The free cash flow dividend payout ratio for the full year was 64%.

Looking ahead, the company forecast double-digit consolidated revenue growth in 2016 and projected that earnings per share will increase “in the mid-single digit range or better”.

Dividend: AT&T increased its quarterly dividend by a penny a share in January. The new rate is $0.48, or $1.92 annually. At the current price, the stock yields a very attractive 5.2%.

Action now: Buy. This stock is best suited for conservative investors whose main interests are low risk, high yield, and U.S. dollar cash flow.

J.B. Hunt Transport (NDQ: JBHT)

Originally recommended by Tom Slee on May 18/14 (#21419) at $76.56. Closed Friday at $78.05. (All figures in U.S. dollars.)

Background: This company is in the freight transportation business, providing truckload, intermodal, and contract carriage facilities to customers across a diverse set of industries in the U.S., Canada, and Mexico. It has been in business more than 35 years and specializes in handling imports through its “shore to door” service. Major customers include the Burlington Northern and Norfolk Southern railways.

Stock performance: At the time of our last review in July, the shares were trading at over $82. Since then they have been trending down, reaching a low of $63.58 in mid-January. However, fourth-quarter earnings gave the company a boost and the stock has now moved above its 50- and 200-day moving averages.

Recent developments: Fourth-quarter revenue was up only 1%, to $1.6 billion. However, net earnings rose 6% to $116.7 million from $110.3 million in 2014, due to increased operating income and lower net interest expense.

For the full year, operating revenue was pretty much flat at $6.2 billion. However, reduced operating expenses resulted in a 14% increase in earnings to $427.2 million compared to $374.8 million in 2014. On a per share basis, earnings were up 15.8% to $3.66, from $3.16 the year before. The number of outstanding shares fell by about 1.7 million.

Dividend: Investors will receive a 5% dividend increase with this month’s payment. The new rate is $0.22 per quarter ($0.88), for a yield of 1.1% based on Friday’s closing price.

Action now: Buy. Investors appear to have regained confidence in the stock and it is moving higher. The median target price among the 22 analysts following the company is $82.50.

MetLife Inc. (NYSE: MET)

Originally recommended on July 7/13 (#21325) at $47.52. Closed Friday at $40.09. (All figures in U.S. dollars.)

Background: MetLife is one of the largest life insurance companies in the world. Founded in 1868, it is a global provider of life insurance, annuities, employee benefits, and asset management, with approximately 100 million customers. MetLife has operations in nearly 50 countries and holds leading market positions in the United States, Japan, Latin America, Asia, Europe, and the Middle East.

Stock performance: After reaching a 12-month high of $57.74 in mid-July, the shares went into a long slide, dropping as low as $35 on Feb. 11. There are several reasons for this, including low interest rates and weak stock prices, which have negatively affected portfolio earnings, and the announcement of what amounts to a government-forced divestiture of part of its business.

Recent developments: On Jan. 12, the company announced it is pursuing plans to dispose of its U.S. retail insurance business, either by an stock IPO, spinning it off into a separate company, or selling it outright to a third party. The move is being made because Washington has designated the company as systemically important to the American economy (i.e. “too big to fail”), a decision MetLife has challenged in court. The Systemically Important Financial Institution (SIFI) designation means the company must meet stricter capital and reporting requirements.

“We have concluded that an independent new company would be able to compete more effectively and generate stronger returns for shareholders,” said CEO Steven A. Kandarian. “Currently, U.S. Retail is part of a Systemically Important Financial Institution and risks higher capital requirements that could put it at a significant competitive disadvantage. Even though we are appealing our SIFI designation in court and do not believe any part of MetLife is systemic, this risk of increased capital requirements contributed to our decision to pursue the separation of the business. An independent company would benefit from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden.”

The new company would represent approximately 20% of the operating earnings of MetLife and 50% of the operating earnings of MetLife’s U.S. Retail segment. It would have approximately $240 billion of total assets.

Subsequently, the company reported fourth-quarter and year-end results that left investors unimpressed. Fourth-quarter operating earnings of $1.4 billion were down 13% from the previous year (10% on a constant currency basis). Operating earnings per share were $1.23, off 11%. The company reported declines in operating earnings from all its geographic segments. On a GAAP basis, MetLife reported fourth-quarter net income of $785 million ($0.70 per share).

For the full 2015 fiscal year, MetLife reported operating earnings of $5.5 billion. That was down 16% from 2014 (12% on a constant currency basis). The company said the decrease reflected a strong U.S. dollar, lower variable investment income, and a previously announced third-quarter non-cash charge of $792 million related to the tax treatment of a wholly owned U.K. investment subsidiary.

