In This Issue

CONSERVATIVE PORTFOLIO BACK ON TRACK

By Gordon Pape, Editor and Publisher

Some investors want to reduce the level of risk in their portfolios as they age, even if that means sacrificing some return. In September 2011, I set up a model portfolio for this purpose. The objective was to preserve capital while earning a target return of two percentage points more than the yield on a five-year GIC from the major banks. The current RBC rate is 1.6% so at present we are aiming for 3.6% per year.

Here is a look at the securities we hold with some comments on how they performed since my last update in mid-September. Prices are as of mid-day on April 19 except for the PIMCO fund, which is at the close of trading on April 18.

iShares 1-5 Year Laddered Corporate Bond Index ETF (TSX: CBO). This short-term corporate bond ETF was chosen because of its low-risk profile and regular monthly cash flow. Because of the low-risk nature of the fund, we don’t expect much of a return. However, we should be doing better than the 0.03% cumulative return to date so a change is needed here.

iShares Core Canadian Short Term Corporate + Maple Bond Index ETF (TSX: XSH). This is another short-term ETF. It was added to the portfolio in the fall of 2013 to provide some exposure to Maple Bonds, which are Canadian-dollar bonds from foreign issuers such as Bank of America, JPMorgan Chase, and Goldman Sachs. The unit price is down $0.08 since the last review in September, but we received monthly distributions totalling just about $0.31 during the period so we came out slightly ahead.

iShares Canadian Universe Bond Index ETF (TSX: XBB). We added this ETF to the portfolio last September when it was trading at $31.37. As of mid-day on April 19 the units were up to $13.72 plus we had received distributions of $0.4491 per unit for a gain of 2.6% during the period.

PIMCO Monthly Income Fund (PMO005). We added this global fixed-income mutual fund in October 2013. It offers monthly cash flow and places a strong emphasis on capital preservation. Since the last review, the unit value has lost $0.40 but that was more than made up for by distributions totalling about $0.54 per unit. We have a total return of 12.1% so far on this one.

BCE Inc. (TSX, NYSE: BCE). BCE continues to be a strong performer for us. The stock has gained $5.64 since the last review and the company increased its quarterly dividend by 5% to $0.6825, effective with the March payment.

Enbridge Inc. (TSX, NYSE: ENB). After being battered last summer, Enbridge shares staged a modest recovery in the latest period, adding $1.28. The big news for income-oriented investors was a dividend increase of about 14% to $0.5299 per quarter.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This Bermuda-based limited partnership invests in infrastructure projects in stable countries around the globe, including Australia, Chile, Great Britain, and the U.S. It lost some ground last summer but bounced back to gain almost $3 per share in the latest period. The quarterly dividend has been increased by 7.5% to US$0.57.

We also received interest of $2.97 on the cash in the high-interest savings account.

Following is a summary of where we stood at mid-day on April 19. The initial book value was $10,000. At the time of my last review the value of the portfolio, including dividends/distributions, was $13,193.73. Brokerage commissions are not factored in and the Canadian and U.S. dollars are treated as being at par (which, obviously, they are not but we do this to remove exchange rates from the performance data).

IWB Conservative Portfolio (a/o April 19/16)

Security

Weight %

Total Shares

Average Cost/Share

Book Value

Current Price

Market Value

Retained Income

Gain/Loss %

CBO

23.1

155

$20.17

$3,125.65

$19.12

$2,963.60

$170.64

+0.03

XSH

18.4

120

$19.72

$2,366.80

$19.68

$2,361.60

$36.91

+ 1.3

XBB

8.6

35

$31.37

$1,097.95

$31.72

$1,110.20

$15.72

+ 2.6

PMO005

9.8

90

$14.01

$1,260.90

$13.98

$1,258.20

$155.08

+12.1

BCE

13.4

29

$38.32

$1,138.28

$59.48

$1,724.92

$155.19

+65.2

ENB

12.4

30

$31.17

$935.10

$53.19

$1,595.70

$200.42

+92.1

BIP.UN

13.9

34

$28.31

$962.47

$52.73

$1,792.82

$122.59

+99.0

Cash

0.4

 

 

$44.30

 

$47.27

 

 

Totals

100.0

 

 

$10,931.45

 

$12,854.31

$856.55

+25.4

Inception

 

 

 

$10,000.00

 

 

 

+37.1

Comments: The portfolio is up 3.9% since the last review, which is a respectable return given the high fixed-income component of almost 60%. Since inception, we have a gain of 37.1%, which works out to an average annual compound rate of return of 7.13%. That is almost double our target.

Changes: As mentioned, I am not happy with the performance of CBO. We want to keep the risk in this portfolio to a minimum but we should be earning more than a flat return, especially from our largest holding. Therefore, we will sell our entire position, which is worth $3,134.24 with retained distributions.

We will use $793 of that to buy an additional 25 units of XBB. This will bring our total position to 60.

The rest will be invested in the iShares Canadian Short Term Bond Index ETF (TSX: XSB). The units were priced at $28.41 at the time of writing so we will buy 80 of them at a cost of $2,272.80. The balance of $68.44 will be added to our general cash reserve.

We will also make a few other small changes.

PMO005 – We will buy 10 units for $139.80. This will bring our total to 100 and reduce the retained income to $15.28.

BCE – We will buy one share at $59.48, which will bring our total to 30 and reduce retained income to $95.71.

BIP.UN – We’ll add one share at $52.73 to bring our position to 35. We will be left with cash of $69.86.

Cash – We will move our cash position of $549.61 to an on-line savings account with EQ Bank that currently pays 2.25%.

Here is the revised portfolio. I will revisit it in September on its fifth anniversary.

IWB Conservative Portfolio (revised April 19/16)

Security

Weight %

Total Shares

Average Cost/Share

Book Value

Current Price

Market Value

Retained Income

XSB

17.2

80

$28.41

$2,272.80

$28.41

$2,272.80

0

XSH

17.8

120

$19.72

$2,366.80

$19.68

$2,361.60

$36.91

XBB

14.3

60

$31.52

$1,890.95

$31.72

$1,903.20

$15.72

PMO005

10.5

100

$14.01

$1,400.70

$13.98

$1,398.00

$15.28

BCE

13.4

30

$39.93

$1,197.76

$59.48

$1,784.40

$95.71

ENB

12.0

30

$31.17

$935.10

$53.19

$1,595.70

$200.42

BIP.UN

13.9

35

$29.01

$1,015.20

$52.73

$1,845.55

$69.86

Cash

0.9

 

 

$115.71

 

$115.71

 

Totals

100.0

 

 

$11,196.02

 

$13,276.96

$433.90

Inception

 

 

 

$10,000.00

 

 

 

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

Top

A LOOK AT U.S. SMALL CAPS

Contributing editor Ryan Irvine is back this week with a look at the promising world of U.S. small cap stocks. Ryan is the CEO of KeyStone Financial (www.KeyStocks.com) and is one of the country’s top experts in small caps. He is based in the Vancouver area.

