In This Issue

WHERE NOW FOR OIL?

By Gordon Pape, Editor and Publisher

Oil briefly crossed the US$50 a barrel threshold on Thursday. It couldn’t stand the rarefied atmosphere and pulled back but it shouldn’t be long before it tests the level again.

We’re still a long way from the $100+ a barrel level that prevailed before the price war broke out in 2014. But the price is up about 85% from the $27 mark it hit in January, which was the lowest since 2003.

The move over $50 set off a wave of speculation as to whether the rebound will continue, with some analysts expressing doubts and others predicting the price could go as high as $65 by year-end.

The bulls base their case on the expectation that demand will continue to grow. According to the U.S. Energy Information Administration, gasoline consumption in that country in 2015 was 140.43 billion gallons or about 384.74 million gallons a day. That was only 1.5% below the record high of 390 million gallons per day recorded in 2007. Lower prices have clearly resulted in significantly higher domestic demand. Overseas, the International Energy Agency (IEA) says demand from non-OECD Asian countries like China and India will continue to grow with volumes increasing from 23.7 million barrels per day (mb/d) in 2015 to 28.9 mb/d in 2021.

“China will be central to demand growth, partly because of the underlying rise of oil demand but also due to its build-up of strategic reserves which will reach at least 500 mb by 2020,” the IEA says on its website. “This trend for China is set to continue to 2040, as oil demand from the transportation sector is growing strongly there as well as in other non-OECD countries such as India.”

The bears point out that supply continues to increase with countries like Iran and Iraq boosting their output. Now that the wildfires in the Fort McMurray area no longer threaten the Oil Sands facilities, production there is starting to ramp up again. Meantime, U.S. shale oil producers are just waiting for prices to stabilize above $50 so they can increase their output, which can be done quickly. The result of all this, the bears contend, will be to keep prices down.

That said, most people seem to agree that we have seen the bottom of the current cycle. Barring an unexpected global recession, the oil price is unlikely to slip back to below $40 a barrel. It may stabilize around the current level for a while but the longer-term trend will probably be higher.

That suggests that you should gradually add a couple of energy stocks to your portfolio if you don’t already own some. One of my favourites in the exploration and production (E&P) group is Vermillion Energy (TSX, NYSE: VET), which I recommended in June 2014 at C$75.79, US$64.68. That was when oil was trading at over $100 and almost no one saw the big drop looming. The price of the stock has dropped significantly since but after falling to a low of $29.71 on the TSX in January it’s now trending higher. Here’s what you need to know.

Background: Vermillion Energy is an exploration and production company based in Calgary. It has over 60% weighting to oil and exposure to Brent-linked pricing. In 2015, it produced 54,922 barrels of oil equivalent per day (boe/d). VET has internationally diversified assets with properties in Canada, France, Australia, Germany, and the Netherlands. The company is an efficient operator and has strong growth prospects in the medium-to-long-term.

Stock performance: From the fall of 2008 to spring 2014, the stock was in a steady upward trend. At one point it approached $80 a share in Toronto. However, the oil shock sent it into a deep decline. It has looked better recently, although it still trades below the 200-day moving average.

Financials: Like most oil producers, Vermillion is operating in the red. First-quarter results showed a loss of $85.8 million ($0.76 per share), however that was a big improvement over the fourth quarter of 2015 when the company lost $142.1 million ($1.28 per share). Fund flows from operations (FFO) were $93.7 million ($0.83 per share), down 31% quarter-over-quarter and 22% year-over-year. The quarter-over-quarter decrease was attributable to lower commodity prices and an inventory build in Australia, partially offset by lower operating expenses.

The company has been aggressively cutting costs. It achieved savings of nearly $90 million in 2015 and is aiming to deliver another $30 to $40 million in cost reductions this year. However, the key to returning to profitability obviously is a sustainably higher oil price.

Advantages: The company has several important advantages when compared to other Canadian E&Ps. For starters, it is internationally diversified so a significant percentage of its production is exposed to world prices (e.g. for Brent crude and European natural gas). Second, the company has done everything possible to protect its balance sheet, including retiring some debt. In a message to shareholders earlier this month, management said that if there is a meaningful recovery in commodity prices this year (and they are currently higher than the first quarter average), the company will direct “the vast majority of incremental cash flow to debt reduction rather than increasing capital spending”.

Third, Vermillion is one of the few oil and gas companies that has not reduced its dividend. It is still $0.215 per month ($2.58 a year), which translates to a yield of 6%. There is no guarantee that the company can continue to hold the line, of course, and it makes this clear in its financial reports. But after protecting the balance sheet, the directors have made retaining the dividend their number one priority.