MetLife reported full year net income of $5.2 billion ($4.57 per share), down from $6.2 billion ($5.42 per share) in 2014.

Dividend: No dividend increase was announced. In recent years, the company has increased its annual payment in May however whether we’ll get one this year is questionable based on the weak results. The current quarterly rate is $0.375 per share ($1.50 per year) for a yield of 3.7%.

Action now: Hold. The company is going through a difficult period but it should eventually recover.

Wal-Mart Stores Inc. (NYSE: WMT)

Originally recommended on June 24/12 (#21222) at $67.30. Closed Friday at $66.51. (All figures in U.S. dollars.)

Background: Wal-Mart is the world’s largest bricks and mortar retailer with more than 11,500 stores in 28 countries, plus e-commerce operations in 11 countries. It employs some 2.2 million people worldwide and had revenue in the 2015 fiscal year of more than $485 billion.

Stock performance: Better lately. After hitting a low of $56.30 in mid-November, the shares have rallied and are now back close to our original recommended price.

Recent developments: The retailing giant released fourth-quarter and year-end results for fiscal 2016 on Feb. 18 (figures to Jan. 31). The numbers weren’t great but they were pretty much in line with expectations. Revenue was down 1.4% year-over-year to $129.7 billion, mainly because of the strong U.S. dollar, which knocked $4.8 billion off sales. Taking foreign exchange out of the equation, revenue was up 2.2%. On a constant currency basis, revenue for the full year was $499.4 billion, ahead 2.8%.

Fourth-quarter earnings per share from continuing operations came in at $1.43, fully diluted. For the whole of fiscal 2016, Wal-Mart reported earnings from continuing operations of $4.57 per share. The forecast for fiscal 2017 is between $4 and $4.30 per share, down from the 2016 level.

Free cash flow was $15.9 billion for the year, compared to $16.4 billion in fiscal 2015. The decrease in free cash flow was primarily due to lower income from continuing operations, partially offset by lower capital spending and the timing of payments.

Dividend: The company announced a 2% dividend increase to $0.50 per quarter ($2 per year), effective with the April 4 payment. It marks the 43rd consecutive year that Wal-Mart has hiked its payment. The yield at the current price is 3%.

Action now: Hold. The company appears to be treading water at this stage. Whether it can regain its former strong growth momentum remains to be seen.

Lundin Mining Corp. (TSX: LUN, OTC: LUNMF)

Originally recommended by Tom Slee on July 14/14 (#21425) at C$6.27, US$5.75. Closed Friday at C$3.72, US$2.72.

Background: Lundin Mining is a diversified Canadian base metals mining company with operations in Chile, the USA, Portugal, and Sweden, primarily producing copper, nickel, and zinc. In addition, it holds a 24% equity stake in the world-class Tenke Fungurume copper/cobalt mine in the Democratic Republic of Congo and in the Freeport Cobalt Oy business, which includes a cobalt refinery located in Kokkola, Finland. 

Stock performance: Lundin was recommended by former contributing editor Tom Slee in July 2014 at $6.27. The stock traded in the $5 to $6 range for most of the following year but then went into a downtrend about the middle of 2015 as commodity prices continued to weaken. At current levels, the shares are well below their 50- and 200-day moving averages.

Recent developments: The company released fourth-quarter and year-end financial results on Feb. 22. The big story was a non-cash impairment charge of $278 million ($0.39 per share), reflecting the reduced value of the company’s assets in light of the big drop in metals prices. As a result, Lundin posted a fourth-quarter loss attributable to shareholders of $377.7 million ($0.52 per share) compared to a profit of $25.8 million ($0.04 per share) in the prior year. For the full year the loss attributable to shareholders was $294.1 million ($0.41 per share).

However, cash flow from operations was an impressive $713.9 million compared to $187.4 million in 2014 and the company reported cash reserves of $557 million. RBC Capital Markets describes the balance sheet as “solid” and maintained its “Outperform” rating on the stock with a target price of $6.

The reality is, however, that nothing very good is going to happen to Lundin until the price of base metals starts to recover from its current depressed state. RBC says it sees “significant upside potential” in zinc and nickel over the next 12 to 18 months. If that happens, the shares will move higher.

Dividend: The stock does not pay a dividend.

Action now: Hold/Sell. Lundin has first-class assets and its partnership with Freeport in the Tenke mine is a big plus. But until metals prices firm, the stock will remain range-bound. Investors with a long time horizon should maintain their positions; those who hold the shares in a non-registered account and see better short-term opportunities should sell.