Ryan Irvine writes:

Over the past six months, KeyStone analysts have reviewed thousands of U.S. listed companies including the entire Russell 2000 Index. We have also looked at all small and mid-caps listed on Nasdaq and about 1,700 over-the-counter (OTC) listed companies. In total, we reviewed well over 4,000 stocks.

Our standard minimum criteria of ongoing profitability applied. KeyStone’s bias towards strong, cash rich balance sheets with solid cash flow growth also weighed heavily for inclusion purposes.

Before we delve deeper into the valuation criteria, let’s take a quick look at some broader findings from the research as they relate to the U.S. and Canadian markets.

A far greater percentage of U.S. companies are actually profitable. This is a significant advantage that U.S. markets possess in terms of actual analysis of cash flows, balance sheets, etc. when compared to Canadian stocks. The Canadian markets consist of roughly 4,000 individual companies on the TSX and Venture exchanges. The large number of companies in the junior mining and oil and gas industries, as well as junior tech and biotech, results in a very high proportion of stocks that are either pre-revenue, currently posting very small sales, or reporting sales but nowhere near profitability.

Generally in the U.S. market, particularly on the larger exchanges such as the NYSE and Nasdaq, this is not the case. The vast majority of the companies passed our minimum criteria of profitability, whereas a great number in Canada are immediately excluded. U.S. OTC listed companies were the exception with most of them resembling the highly speculative companies that make up most of the TSX Venture, or worse.

The U.S. market possesses far more publicly listed banks and related finance companies than in Canada. This is another significant difference between the Canadian and U.S. small cap markets. The U.S. boasts a number of regional banks that have some attraction but there are also a large number of city-based banks and finance companies with only one or two locations. Due to their relative size (extremely small) we removed most of these very thinly traded financial companies from our U.S. coverage universe. In Canada, the banking sector continues to be dominated by the big six banks, due in large part to the regulatory structure.

Average balance sheet strength is greater in the U.S. than Canada. This does not mean they are necessarily better companies, just that they appear to be better funded. Access to capital appears greater. In fact, within a recent U.S. small-cap report, 21 out of 32 companies selected held strong net cash positions (cash minus debt). A number of these held over a quarter of their market capitalization (market value) in cash.

The U.S. market overall is much more expensive than the Canadian market. There are a number of reasons for this including access to capital, but it can make the job of a growth/value analyst more difficult. While there are plenty of growth stocks in the U.S. market, most are currently trading at what we would consider to be inflated valuations. Of course, this can be dependent on how one defines earnings, but from a traditional perspective, the broader U.S. market is historically offering little value based on growth estimates.

Currently, most individual stocks with decent growth profiles and strong balance sheets trade at 40 to 50 times earnings and in some cases much higher. The few that appear to be actually cheap on the surface generally have some form of overhang or “warts” in the story.

Our strategy when applying the valuation criteria for this report was to focus on growth at a reasonable price as opposed to pure value. What that means is that we were willing to look at companies with somewhat more expensive valuations as long as the growth and other fundamentals provided the justification.

At a certain level, around 40 to 50+ times earnings, the investment risk increases unless the growth is reasonably certain. For example, a company that trades at 50 times earnings but is growing earnings per share at 50% to 75% per year is not actually that expensive relative to the growth rate.

However, that level of growth is very difficult to maintain for an extended period of time. If the growth were to decline to the 15% to 25% range, then there is a significant risk that the valuation would contract and the share price would fall even though earnings are continuing to grow at an impressive rate.

At present, we believe we are seeing the most value is in the companies trading at 15 to 25 times trailing earnings multiple with strong growth rates and fundamentals. Although 20+ times earnings is not generally considered cheap for our style of research, it can still be very reasonable if the underlying fundamentals and growth of the company justify it.

Without further ado, we introduce a new U.S. stock to our coverage universe – one of the products of our recent report on the U.S. growth stock market.

 

Top

RYAN IRVINE PICKS TRUEBLUE

Background: TrueBlue Inc. (NYSE: TBI) is a leading provider of specialized workforce solutions including staffing, large-volume on-site workforce management, and recruitment process outsourcing to fill full-time positions. The company helps approximately 130,000 businesses, in a wide variety of industries and geographies, to be more productive and connects as many as 840,000 people to work each year.

TrueBlue consists of two business segments: Staffing Services and Managed Services. Staffing Services provides a wide range of blue-collar staffing services including general labor, light industrial, skilled trades, aviation and transportation mechanics and technicians, and drivers as well as on-premise staffing and management of a facility’s contingent blue-collar workforce. Managed Services includes outsourced service offerings in permanent employment recruitment process outsourcing (RPO) and management of contingent labor services providers (MSP).

Investment highlights: Here are some of the key points that caught our attention:

  • Record fourth quarter and annual results in 2015.
  • Strong organic growth: 14% for the fourth quarter and 7% for the year.
  • Completed two acquisitions in 2015 to expand services; expected to generate accretive growth in 2016.
  • 2016 guidance of $3.1 billion (an increase of 16%) for revenue and $2.65 per share (an increase of 31%) adjusted net income.
  • Attractive valuation coupled with positive outlook and solid opportunities for future growth.

Financial overview: TrueBlue reported record financial results for the fourth quarter and full year of 2015. Revenue increased 17% in the fourth quarter to $811 million. Full-year revenue was a record $2.7 billion, an increase of 24% compared to 2014. The company achieved strong organic growth in 2015 of 14% in the fourth quarter and 7% for the full year. Adjusted EBITDA rose 6.1% in the fourth quarter to $46 million. Full-year adjusted EBITDA increased 23% to $147 million. Adjusted net income per share for the fourth quarter was $0.66, up 6.5% from the same quarter last year. Full-year adjusted net income per share was $2.02, an increase of 21% compared to 2014.

Within TrueBlue’s core business, the company reported widespread growth serving the specialized staffing needs of small to mid-sized customers. The growth also continued to be widespread throughout the company’s geographies, with strong momentum in both local and national accounts. Construction was strong with double-digit sales growth in the fourth quarter. Although manufacturing has declined year-over-year, the company did report low-single digit declines versus slightly higher declines earlier in the year in that industry segment.

TrueBlue is expecting another record year in 2016 with significant year-over-year growth in key financial metrics. For the full year, TrueBlue is estimating revenue of $3.1 billion and adjusted earnings per share of $2.65, representing year-over-year growth of 16% and 31% respectively. For the first quarter of 2016, the company is estimating revenue of $660 million to $675 million, an increase of 15% to 18% and adjusted net income per diluted share of $0.23 to $0.28, an increase of 15% to 40%.

Historically, we have been able to trace the company’s financial history back 22 years to 1994. Over this period, the company was profitable in all but a single year (2008). Revenue, while exhibiting some volatility, has travelled on a relatively steady trend upwards. Earnings have been more volatile and we saw a sharp drop in 2008, which was the start of the financial crisis and “great recession.” It is clear from the historical data that there is a strong element of economic sensitivity in the business.

Key areas of growth: Acquisitions are an important aspect of TrueBlue’s growth strategy with the company averaging one transaction per year since 2012. The company has completed two acquisitions in recent months, both of which are expected to deliver significant accretion to earnings per share this year.

On Dec. 1, the company acquired SIMOS, a leading provider of on-premise staffing solutions for several Fortune 500 companies. SIMOS is on the cutting edge of using contingent labor to increase performance. On Jan. 11, TrueBlue acquired the recruitment process outsourcing (RPO) business of Aon Hewitt. This acquisition is a part of the company’s initiative to further position PeopleScout (acquired in 2014) as the leading global RPO provider with more than $150 million in annual revenue and 300,000 annual full-time placements.

TrueBlue believes the RPO market has tremendous potential on a worldwide scale. In addition, the SIMOS acquisition complements the work that the company is doing to offer businesses large scale on premise management with a focus on improving productivity. Together, the company expects that these two acquisitions will increase 2016 adjusted earnings by $0.34 per share, or 17% over 2015. Over the next six months, management’s strategy is to focus on the recently completed acquisitions to ensure customers and employees are retained and relevant integration activities are completed to enable future growth.

Management believes that success with these activities will provide capacity to complete economically priced deals in the future that provide unique value to customers, yet are complementary to the company’s current portfolio of services.

TrueBlue has also made significant investments into personnel and technology. Investments for growth include the development of technology to connect with both the company’s current workforce and candidates alike by moving from a texting system to an app built for smart devices. Investments were also made into additional professionals on the ground, selling and recruiting. Since the end of the first quarter of 2015, 300 new positions have been added in the branch-based staffing business, predominately in higher paid sales and recruiting positions. These investments, while successfully generating organic growth, also resulted in a decline in EBITDA margins in 2015. Management is confident that the company is investing in the right areas, however they have decided to pull back slightly on certain costs to ensure that adjusted EBITDA margins can be maintained at the current level during 2016.

Strong profitable organic growth continues to be a top priority for the company due to the solid shareholder return it produces.

TrueBlue believes that one of the most remarkable changes in today’s employment market is the growing use of contingent workers alongside the permanent workforce for businesses of all sizes. The company views this is a growing trend that has been in the marketplace for many years, driven in part by two factors. One is the retirement of Baby Boomers, whose skills are not being replaced by the next generation of workers. The second is the interest of the next generation, and the companies who employ them, in greater flexibility. The company also reports that this change has been accelerating rapidly over the past few years and is on its way to becoming the standard way businesses will operate in the future.

This broader use of a blended workforce has also increased the need for services beyond simply filling positions, including the recruiting and management of large-scale contingent workforces for individual projects or locations, as well as recruiting high numbers of top candidates to fill permanent positions. The company sees tremendous long-term opportunities helping its clients adapt to the changing marketplace and believes that it will continue be a beneficiary of this trend.

Conclusion: TrueBlue reported record performance in 2015 capping off the sixth straight year of higher revenue and earnings. Based on management’s guidance, 2016 is shaping up to be another record year with earnings expected to increase 30% over 2015. TrueBlue currently maintains a significant amount of operating momentum in its business, which has been driven by growth initiatives implemented by the company and an improving employment market in the U.S. The company views this as a growing trend driven by changing demographics and the need of companies and workers for more flexibility and reports that the change has been accelerating rapidly over the past few years.

On a price-to-earnings basis, the company is trading at or below the lower end of its historical range, which indicates to us that there is strong potential for valuation expansion if it can maintain its current revenue and earnings momentum over the next one to two years.

The main risk we see with the stock is economic sensitivity as the industry has demonstrated cyclicality in line with the business and employment cycle. Although TrueBlue’s revenue and earnings have risen and declined with the economy, we are impressed by the long-term track record of 21 out of 22 years of profitability as well as the achievement of higher revenue and earnings peaks through each cycle.

We like the company because it has a rare combination of growth and value. As long as the economy keeps limping forward at even a moderate pace, we see excellent potential for short-term returns to shareholders of TrueBlue. On a longer-term basis, there is the risk of cyclicality (which exists for nearly all companies) but the company has also navigated these risks very well in the past and has proven itself to be a value generator over time.

Action now: Buy. The stock closed on Friday at $21.02

– end Ryan Irvine

 

Top

AS OTHERS SEE US

The Liberal budget has received mixed reviews in Canada but The Wall Street Journal said it was good news for the global economy in an analysis piece by Greg Ip published last week.

In the article, Mr. Ip says Canada did the world a favour “by faithfully executing the formula that finance ministers and central bankers from the top 20 economies agreed to pursue at their just-concluded meetings in Washington; namely rely less on monetary and more on fiscal policy to rejuvenate growth.”

The problem, he added, is that Canada “is virtually alone in being both willing and able” to do this.

The column is fulsome in its praise of Canada’s historical record, calling it “an exemplar of astute microeconomic management”.

But Mr. Ip does note that only 42% of the budget stimulus is directed to infrastructure, which he calls the “safest” form. “Most of the rest goes to expanded social transfers such as child benefits, expanded unemployment insurance, and old-age pensions. All are permanent obligations and some at the margin may discourage work,” he comments. – G.P.

 

Top

GORDON PAPE’S UPDATES

New Flyer Industries (TSX: NFI, OTC: NFYEF)

Originally recommended by Tom Slee on March 4/13 (#21309) at C$10.30, US$10.04. Closed Friday at C$35.84, US$28.50.

Background: New Flyer is the leading manufacturer of heavy-duty transit buses in the United States and Canada. The company, which is based in Winnipeg, offers a broad product line of transit buses including drive systems powered by clean diesel, natural gas, diesel-electric hybrid, electric trolley, and battery-electric. The company also operates an aftermarket parts organization, sourcing parts from hundreds of different suppliers and providing support for all types of transit buses. New Flyer employs about 5,000 people with manufacturing, fabrication, parts distribution, and service centres in both Canada and the U.S.

Stock performance: The shares were first recommended by retired contributing editor Tom Slee in March 2014 at $10.30. They remained in a gradual uptrend until last fall, when they suddenly spiked sharply higher on good financial results. At the time of the last update, on Oct. 24, they were trading at $19.23 and I rated them as a Buy. They closed on Friday at $35.84, up 86% since the October review.