 

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YOUR QUESTIONS

Portfolio results

Q – I just enjoyed the latest issue of IWB. One thing that has bothered me for years is the time period for the “gain/loss %” column in your stock portfolios. It never seems well defined. By reading some of the text you might discover that it covers a 3.5 year time period. The next table will be different. Why not standardize on a 12-month ROI for this data? I guess I have come to look for this from the Globe or Bloomberg. I always question your gain/loss numbers because the time period is never the same. Why do you do it this way? – Dale W.

A – The return shown in the column on the far right of the table is the cumulative gain or loss from the time of the portfolio’s launch or the date the security was added if it was later than the launch date. The latest six-month result for the portfolio is given in the Comments section, as is the portfolio’s average annual compound rate of return since inception. I felt this was all the information readers needed to judge performance but if more analysis is desired I can certainly provide that. I’d be pleased to hear from other members on this issue. – G.P.

In This Issue

FIRST, DO NO HARM

By Gordon Pape, Editor and Publisher

RRSP investors face a tough challenge this year. With stock markets in turmoil and interest rates still near levels not seen since the Great Depression, where should you put your money?

Nothing looks very attractive. Despite the recent rally, the TSX and all the New York indexes are in negative territory after the first two months of 2016. Overseas markets aren’t faring any better. France, Germany, Switzerland, Japan, Hong Kong, and India are all in correction territory with year-to-date losses of over 10%.

On the bond side, short-term yields are approaching zero. According to the Bank of Canada website, as of Feb. 25 the average yield on three to five year Government of Canada bonds was only 0.52%. For five to ten year bonds, it was 0.88%. No one is going to build an RRSP very quickly with returns like that.

In this situation, it’s a good idea to remember the prime rule of the medical profession: “First, do no harm”. Your RRSP is a pension plan, for some people the only one they’ll ever have. That means protecting your assets. It can take years to make up for major losses and they are not tax deductible. So preservation of capital must be a primary goal and the older you are, the more important that becomes.

It’s rarely a good idea to tear an RRSP portfolio apart unless it has been poorly designed and carries a higher degree of risk than is appropriate for a pension plan. Instead, I suggest gradually changing the composition of the plan as needed through careful allocation of new money.

This year, that suggests adopting a very conservative approach. For example, I normally don’t like to hold a lot of cash because it produces a negative return, once inflation is taken into account. But at this moment, keeping some or all of this year’s contribution in cash until the markets settle down is not a bad idea.

Guaranteed Investment Certificates are another almost risk-free option. The returns are low but at least they are positive. Avoid the major banks, which are paying almost nothing for your money right now; RBC is offering just 1.5% for a five-year term. You can do much better at a smaller financial institution where five-year rates are as high as 2.5% (e.g. AcceleRate Financial, Achieva Financial, Hubert Financial, MAXA Financial, Oaken Financial). Just be sure your money is protected by deposit insurance.

Bond funds are another option to consider, although they entail somewhat more risk. The iShares Canadian Universe Bond Index ETF (TSX: XBB), which is on our Recommended List, was showing a year-to-date gain of 0.78% at the time of writing. The five-year average annual compound rate of return to Jan. 31 was 4.69%. Especially important in the context of safety is that when the fund does a rare dip into negative territory, the loss is minimal. Since its launch in late 2000, the worst 12-month period was a decline of 1.91% in the year ending Sept. 30, 2013.

For those who prefer mutual funds, the Phillips, Hager and North Total Return Bond Fund, also on our Recommended List, has a similar record.

Any fund with exposure to the stock markets obviously comes with a higher degree of risk. There’s also more opportunity for gains, of course, but current conditions suggest restricting new purchases to non-registered accounts where a capital loss can be claimed if things turn sour.

If you really want to add equity exposure to your RRSP at this stage, I suggest a global balanced fund to keep the risk to a minimum. The Mawer Balanced Fund, which has been on our Recommended List since February 2012, is an excellent choice. It was showing a four-year average annual compound rate of return of 12.31% to Jan. 31, which roughly corresponds to the period of time we have held it. The MER is a very reasonable 0.93%, not much more than an ETF.

If the Mawer fund is not available to you (not all advisers offer it as it does not pay trailer fees), look at the Fidelity Global Monthly Income Fund B units (FID1222). Despite a much higher MER of 2.29%, its performance record is comparable to that of the Mawer fund. However, it has shown slightly more volatility over time.

The bottom line is that the current circumstances dictate using a low-risk approach when investing your RRSP money this year. There are times to be greedy when choosing your investments. This isn’t one of them.

Follow Gordon Pape on Twitter @GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney

 

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RYAN IRVINE REVISITS THREE STOCKS

Contributing editor Ryan Irvine is back this week to look at how three of his stock picks are progressing. Ryan is the CEO of KeyStone Financial (www.KeyStocks.com) and is one of the country’s top experts in small cap stocks. He is based in the Vancouver area. Here are his updates.