Recent developments: The company announced fourth-quarter and year-end results on March 23. Revenue for the quarter was down slightly year-over-year to $418.9 million (the company reports in U.S. dollars). However, net earnings almost doubled to $14.1 million ($0.25 per share) from $7.4 million ($0.13 per share) the year before.

For the full 2015 fiscal year, revenue was up 6.1% to just over $1.5 billion. Earnings came in at $53.9 million ($0.97 per share) compared to $26.7 million ($0.48 per share) in 2014. Free cash flow was $108.3 million compared to $65.5 million the year before.

As of year-end, New Flyer reported an order backlog of $4.95 billion, up 38% from the prior year. About $1.1 billion of that is attributable to the acquisition of Motor Coach Industries (MCI) in December for $455 million. New Flyer expects the deal to result in savings of $10 million a year through synergies.

Dividend: There have been two important changes relating to the dividend. The first is a 12.9% increase in the rate, from $0.62 to $0.70 a year. The second is a decision to switch from monthly payments to quarterly. The first quarterly dividend of $0.175 per share will be paid on April 15. The stock yields about 2% at the current price.

Action now: Buy. The MCI deal adds significant growth potential to this company.

Norfolk Southern (NYSE: NSC)

Originally recommended by Tom Slee on Dec. 13/09 (#2944) at $52.22. Closed Friday at $91.33. (All figures in U.S. dollars.)

Background: Norfolk Southern Railway operates approximately 20,000 route miles in 22 states and the District of Columbia. It serves every major container port in the eastern United States, operates the most extensive intermodal network in the East, and is a major transporter of coal, automotive, and industrial products.

Stock performance: Retired contributing editor Tom Slee first recommended the shares in December 2009 at $52.22. They briefly topped $115 in late 2014 but then went into a prolonged slide. A hostile takeover bid from Canadian Pacific prompted a modest rebound but after CP gave up the chase earlier this month the stock sold off again. However, the shares shot up about 10% on Friday after the release of the first-quarter results.

Recent developments: The first-quarter results show that Norfolk Southern doesn’t need CP’s help to improve its operations. Although revenue was off 6% from the same period last year, railroad operating expenses were 13% lower. The result was a 25% improvement in net income to $387 million ($1.29 per share, fully diluted). The all-important operating ratio was 70.1%, an improvement of 8% over the prior year and a Norfolk Southern first-quarter record.

Dividend: The stock pays a quarterly dividend of $0.5899 ($2.36 a year) to yield 2.6% at the current price. There has not been any announcement of a dividend increase so far this year.

Action now: Buy.

Shaw Communications (TSX: SJR.B, NYSE: SJR)

Originally recommended on Feb. 3/08 (#2805) at C$20.53, US$20.64. Closed Friday at C$23.58, US$18.61.

Background: Shaw Communications is a Calgary-based diversified communications company, serving 3.2 million customers in Alberta and British Columbia. Its services include broadband Internet, WiFi, digital phone, and video products and services. Shaw Business Network Services provides business customers with Internet, data, Wi-Fi, telephony, video, and fleet tracking services. Shaw Business Infrastructure Services offers colocation, cloud, and managed services through ViaWest.

Stock performance: The shares briefly moved over $28 in December but then dropped to below $23 in February. I don’t see much short-term upside potential from here.

Recent developments: On April 14 the company announced results for the second quarter of fiscal 2016 (to Feb. 29). Revenue for the quarter was up 3% to $1.51 billion but net income dropped 2.4% to $164 million ($0.32 per share, fully diluted).

The same pattern showed for the six-month results, with revenue ahead by 3.4% to just under $2.3 billion while net income dropped 3.3% to $382 million ($0.75 per share). Free cash flow for the six months was off 19.6% to $291 million. The company said that transaction costs associated with the acquisition of WIND Mobile contributed to the decline in profits.

Shaw has completed two major transactions that change its business model significantly. The purchase of WIND moves it into the wireless business, an area it had previously decided to avoid because of the costs and stiff competition from companies like Telus. As well, the company got out of the broadcasting business, selling its assets in Global and various specialty channels (known as Shaw Media) to Chorus Entertainment.

As a result, the company has revised its guidance for 2016, projecting that growth in operating income before restructuring costs and amortization will be in the flat to low single digit range. CEO Brad Shaw is extolling the growth potential of the new look company but investors are advised to wait until we see some proof before jumping in.

Dividend: The B shares pay a monthly dividend of $0.09875, which works out to $1.185 per year. The yield at the current price is 5%.

Action now: Hold for income.

 

Top

YOUR QUESTIONS

Underperforming ETF

Q – I bought XUU when first recommended. It represents the entire U.S. market. I am puzzled as to why there is virtually no daily volume, and some days zero! Why is it not performing better? – Leo S.

A – I recommended the iShares Core S&P U.S. Market ETF a little over a year ago as a way to obtain exposure to the entire American market at low cost. It comes in two versions, unhedged (TSX: XUU) and hedged (TSX: XUH). Neither has performed well; the hedged version had a one-year return to March 31 of -0.2% while the unhedged version was up by 1.9%. By comparison, the iShares Core S&P 500 ETF (TSX: XUS), an unhedged fund that tracks only the S&P 500, was ahead 3.4% in the same period. The hedged version of that fund (TSX: XSP) was up 0.8%.

The main reason why XUU/XUH has fared poorly is its exposure to U.S. small cap stocks. They have had a bad year, with the iShares fund that tracks them down over 10%. The small caps will eventually recover and when they do the fund’s performance will improve.

As for the low trading volume, it comes down to the fact there aren’t that many units out there. XUU/XUH has only been in existence since February 2015 and has attracted just $50 million in assets to date. By comparison, XSP has $3.7 billion. – G.P.

 

Top

EQUITABLE CLARIFICATION

We received the following e-mail from Andrew Moor, CEO of Equitable Bank, relating to our recent update on the stock.

“Just one point of clarification: we are taking clients in EQ Bank, our digital offering. In fact, we have over 15,000 clients successfully on-boarded and with deposits in the Bank. Our goal is to offer a great customer experience. In order to try to deliver that service, we on-boarding clients in an orderly fashion so we can answer their questions quickly in our call centre and (do) all the other things that customers deserve. Prospective clients can put themselves on a list and will get an invitation to actually sign-up as they reach the top of the list (we are on-boarding several hundred customers a week).

“We are offering a single rate of 3% to all customers in our Savings Plus Account. While the rate will likely change marginally downwards sooner than later – we want to stand firm in offering all our clients the same good rate and avoid the approach of offering limited time special offers and different rates for different customers. Simple and transparent is the goal!”

Editor’s note: The rate on EQ’s Saving Plus Account was reduced to 2.25% on April 18.