Enghouse Systems Limited (TSX: ESL, OTC: EGHSF)

Originally recommended on March 7/11 (#21109) at C$9.10. Closed Friday at C$54.47, US$40.45.

Background: Enghouse is a leading global provider of enterprise software solutions serving a variety of distinct vertical markets. Its strategy is to build a larger and more diverse software company through strategic acquisitions and profitable growth. Core technologies include contact centre, attendant console, predictive outbound dialer, knowledge management, interactive voice response, and call recording solutions that support any telephony environment, on premise or in the cloud. Enghouse Interactive has thousands of customers worldwide, supported by a global network of partners and more than 700 staff across the company’s international operations.

Stock performance: Enghouse Systems was introduced to the IWB in our February 2011 installment when the stock traded at $9.10. In our latest update in October 2015 with the stock at $55.78, we maintained our near and long-term rating at Hold. The price shot up above $70 in December but has since retreated to about the same level as it was in October.

Recent developments: In December, Enghouse reported that 2015 revenue increased by 27% to a record $279.3 million from $220 million in the previous fiscal year (the company’s fiscal year ends Oct. 31). Income from operating activities was $67.3 million compared to $52.1 million last year, an increase of 29.1%. Net income was $31.4 million ($1.17 per share, fully diluted) compared to $29.7 million ($1.11 per share) in the prior year. Adjusted EBITDA for the fiscal year was $71.9 million ($2.69 per share) compared to $56 million ($2.09 per share) last year, an increase of 28.7%.

Dividend: The company has been a model of consistency, paying regular quarterly dividends since May 31, 2007. It has increased its quarterly dividend in each of the past seven years from $0.025 per share in 2007 to $0.12 per share now. We expect another increase in 2016.

Conclusion: We were very pleased with Enghouse’s 2015 results, which beat estimates on both a revenue and adjusted EBITDA basis. Despite correcting 25% from recent highs, the stock remains up 33% over the last 12 months in a negative climate. Given that rise, it is still not inexpensive, trading at around 17 times next year’s expected adjusted EBITDA. However, we do not see it as tremendously expensive either, given its track record of consistent growth.

Action now: For those who own the stock, we continue to maintain a Hold rating in the near-term (six months or less). However, we recommend that new investors with a two to five year time horizon buy a half position at this price. Enghouse is one of the best combinations of balance sheet strength, management, and historical long-term growth that the Canadian technology market currently offers.

Grenville Strategic Royalty Corp. (TSX-V: GRC)

Originally recommended on July 20/15 (#21527) at $0.90. Closed Friday at $0.67.

Background: Grenville is a royalty company that makes investments in established businesses with revenues of up to $50 million. It generates revenues from royalty payments and buyouts from contracts. The non-dilutive royalty financing structure offered by Grenville competes directly with traditional equity to meet the long-term financing needs of companies on more attractive commercial terms. To date, GRC has announced cash inflows of $23.4 million from $56.9 million invested in the two years since its inception.

Stock performance: We recommended Grenville as a speculative Buy in July 2015 at $0.90. The shares dropped as low as $0.46 in August and were trading at $0.63 at the time of our last review in early November. Since then they have pretty much marked time.

Recent developments: The company released third-quarter results in November. Highlights included:

  • Royalty payments income of $2.3 million, an increase of 14.2% from the second quarter.
  • Total revenue (including gains on contract buyouts) of $4.54 million, an increase of 97% from the second quarter.
  • Adjusted EBITDA from continuing operations of $1.72 million, an increase of 17.5% from the second quarter.
  • Free cash flow of $1.18 million ($0.01 per share), an increase of 26.1% from the second quarter.
  • New royalty streams acquired in the quarter totalling $4.97 million.
  • Four contract buyouts closed since the start of the third quarter, totalling $12.1million ($5.2 million capital gains).

 

On Dec. 9, GRC reported that it has contracted for gross sales royalties from three companies for a total cost of C$9.6 million. They are Steam Plant and CHX Systems Limited (US$2 million); Compression/Generation Services LLC (US$3 million); and Westlake Financial Group Inc. (US$2 million). In exchange for these advances, GRC will receive royalties based on the respective companies’ gross revenues. Following the purchases of these three royalty agreements GRC has approximately $17.8 million of capital available for future investments.

Dividend: The company announced a 40% increase in the dividend to $0.07 per annum. At the current price this results in a very attractive yield of 10.4% and according to management keeps the payout ratio well below the target of 80%.