In This Issue

CONSERVATIVE PORTFOLIO BACK ON TRACK

By Gordon Pape, Editor and Publisher

Some investors want to reduce the level of risk in their portfolios as they age, even if that means sacrificing some return. In September 2011, I set up a model portfolio for this purpose. The objective was to preserve capital while earning a target return of two percentage points more than the yield on a five-year GIC from the major banks. The current RBC rate is 1.6% so at present we are aiming for 3.6% per year.

Here is a look at the securities we hold with some comments on how they performed since my last update in mid-September. Prices are as of mid-day on April 19 except for the PIMCO fund, which is at the close of trading on April 18.

iShares 1-5 Year Laddered Corporate Bond Index ETF (TSX: CBO). This short-term corporate bond ETF was chosen because of its low-risk profile and regular monthly cash flow. Because of the low-risk nature of the fund, we don’t expect much of a return. However, we should be doing better than the 0.03% cumulative return to date so a change is needed here.

iShares Core Canadian Short Term Corporate + Maple Bond Index ETF (TSX: XSH). This is another short-term ETF. It was added to the portfolio in the fall of 2013 to provide some exposure to Maple Bonds, which are Canadian-dollar bonds from foreign issuers such as Bank of America, JPMorgan Chase, and Goldman Sachs. The unit price is down $0.08 since the last review in September, but we received monthly distributions totalling just about $0.31 during the period so we came out slightly ahead.

iShares Canadian Universe Bond Index ETF (TSX: XBB). We added this ETF to the portfolio last September when it was trading at $31.37. As of mid-day on April 19 the units were up to $13.72 plus we had received distributions of $0.4491 per unit for a gain of 2.6% during the period.

PIMCO Monthly Income Fund (PMO005). We added this global fixed-income mutual fund in October 2013. It offers monthly cash flow and places a strong emphasis on capital preservation. Since the last review, the unit value has lost $0.40 but that was more than made up for by distributions totalling about $0.54 per unit. We have a total return of 12.1% so far on this one.

BCE Inc. (TSX, NYSE: BCE). BCE continues to be a strong performer for us. The stock has gained $5.64 since the last review and the company increased its quarterly dividend by 5% to $0.6825, effective with the March payment.

Enbridge Inc. (TSX, NYSE: ENB). After being battered last summer, Enbridge shares staged a modest recovery in the latest period, adding $1.28. The big news for income-oriented investors was a dividend increase of about 14% to $0.5299 per quarter.

Brookfield Infrastructure Limited Partnership (TSX: BIP.UN, NYSE: BIP). This Bermuda-based limited partnership invests in infrastructure projects in stable countries around the globe, including Australia, Chile, Great Britain, and the U.S. It lost some ground last summer but bounced back to gain almost $3 per share in the latest period. The quarterly dividend has been increased by 7.5% to US$0.57.

We also received interest of $2.97 on the cash in the high-interest savings account.

Following is a summary of where we stood at mid-day on April 19. The initial book value was $10,000. At the time of my last review the value of the portfolio, including dividends/distributions, was $13,193.73. Brokerage commissions are not factored in and the Canadian and U.S. dollars are treated as being at par (which, obviously, they are not but we do this to remove exchange rates from the performance data).

IWB Conservative Portfolio (a/o April 19/16)

Security

Weight %

Total Shares

Average Cost/Share

Book Value

Current Price

Market Value

Retained Income

Gain/Loss %

CBO

23.1

155

$20.17

$3,125.65

$19.12

$2,963.60

$170.64

+0.03

XSH

18.4

120

$19.72

$2,366.80

$19.68

$2,361.60

$36.91

+ 1.3

XBB

8.6

35

$31.37

$1,097.95

$31.72

$1,110.20

$15.72

+ 2.6

PMO005

9.8

90

$14.01

$1,260.90

$13.98

$1,258.20

$155.08

+12.1

BCE

13.4

29

$38.32

$1,138.28

$59.48

$1,724.92

$155.19

+65.2

ENB

12.4

30

$31.17

$935.10

$53.19

$1,595.70

$200.42

+92.1

BIP.UN

13.9

34

$28.31

$962.47

$52.73

$1,792.82

$122.59

+99.0

Cash

0.4

 

 

$44.30

 

$47.27

 

 

Totals

100.0

 

 

$10,931.45

 

$12,854.31

$856.55

+25.4

Inception

 

 

 

$10,000.00

 

 

 

+37.1

Comments: The portfolio is up 3.9% since the last review, which is a respectable return given the high fixed-income component of almost 60%. Since inception, we have a gain of 37.1%, which works out to an average annual compound rate of return of 7.13%. That is almost double our target.

Changes: As mentioned, I am not happy with the performance of CBO. We want to keep the risk in this portfolio to a minimum but we should be earning more than a flat return, especially from our largest holding. Therefore, we will sell our entire position, which is worth $3,134.24 with retained distributions.

We will use $793 of that to buy an additional 25 units of XBB. This will bring our total position to 60.

The rest will be invested in the iShares Canadian Short Term Bond Index ETF (TSX: XSB). The units were priced at $28.41 at the time of writing so we will buy 80 of them at a cost of $2,272.80. The balance of $68.44 will be added to our general cash reserve.

We will also make a few other small changes.

PMO005 – We will buy 10 units for $139.80. This will bring our total to 100 and reduce the retained income to $15.28.

BCE – We will buy one share at $59.48, which will bring our total to 30 and reduce retained income to $95.71.

BIP.UN – We’ll add one share at $52.73 to bring our position to 35. We will be left with cash of $69.86.

Cash – We will move our cash position of $549.61 to an on-line savings account with EQ Bank that currently pays 2.25%.

Here is the revised portfolio. I will revisit it in September on its fifth anniversary.

IWB Conservative Portfolio (revised April 19/16)

Security

Weight %

Total Shares

Average Cost/Share

Book Value

Current Price

Market Value

Retained Income

XSB

17.2

80

$28.41

$2,272.80

$28.41

$2,272.80

0

XSH

17.8

120

$19.72

$2,366.80

$19.68

$2,361.60

$36.91

XBB

14.3

60

$31.52

$1,890.95

$31.72

$1,903.20

$15.72

PMO005

10.5

100

$14.01

$1,400.70

$13.98

$1,398.00

$15.28

BCE

13.4

30

$39.93

$1,197.76

$59.48

$1,784.40

$95.71

ENB

12.0

30

$31.17

$935.10

$53.19

$1,595.70

$200.42

BIP.UN

13.9

35

$29.01

$1,015.20

$52.73

$1,845.55

$69.86

Cash

0.9

 

 

$115.71

 

$115.71

 

Totals

100.0

 

 

$11,196.02

 

$13,276.96

$433.90

Inception

 

 

 

$10,000.00

 

 

 

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

Top

A LOOK AT U.S. SMALL CAPS

Contributing editor Ryan Irvine is back this week with a look at the promising world of U.S. small cap stocks. Ryan is the CEO of KeyStone Financial (www.KeyStocks.com) and is one of the country’s top experts in small caps. He is based in the Vancouver area.

Ryan Irvine writes:

Over the past six months, KeyStone analysts have reviewed thousands of U.S. listed companies including the entire Russell 2000 Index. We have also looked at all small and mid-caps listed on Nasdaq and about 1,700 over-the-counter (OTC) listed companies. In total, we reviewed well over 4,000 stocks.

Our standard minimum criteria of ongoing profitability applied. KeyStone’s bias towards strong, cash rich balance sheets with solid cash flow growth also weighed heavily for inclusion purposes.

Before we delve deeper into the valuation criteria, let’s take a quick look at some broader findings from the research as they relate to the U.S. and Canadian markets.

A far greater percentage of U.S. companies are actually profitable. This is a significant advantage that U.S. markets possess in terms of actual analysis of cash flows, balance sheets, etc. when compared to Canadian stocks. The Canadian markets consist of roughly 4,000 individual companies on the TSX and Venture exchanges. The large number of companies in the junior mining and oil and gas industries, as well as junior tech and biotech, results in a very high proportion of stocks that are either pre-revenue, currently posting very small sales, or reporting sales but nowhere near profitability.

Generally in the U.S. market, particularly on the larger exchanges such as the NYSE and Nasdaq, this is not the case. The vast majority of the companies passed our minimum criteria of profitability, whereas a great number in Canada are immediately excluded. U.S. OTC listed companies were the exception with most of them resembling the highly speculative companies that make up most of the TSX Venture, or worse.

The U.S. market possesses far more publicly listed banks and related finance companies than in Canada. This is another significant difference between the Canadian and U.S. small cap markets. The U.S. boasts a number of regional banks that have some attraction but there are also a large number of city-based banks and finance companies with only one or two locations. Due to their relative size (extremely small) we removed most of these very thinly traded financial companies from our U.S. coverage universe. In Canada, the banking sector continues to be dominated by the big six banks, due in large part to the regulatory structure.

Average balance sheet strength is greater in the U.S. than Canada. This does not mean they are necessarily better companies, just that they appear to be better funded. Access to capital appears greater. In fact, within a recent U.S. small-cap report, 21 out of 32 companies selected held strong net cash positions (cash minus debt). A number of these held over a quarter of their market capitalization (market value) in cash.

The U.S. market overall is much more expensive than the Canadian market. There are a number of reasons for this including access to capital, but it can make the job of a growth/value analyst more difficult. While there are plenty of growth stocks in the U.S. market, most are currently trading at what we would consider to be inflated valuations. Of course, this can be dependent on how one defines earnings, but from a traditional perspective, the broader U.S. market is historically offering little value based on growth estimates.

Currently, most individual stocks with decent growth profiles and strong balance sheets trade at 40 to 50 times earnings and in some cases much higher. The few that appear to be actually cheap on the surface generally have some form of overhang or “warts” in the story.

Our strategy when applying the valuation criteria for this report was to focus on growth at a reasonable price as opposed to pure value. What that means is that we were willing to look at companies with somewhat more expensive valuations as long as the growth and other fundamentals provided the justification.

At a certain level, around 40 to 50+ times earnings, the investment risk increases unless the growth is reasonably certain. For example, a company that trades at 50 times earnings but is growing earnings per share at 50% to 75% per year is not actually that expensive relative to the growth rate.

However, that level of growth is very difficult to maintain for an extended period of time. If the growth were to decline to the 15% to 25% range, then there is a significant risk that the valuation would contract and the share price would fall even though earnings are continuing to grow at an impressive rate.

At present, we believe we are seeing the most value is in the companies trading at 15 to 25 times trailing earnings multiple with strong growth rates and fundamentals. Although 20+ times earnings is not generally considered cheap for our style of research, it can still be very reasonable if the underlying fundamentals and growth of the company justify it.

Without further ado, we introduce a new U.S. stock to our coverage universe – one of the products of our recent report on the U.S. growth stock market.

 

Top

RYAN IRVINE PICKS TRUEBLUE

Background: TrueBlue Inc. (NYSE: TBI) is a leading provider of specialized workforce solutions including staffing, large-volume on-site workforce management, and recruitment process outsourcing to fill full-time positions. The company helps approximately 130,000 businesses, in a wide variety of industries and geographies, to be more productive and connects as many as 840,000 people to work each year.

TrueBlue consists of two business segments: Staffing Services and Managed Services. Staffing Services provides a wide range of blue-collar staffing services including general labor, light industrial, skilled trades, aviation and transportation mechanics and technicians, and drivers as well as on-premise staffing and management of a facility’s contingent blue-collar workforce. Managed Services includes outsourced service offerings in permanent employment recruitment process outsourcing (RPO) and management of contingent labor services providers (MSP).

Investment highlights: Here are some of the key points that caught our attention:

  • Record fourth quarter and annual results in 2015.
  • Strong organic growth: 14% for the fourth quarter and 7% for the year.
  • Completed two acquisitions in 2015 to expand services; expected to generate accretive growth in 2016.
  • 2016 guidance of $3.1 billion (an increase of 16%) for revenue and $2.65 per share (an increase of 31%) adjusted net income.
  • Attractive valuation coupled with positive outlook and solid opportunities for future growth.

Financial overview: TrueBlue reported record financial results for the fourth quarter and full year of 2015. Revenue increased 17% in the fourth quarter to $811 million. Full-year revenue was a record $2.7 billion, an increase of 24% compared to 2014. The company achieved strong organic growth in 2015 of 14% in the fourth quarter and 7% for the full year. Adjusted EBITDA rose 6.1% in the fourth quarter to $46 million. Full-year adjusted EBITDA increased 23% to $147 million. Adjusted net income per share for the fourth quarter was $0.66, up 6.5% from the same quarter last year. Full-year adjusted net income per share was $2.02, an increase of 21% compared to 2014.

Within TrueBlue’s core business, the company reported widespread growth serving the specialized staffing needs of small to mid-sized customers. The growth also continued to be widespread throughout the company’s geographies, with strong momentum in both local and national accounts. Construction was strong with double-digit sales growth in the fourth quarter. Although manufacturing has declined year-over-year, the company did report low-single digit declines versus slightly higher declines earlier in the year in that industry segment.

TrueBlue is expecting another record year in 2016 with significant year-over-year growth in key financial metrics. For the full year, TrueBlue is estimating revenue of $3.1 billion and adjusted earnings per share of $2.65, representing year-over-year growth of 16% and 31% respectively. For the first quarter of 2016, the company is estimating revenue of $660 million to $675 million, an increase of 15% to 18% and adjusted net income per diluted share of $0.23 to $0.28, an increase of 15% to 40%.