Conclusion: GRC had a solid third quarter with continued sequential growth in royalty payment income, EBITDA, and free cash flow. The highlight since the start of the third quarter seems to be contract buyouts, with GRC announcing four buyouts for total proceeds of $12.1 million, including $5.2 million in capital gains. Management is of the opinion that buyouts will be an ongoing, albeit intermittent, component of total portfolio return. Recent and expected cash inflows from buyouts, along with continued growth in regular royalty payments and a solid financial position, prompted the company to declare the 40% increase to the dividend.

Although regular royalty payments are continuing to grow, the current free cash flow run rate from royalties would not be sufficient alone to fund the dividend payment, and management has factored ongoing contract buyouts into the payout ratio. In our view, this strategy is overzealous and we would have preferred if management funded dividends with continuing free cash flow derived from regular royalty payments while directing capital gains from buyouts back into the royalty portfolio for future growth. Although buyouts have the potential to be highly profitable and do provide substantial upside, we must also recognize the fact that these events will be intermittent, are difficult to quantitatively factor into our analysis, and therefore, in our opinion, should not be relied on.

Nevertheless, we believe that GRC can fully invest its existing cash balance of $17.8 million over the next 12 months and should, at that time, be able to fully fund the new $0.07 dividend with cash flow from royalty payments. We also don’t see any significant near-term threat to the dividend, considering how well capitalized the company is currently.

Overall, we continue to be very positive on the company, as GRC has a significant amount of embedded growth through the investment of its existing cash. Grenville remains very well diversified with royalty streams in 26 companies spanning multiple industries, risk categories, and geographies, including an approximate 60% weighting to the United States.

Action now: We continue to view GRC as a promising investment over the next one to three years but also emphasize that the company is still at a relatively early stage in its development and is higher risk. We rate it as a speculative Buy in its current range.

Merus Labs International Inc. (TSX: MSL, NDQ: MSLI)

Originally recommended on March 28/15 at C$2.72, US$2.13. Closed Friday at C$1.90, US$1.41.

Background: Merus Labs International is a specialty pharmaceutical company that acquires and licenses pharmaceutical products and then sells them into select international markets. Merus Labs currently has products in the area of urology/women’s health, oncology, anticoagulants, and anti-infective.

Stock performance: We recommended buying a half position in Merus in March of 2015 at C$2.72. The company’s shares subsequently rose to the $3.30 range but have been hit over past six months along with the entire Pharma/Biotech sector and the market generally, despite executing its stated acquisition strategy.

Recent developments: On Feb. 11, the company released financial results for the first quarter of fiscal 2016 (to Dec. 31). Revenue jumped 50% to $15.9 million from $10.6 million in the same period of fiscal 2015. The company incurred a net loss of $0.9 million compared to a net loss of $0.2 million for the prior year period. More importantly, earnings before interest, taxes, depreciation and amortization (EBITDA) was $7.5 million and adjusted EBITDA, which adds back non-cash share based compensation expense, foreign exchange, and investment expenses, was $8.5 million. For the same period last year, EBITDA, and adjusted EBITDA were $7.5 million and $7.6 million, respectively.

On Feb. 1, Merus reported that it has entered into an agreement with UCB to acquire rights to Elantan, Isoket, and Deponit in Europe and select other markets. Upon closing the acquisition on Feb. 4, the company provided the following update:

  • Transaction value at closing was approximately $142 million.
  • Final metrics equate to 2.8 times revenue and approximately 6.1 times expected forward EBITDA.
  • Net debt at closing was approximately $157 million, less than three times expected forward EBITDA.
  • Acquisition benefits include established prescription products with proven safety and efficacy, predictable future cash flows, and no patent cliff.
  • The transaction leverages the existing commercial platform, with over 80% of revenue in countries where Merus’s existing products are currently sold.
  • Products are currently sold in 20 European countries plus Mexico, Turkey, and South Korea.
  • A variety of formats are available, including tablet, spray, patch, and injectable presentations.
  • An opportunity exists to launch the products in certain new markets and to expand formulations in existing markets.

The company believes the acquisition of the UCB nitrate portfolio is a very strong strategic fit, adding product diversity, improving cost of capital, and significantly increasing cash flow. Management believes it is a transformational deal for Merus, as the company’s 4.5% borrowing cost provides the capacity to do more transactions later in the year.

On February 23, Merus announced that it has entered into an agreement with Sanofi S.A. to acquire the rights to Surgestone (50% of overall sales), Provames (33% of overall sales), Speciafoldine, and Tredemine in France.