Historically, we have been able to trace the company’s financial history back 22 years to 1994. Over this period, the company was profitable in all but a single year (2008). Revenue, while exhibiting some volatility, has travelled on a relatively steady trend upwards. Earnings have been more volatile and we saw a sharp drop in 2008, which was the start of the financial crisis and “great recession.” It is clear from the historical data that there is a strong element of economic sensitivity in the business.

Key areas of growth: Acquisitions are an important aspect of TrueBlue’s growth strategy with the company averaging one transaction per year since 2012. The company has completed two acquisitions in recent months, both of which are expected to deliver significant accretion to earnings per share this year.

On Dec. 1, the company acquired SIMOS, a leading provider of on-premise staffing solutions for several Fortune 500 companies. SIMOS is on the cutting edge of using contingent labor to increase performance. On Jan. 11, TrueBlue acquired the recruitment process outsourcing (RPO) business of Aon Hewitt. This acquisition is a part of the company’s initiative to further position PeopleScout (acquired in 2014) as the leading global RPO provider with more than $150 million in annual revenue and 300,000 annual full-time placements.

TrueBlue believes the RPO market has tremendous potential on a worldwide scale. In addition, the SIMOS acquisition complements the work that the company is doing to offer businesses large scale on premise management with a focus on improving productivity. Together, the company expects that these two acquisitions will increase 2016 adjusted earnings by $0.34 per share, or 17% over 2015. Over the next six months, management’s strategy is to focus on the recently completed acquisitions to ensure customers and employees are retained and relevant integration activities are completed to enable future growth.

Management believes that success with these activities will provide capacity to complete economically priced deals in the future that provide unique value to customers, yet are complementary to the company’s current portfolio of services.

TrueBlue has also made significant investments into personnel and technology. Investments for growth include the development of technology to connect with both the company’s current workforce and candidates alike by moving from a texting system to an app built for smart devices. Investments were also made into additional professionals on the ground, selling and recruiting. Since the end of the first quarter of 2015, 300 new positions have been added in the branch-based staffing business, predominately in higher paid sales and recruiting positions. These investments, while successfully generating organic growth, also resulted in a decline in EBITDA margins in 2015. Management is confident that the company is investing in the right areas, however they have decided to pull back slightly on certain costs to ensure that adjusted EBITDA margins can be maintained at the current level during 2016.

Strong profitable organic growth continues to be a top priority for the company due to the solid shareholder return it produces.

TrueBlue believes that one of the most remarkable changes in today’s employment market is the growing use of contingent workers alongside the permanent workforce for businesses of all sizes. The company views this is a growing trend that has been in the marketplace for many years, driven in part by two factors. One is the retirement of Baby Boomers, whose skills are not being replaced by the next generation of workers. The second is the interest of the next generation, and the companies who employ them, in greater flexibility. The company also reports that this change has been accelerating rapidly over the past few years and is on its way to becoming the standard way businesses will operate in the future.

This broader use of a blended workforce has also increased the need for services beyond simply filling positions, including the recruiting and management of large-scale contingent workforces for individual projects or locations, as well as recruiting high numbers of top candidates to fill permanent positions. The company sees tremendous long-term opportunities helping its clients adapt to the changing marketplace and believes that it will continue be a beneficiary of this trend.

Conclusion: TrueBlue reported record performance in 2015 capping off the sixth straight year of higher revenue and earnings. Based on management’s guidance, 2016 is shaping up to be another record year with earnings expected to increase 30% over 2015. TrueBlue currently maintains a significant amount of operating momentum in its business, which has been driven by growth initiatives implemented by the company and an improving employment market in the U.S. The company views this as a growing trend driven by changing demographics and the need of companies and workers for more flexibility and reports that the change has been accelerating rapidly over the past few years.

On a price-to-earnings basis, the company is trading at or below the lower end of its historical range, which indicates to us that there is strong potential for valuation expansion if it can maintain its current revenue and earnings momentum over the next one to two years.

The main risk we see with the stock is economic sensitivity as the industry has demonstrated cyclicality in line with the business and employment cycle. Although TrueBlue’s revenue and earnings have risen and declined with the economy, we are impressed by the long-term track record of 21 out of 22 years of profitability as well as the achievement of higher revenue and earnings peaks through each cycle.

We like the company because it has a rare combination of growth and value. As long as the economy keeps limping forward at even a moderate pace, we see excellent potential for short-term returns to shareholders of TrueBlue. On a longer-term basis, there is the risk of cyclicality (which exists for nearly all companies) but the company has also navigated these risks very well in the past and has proven itself to be a value generator over time.

Action now: Buy. The stock closed on Friday at $21.02

– end Ryan Irvine

 

Top

AS OTHERS SEE US

The Liberal budget has received mixed reviews in Canada but The Wall Street Journal said it was good news for the global economy in an analysis piece by Greg Ip published last week.

In the article, Mr. Ip says Canada did the world a favour “by faithfully executing the formula that finance ministers and central bankers from the top 20 economies agreed to pursue at their just-concluded meetings in Washington; namely rely less on monetary and more on fiscal policy to rejuvenate growth.”

The problem, he added, is that Canada “is virtually alone in being both willing and able” to do this.

The column is fulsome in its praise of Canada’s historical record, calling it “an exemplar of astute microeconomic management”.

But Mr. Ip does note that only 42% of the budget stimulus is directed to infrastructure, which he calls the “safest” form. “Most of the rest goes to expanded social transfers such as child benefits, expanded unemployment insurance, and old-age pensions. All are permanent obligations and some at the margin may discourage work,” he comments. – G.P.

 

Top

GORDON PAPE’S UPDATES

New Flyer Industries (TSX: NFI, OTC: NFYEF)

Originally recommended by Tom Slee on March 4/13 (#21309) at C$10.30, US$10.04. Closed Friday at C$35.84, US$28.50.

Background: New Flyer is the leading manufacturer of heavy-duty transit buses in the United States and Canada. The company, which is based in Winnipeg, offers a broad product line of transit buses including drive systems powered by clean diesel, natural gas, diesel-electric hybrid, electric trolley, and battery-electric. The company also operates an aftermarket parts organization, sourcing parts from hundreds of different suppliers and providing support for all types of transit buses. New Flyer employs about 5,000 people with manufacturing, fabrication, parts distribution, and service centres in both Canada and the U.S.

Stock performance: The shares were first recommended by retired contributing editor Tom Slee in March 2014 at $10.30. They remained in a gradual uptrend until last fall, when they suddenly spiked sharply higher on good financial results. At the time of the last update, on Oct. 24, they were trading at $19.23 and I rated them as a Buy. They closed on Friday at $35.84, up 86% since the October review.