Surgestone and Provames are used in a variety of women’s health indications, Speciafoldine is used to treat macrocytic anemia, while Tredemine is a World Health Organization recognized essential medicine to treat tapeworm. Highlights of this deal include:

  • Merus acquired the product rights for a one-time payment of ?22.5 million. Net revenue for the products in 2016 is expected to be approximately ?6.3 million.
  • At current exchange rates, the products are expected to generate approximately $5.6 million in annual EBITDA, reflecting an EBITDA margin of almost 60%.
  • The acquisition is expected to be funded with one-third debt and two-thirds equity. That will lower Merus’s overall leverage to approximately 2.8 times, right within the company’s stated leverage target range of 2.5 to 3.0.
  • All closing conditions under the purchase agreement, other than payment of the purchase price, have been satisfied. The acquisition is expected to close during the second week of March.

Revised guidance for adjusted EBITDA during the fiscal year ending Sept. 30, 2016 (post-deal) is expected to be in the range of $47 million to $50 million. Management reports that the acquisition pipeline remains robust and they continue to look at a wide spectrum of opportunities including legacy products and growth assets.

Dividend: This stock does not pay a dividend.

Conclusion: Merus’s first-quarter results were strong in absolute terms and essentially in line with our estimates. However, they were sequentially soft because gross sales for one of Merus’s core EU assets, the small-molecule anti-coagulation drug Sintrom, were unusually strong in the fourth quarter of 2015 on transient shifts in inventory stockpiling. Sales for that drug look to have normalized in the first quarter of fiscal 2016 as analysts expected. (Sales for urinary incontinence drug Emselex were transiently lumpy in the second to fourth quarters of 2015 for the same reason).

From a valuation basis, Merus remains relatively attractive, trading at around an eight times EV/EBITDA multiple to this year’s projected EBITDA and a 6.1 times EV/EBITDA multiple to the 2017 consensus adjusted EBITDA estimate of $59.6 million. This is a discount to its peer group, which trades at an average EV/EBITDA multiple of 10.

A number of analysts believe Merus’s low cost of capital at 4.5% is key. They believe that this will enable the company to continue to execute on its M&A strategy and separates it from peers (by a wide margin). Whereas other specialty pharma companies have seen their credit spreads blow out in recent months, Merus appears locked in with access to cheap capital. Of course, this is only part of the equation, as the company has to target the right cash flowing products and balance debt with cash flow. The company appears to be doing a decent job in terms of the latter, but the long-term success of the “transformational” acquisition will depend on the accretive cash flows produced from the acquired products and this will bear out over time.

Action now: We would like to see more growth from cash flow long term, but the company appears to offer value again after the recent market sell-off. For a mid-term fair value over the next 12 months, if we apply a peer equivalent multiple of 10 times Enterprise Value/EBITDA, the stock should have upside to the $2.75 range. As such, we maintain our Buy rating.

 

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GORDON PAPE’S UPDATES

AT&T (NYSE:T)

Originally recommended on May 13/12 (#21218) at $33.59. Closed Friday at $37.13. (All figures in U.S. dollars.)

Background: AT&T is the largest telecom company in the U.S. with more than 120 million wireless customers. It provides services in some 225 countries and territories and employs 243,000 people.

Stock performance: Dull. The shares are slightly higher than when I first recommended AT&T in 2012, but not by a lot. The story here is primarily stability and yield. If you’re after capital gains, look elsewhere.

Recent developments: AT&T released its fourth-quarter and year-end results in late January but the markets just yawned despite some decent numbers. This is a company that can’t get any respect!

Consolidated fourth-quarter revenue came in at $42.1 billion, an increase of 22% from the previous year. The big jump was mainly due to the acquisition of DirecTV. Operating income was $7.5 billion and operating income margin was 17.9%. Net income was $4 billion ($0.65 per share) compared to a net loss of $4 billion (-$0.77 per share) in the year-ago quarter. Stripping out one-time items, earnings per share for the quarter were $0.63 compared to $0.56 in 2014, an improvement of 12.5%. Free cash flow was $3.1 billion.

For the full year, operating revenue was $146.8 billion versus $132.4 billion in 2014, up 10.8% for the year. Net income was $13.3 billion ($2.37 per share), more than double the previous year’s $6.4 billion ($1.24 per share). Full-year free cash flow was $15.9 billion compared to $9.9 billion in 2014, a 60% increase. The free cash flow dividend payout ratio for the full year was 64%.

Looking ahead, the company forecast double-digit consolidated revenue growth in 2016 and projected that earnings per share will increase “in the mid-single digit range or better”.

Dividend: AT&T increased its quarterly dividend by a penny a share in January. The new rate is $0.48, or $1.92 annually. At the current price, the stock yields a very attractive 5.2%.

Action now: Buy. This stock is best suited for conservative investors whose main interests are low risk, high yield, and U.S. dollar cash flow.

J.B. Hunt Transport (NDQ: JBHT)

Originally recommended by Tom Slee on May 18/14 (#21419) at $76.56. Closed Friday at $78.05. (All figures in U.S. dollars.)

Background: This company is in the freight transportation business, providing truckload, intermodal, and contract carriage facilities to customers across a diverse set of industries in the U.S., Canada, and Mexico. It has been in business more than 35 years and specializes in handling imports through its “shore to door” service. Major customers include the Burlington Northern and Norfolk Southern railways.

Stock performance: At the time of our last review in July, the shares were trading at over $82. Since then they have been trending down, reaching a low of $63.58 in mid-January. However, fourth-quarter earnings gave the company a boost and the stock has now moved above its 50- and 200-day moving averages.

Recent developments: Fourth-quarter revenue was up only 1%, to $1.6 billion. However, net earnings rose 6% to $116.7 million from $110.3 million in 2014, due to increased operating income and lower net interest expense.

For the full year, operating revenue was pretty much flat at $6.2 billion. However, reduced operating expenses resulted in a 14% increase in earnings to $427.2 million compared to $374.8 million in 2014. On a per share basis, earnings were up 15.8% to $3.66, from $3.16 the year before. The number of outstanding shares fell by about 1.7 million.

Dividend: Investors will receive a 5% dividend increase with this month’s payment. The new rate is $0.22 per quarter ($0.88), for a yield of 1.1% based on Friday’s closing price.

Action now: Buy. Investors appear to have regained confidence in the stock and it is moving higher. The median target price among the 22 analysts following the company is $82.50.

MetLife Inc. (NYSE: MET)

Originally recommended on July 7/13 (#21325) at $47.52. Closed Friday at $40.09. (All figures in U.S. dollars.)

Background: MetLife is one of the largest life insurance companies in the world. Founded in 1868, it is a global provider of life insurance, annuities, employee benefits, and asset management, with approximately 100 million customers. MetLife has operations in nearly 50 countries and holds leading market positions in the United States, Japan, Latin America, Asia, Europe, and the Middle East.

Stock performance: After reaching a 12-month high of $57.74 in mid-July, the shares went into a long slide, dropping as low as $35 on Feb. 11. There are several reasons for this, including low interest rates and weak stock prices, which have negatively affected portfolio earnings, and the announcement of what amounts to a government-forced divestiture of part of its business.

Recent developments: On Jan. 12, the company announced it is pursuing plans to dispose of its U.S. retail insurance business, either by an stock IPO, spinning it off into a separate company, or selling it outright to a third party. The move is being made because Washington has designated the company as systemically important to the American economy (i.e. “too big to fail”), a decision MetLife has challenged in court. The Systemically Important Financial Institution (SIFI) designation means the company must meet stricter capital and reporting requirements.

“We have concluded that an independent new company would be able to compete more effectively and generate stronger returns for shareholders,” said CEO Steven A. Kandarian. “Currently, U.S. Retail is part of a Systemically Important Financial Institution and risks higher capital requirements that could put it at a significant competitive disadvantage. Even though we are appealing our SIFI designation in court and do not believe any part of MetLife is systemic, this risk of increased capital requirements contributed to our decision to pursue the separation of the business. An independent company would benefit from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden.”

The new company would represent approximately 20% of the operating earnings of MetLife and 50% of the operating earnings of MetLife’s U.S. Retail segment. It would have approximately $240 billion of total assets.

Subsequently, the company reported fourth-quarter and year-end results that left investors unimpressed. Fourth-quarter operating earnings of $1.4 billion were down 13% from the previous year (10% on a constant currency basis). Operating earnings per share were $1.23, off 11%. The company reported declines in operating earnings from all its geographic segments. On a GAAP basis, MetLife reported fourth-quarter net income of $785 million ($0.70 per share).

For the full 2015 fiscal year, MetLife reported operating earnings of $5.5 billion. That was down 16% from 2014 (12% on a constant currency basis). The company said the decrease reflected a strong U.S. dollar, lower variable investment income, and a previously announced third-quarter non-cash charge of $792 million related to the tax treatment of a wholly owned U.K. investment subsidiary.

MetLife reported full year net income of $5.2 billion ($4.57 per share), down from $6.2 billion ($5.42 per share) in 2014.

Dividend: No dividend increase was announced. In recent years, the company has increased its annual payment in May however whether we’ll get one this year is questionable based on the weak results. The current quarterly rate is $0.375 per share ($1.50 per year) for a yield of 3.7%.

Action now: Hold. The company is going through a difficult period but it should eventually recover.

Wal-Mart Stores Inc. (NYSE: WMT)

Originally recommended on June 24/12 (#21222) at $67.30. Closed Friday at $66.51. (All figures in U.S. dollars.)