Recent developments: The company announced fourth-quarter and year-end results on March 23. Revenue for the quarter was down slightly year-over-year to $418.9 million (the company reports in U.S. dollars). However, net earnings almost doubled to $14.1 million ($0.25 per share) from $7.4 million ($0.13 per share) the year before.

For the full 2015 fiscal year, revenue was up 6.1% to just over $1.5 billion. Earnings came in at $53.9 million ($0.97 per share) compared to $26.7 million ($0.48 per share) in 2014. Free cash flow was $108.3 million compared to $65.5 million the year before.

As of year-end, New Flyer reported an order backlog of $4.95 billion, up 38% from the prior year. About $1.1 billion of that is attributable to the acquisition of Motor Coach Industries (MCI) in December for $455 million. New Flyer expects the deal to result in savings of $10 million a year through synergies.

Dividend: There have been two important changes relating to the dividend. The first is a 12.9% increase in the rate, from $0.62 to $0.70 a year. The second is a decision to switch from monthly payments to quarterly. The first quarterly dividend of $0.175 per share will be paid on April 15. The stock yields about 2% at the current price.

Action now: Buy. The MCI deal adds significant growth potential to this company.

Norfolk Southern (NYSE: NSC)

Originally recommended by Tom Slee on Dec. 13/09 (#2944) at $52.22. Closed Friday at $91.33. (All figures in U.S. dollars.)

Background: Norfolk Southern Railway operates approximately 20,000 route miles in 22 states and the District of Columbia. It serves every major container port in the eastern United States, operates the most extensive intermodal network in the East, and is a major transporter of coal, automotive, and industrial products.

Stock performance: Retired contributing editor Tom Slee first recommended the shares in December 2009 at $52.22. They briefly topped $115 in late 2014 but then went into a prolonged slide. A hostile takeover bid from Canadian Pacific prompted a modest rebound but after CP gave up the chase earlier this month the stock sold off again. However, the shares shot up about 10% on Friday after the release of the first-quarter results.

Recent developments: The first-quarter results show that Norfolk Southern doesn’t need CP’s help to improve its operations. Although revenue was off 6% from the same period last year, railroad operating expenses were 13% lower. The result was a 25% improvement in net income to $387 million ($1.29 per share, fully diluted). The all-important operating ratio was 70.1%, an improvement of 8% over the prior year and a Norfolk Southern first-quarter record.

Dividend: The stock pays a quarterly dividend of $0.5899 ($2.36 a year) to yield 2.6% at the current price. There has not been any announcement of a dividend increase so far this year.

Action now: Buy.

Shaw Communications (TSX: SJR.B, NYSE: SJR)

Originally recommended on Feb. 3/08 (#2805) at C$20.53, US$20.64. Closed Friday at C$23.58, US$18.61.

Background: Shaw Communications is a Calgary-based diversified communications company, serving 3.2 million customers in Alberta and British Columbia. Its services include broadband Internet, WiFi, digital phone, and video products and services. Shaw Business Network Services provides business customers with Internet, data, Wi-Fi, telephony, video, and fleet tracking services. Shaw Business Infrastructure Services offers colocation, cloud, and managed services through ViaWest.

Stock performance: The shares briefly moved over $28 in December but then dropped to below $23 in February. I don’t see much short-term upside potential from here.

Recent developments: On April 14 the company announced results for the second quarter of fiscal 2016 (to Feb. 29). Revenue for the quarter was up 3% to $1.51 billion but net income dropped 2.4% to $164 million ($0.32 per share, fully diluted).

The same pattern showed for the six-month results, with revenue ahead by 3.4% to just under $2.3 billion while net income dropped 3.3% to $382 million ($0.75 per share). Free cash flow for the six months was off 19.6% to $291 million. The company said that transaction costs associated with the acquisition of WIND Mobile contributed to the decline in profits.

Shaw has completed two major transactions that change its business model significantly. The purchase of WIND moves it into the wireless business, an area it had previously decided to avoid because of the costs and stiff competition from companies like Telus. As well, the company got out of the broadcasting business, selling its assets in Global and various specialty channels (known as Shaw Media) to Chorus Entertainment.

As a result, the company has revised its guidance for 2016, projecting that growth in operating income before restructuring costs and amortization will be in the flat to low single digit range. CEO Brad Shaw is extolling the growth potential of the new look company but investors are advised to wait until we see some proof before jumping in.

Dividend: The B shares pay a monthly dividend of $0.09875, which works out to $1.185 per year. The yield at the current price is 5%.

Action now: Hold for income.

 

Top

YOUR QUESTIONS

Underperforming ETF

Q – I bought XUU when first recommended. It represents the entire U.S. market. I am puzzled as to why there is virtually no daily volume, and some days zero! Why is it not performing better? – Leo S.

A – I recommended the iShares Core S&P U.S. Market ETF a little over a year ago as a way to obtain exposure to the entire American market at low cost. It comes in two versions, unhedged (TSX: XUU) and hedged (TSX: XUH). Neither has performed well; the hedged version had a one-year return to March 31 of -0.2% while the unhedged version was up by 1.9%. By comparison, the iShares Core S&P 500 ETF (TSX: XUS), an unhedged fund that tracks only the S&P 500, was ahead 3.4% in the same period. The hedged version of that fund (TSX: XSP) was up 0.8%.

The main reason why XUU/XUH has fared poorly is its exposure to U.S. small cap stocks. They have had a bad year, with the iShares fund that tracks them down over 10%. The small caps will eventually recover and when they do the fund’s performance will improve.

As for the low trading volume, it comes down to the fact there aren’t that many units out there. XUU/XUH has only been in existence since February 2015 and has attracted just $50 million in assets to date. By comparison, XSP has $3.7 billion. – G.P.

 

Top

EQUITABLE CLARIFICATION

We received the following e-mail from Andrew Moor, CEO of Equitable Bank, relating to our recent update on the stock.

“Just one point of clarification: we are taking clients in EQ Bank, our digital offering. In fact, we have over 15,000 clients successfully on-boarded and with deposits in the Bank. Our goal is to offer a great customer experience. In order to try to deliver that service, we on-boarding clients in an orderly fashion so we can answer their questions quickly in our call centre and (do) all the other things that customers deserve. Prospective clients can put themselves on a list and will get an invitation to actually sign-up as they reach the top of the list (we are on-boarding several hundred customers a week).

“We are offering a single rate of 3% to all customers in our Savings Plus Account. While the rate will likely change marginally downwards sooner than later – we want to stand firm in offering all our clients the same good rate and avoid the approach of offering limited time special offers and different rates for different customers. Simple and transparent is the goal!”

Editor’s note: The rate on EQ’s Saving Plus Account was reduced to 2.25% on April 18.