Background: Wal-Mart is the world’s largest bricks and mortar retailer with more than 11,500 stores in 28 countries, plus e-commerce operations in 11 countries. It employs some 2.2 million people worldwide and had revenue in the 2015 fiscal year of more than $485 billion.

Stock performance: Better lately. After hitting a low of $56.30 in mid-November, the shares have rallied and are now back close to our original recommended price.

Recent developments: The retailing giant released fourth-quarter and year-end results for fiscal 2016 on Feb. 18 (figures to Jan. 31). The numbers weren’t great but they were pretty much in line with expectations. Revenue was down 1.4% year-over-year to $129.7 billion, mainly because of the strong U.S. dollar, which knocked $4.8 billion off sales. Taking foreign exchange out of the equation, revenue was up 2.2%. On a constant currency basis, revenue for the full year was $499.4 billion, ahead 2.8%.

Fourth-quarter earnings per share from continuing operations came in at $1.43, fully diluted. For the whole of fiscal 2016, Wal-Mart reported earnings from continuing operations of $4.57 per share. The forecast for fiscal 2017 is between $4 and $4.30 per share, down from the 2016 level.

Free cash flow was $15.9 billion for the year, compared to $16.4 billion in fiscal 2015. The decrease in free cash flow was primarily due to lower income from continuing operations, partially offset by lower capital spending and the timing of payments.

Dividend: The company announced a 2% dividend increase to $0.50 per quarter ($2 per year), effective with the April 4 payment. It marks the 43rd consecutive year that Wal-Mart has hiked its payment. The yield at the current price is 3%.

Action now: Hold. The company appears to be treading water at this stage. Whether it can regain its former strong growth momentum remains to be seen.

Lundin Mining Corp. (TSX: LUN, OTC: LUNMF)

Originally recommended by Tom Slee on July 14/14 (#21425) at C$6.27, US$5.75. Closed Friday at C$3.72, US$2.72.

Background: Lundin Mining is a diversified Canadian base metals mining company with operations in Chile, the USA, Portugal, and Sweden, primarily producing copper, nickel, and zinc. In addition, it holds a 24% equity stake in the world-class Tenke Fungurume copper/cobalt mine in the Democratic Republic of Congo and in the Freeport Cobalt Oy business, which includes a cobalt refinery located in Kokkola, Finland. 

Stock performance: Lundin was recommended by former contributing editor Tom Slee in July 2014 at $6.27. The stock traded in the $5 to $6 range for most of the following year but then went into a downtrend about the middle of 2015 as commodity prices continued to weaken. At current levels, the shares are well below their 50- and 200-day moving averages.

Recent developments: The company released fourth-quarter and year-end financial results on Feb. 22. The big story was a non-cash impairment charge of $278 million ($0.39 per share), reflecting the reduced value of the company’s assets in light of the big drop in metals prices. As a result, Lundin posted a fourth-quarter loss attributable to shareholders of $377.7 million ($0.52 per share) compared to a profit of $25.8 million ($0.04 per share) in the prior year. For the full year the loss attributable to shareholders was $294.1 million ($0.41 per share).

However, cash flow from operations was an impressive $713.9 million compared to $187.4 million in 2014 and the company reported cash reserves of $557 million. RBC Capital Markets describes the balance sheet as “solid” and maintained its “Outperform” rating on the stock with a target price of $6.

The reality is, however, that nothing very good is going to happen to Lundin until the price of base metals starts to recover from its current depressed state. RBC says it sees “significant upside potential” in zinc and nickel over the next 12 to 18 months. If that happens, the shares will move higher.

Dividend: The stock does not pay a dividend.

Action now: Hold/Sell. Lundin has first-class assets and its partnership with Freeport in the Tenke mine is a big plus. But until metals prices firm, the stock will remain range-bound. Investors with a long time horizon should maintain their positions; those who hold the shares in a non-registered account and see better short-term opportunities should sell.

 

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YOUR QUESTIONS

Portfolio results

Q – I just enjoyed the latest issue of IWB. One thing that has bothered me for years is the time period for the “gain/loss %” column in your stock portfolios. It never seems well defined. By reading some of the text you might discover that it covers a 3.5 year time period. The next table will be different. Why not standardize on a 12-month ROI for this data? I guess I have come to look for this from the Globe or Bloomberg. I always question your gain/loss numbers because the time period is never the same. Why do you do it this way? – Dale W.

A – The return shown in the column on the far right of the table is the cumulative gain or loss from the time of the portfolio’s launch or the date the security was added if it was later than the launch date. The latest six-month result for the portfolio is given in the Comments section, as is the portfolio’s average annual compound rate of return since inception. I felt this was all the information readers needed to judge performance but if more analysis is desired I can certainly provide that. I’d be pleased to hear from other members on this issue. – G.P.