Outlook: The company projects average production of 62,500 to 63,500 boe/d in 2016. This is significantly higher than the 2015 average of just under 55,000 boe/d. The first-quarter figure was actually higher than guidance at 65,389 boe/d.

Capital spending this year is now estimated at $235 million, a big pullback from last fall’s guidance of $350 million.

Conclusion: Vermillion is in a good position to profit from a recovery in the oil market and its international exposure sets it apart from most other mid-size Canadian producers.

Action now: The stock is a Buy for investors who are willing to assume above-average risk in return for higher return potential. The shares closed on Friday at C$43.11, US$33.04.

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

Top

MINI PORTFOLIO GOING STRONG

By Gordon Pape

It’s time to take a fresh look at the IWB Mini-Portfolio that I created in November 2012. It was designed for those with a limited amount of money to invest who wanted a better return than they could get from a GIC without a lot of risk.

The idea for this portfolio came from two readers who held GICs that were up for renewal. They were unhappy with the rates that were quoted and were seeking alternatives.

Three and a half years later, the situation is almost unchanged. The rates being quoted for GICs are about the same as when the portfolio began. The big banks are offering 1.5% – 1.6% for five years while the best rate from a small institution is 2.75%.

The mini portfolio that I created includes three securities: the common stock of BCE Inc. and Scotiabank, plus the 5.75% convertible debentures from Firm Capital Mortgage Investment Corporation.

The portfolio was last reviewed in November, at which time it was showing an average annual compound rate of return of 9.9%. Here’s a look at the components, based on prices at mid-day on May 27.

BCE Inc. (TSX, NYSE: BCE). BCE shares have performed well and are up $3.77 since our last review. We also received two dividends totaling $1.3625 per share (the company raised its dividend by 5% effective with the March payment). The total return in the period under review is just over 9%.

Bank of Nova Scotia (TSX, NYSE: BNS). Scotiabank shares also did well, gaining $3.08 over six-plus months. We received two dividends totaling $1.42 per share for a total return of 7.3% for the period. There was a dividend increase of 2.9% at the beginning of the year.

Firm Capital Mortgage 5.75% Convertible Debentures (TSX: FC.DB.A). These debentures pay interest at the rate of 5.75% semi-annually, on April 30 and Oct. 31. We received a semi-annual interest payment of $28.75 for each $1,000 debenture at the end of April. We have 55 shares for the equivalent of 5.5 debentures so that amounted to $158.13. The market price moved higher by $1.49 during the period.

We also received interest of $2.10 from the cash invested in a high-interest savings account.

Here is how the Canadian Mini Portfolio stood at mid-day on May 27.

IWB Canadian Mini Portfolio (a/o May 27/16)


Stock

Shares

Average Price

Book Value

Market Price

Market Value

Retained Income

Gain/Loss
%

BCE

135

$42.90

$5,791.25

$60.50

$8,167.50

$351.29

+47.1

BNS

100

$55.52

$5,551.90

$64.74

$6,474.00

$252.60

+21.2

FC.DB.A

55

$101.41

$5,577.50

$102.00

$5,610.00

$388.76

+ 7.6

Interest

 

 

$17.03

 

$19.13

 

 

Totals

 

 

$16,937.68

 

$20,270.63

$992.65

+25.5

Inception

 

 

$14,984.55

 

 

 

+41.9

Comments: The total portfolio value, including retained income, is $21,263.28. That is up almost 7% from the last review. Since inception, the portfolio has gained 41.9%, which works out to an average annual compound rate of return of 10.5%. We’re beating our GIC target by a wide margin.

Changes: We have enough retained earnings to add another five shares of BCE for a cost of $302.50. That will bring our total position to 140 shares and reduce the cash to $48.79.

We’ll keep our interest and retained income of $709.28 in a high-interest savings account with EQ Bank paying 2.25%.

Here’s a look at the revised portfolio. I’ll revisit it in November.

IWB Canadian Mini Portfolio (revised May 27/16)


Stock

Shares

Average Price

Book Value

Market Price

Market Value

Retained Income

BCE

140

$43.53

$6,093.75

$60.50

$8,470.00

$48.79

BNS

100

$55.52

$5,551.90

$64.74

$6,474.00

$252.60

FC.DB.A

55

$101.41

$5,577.50

$102.00

$5,610.00

$388.76

Interest

 

 

$19.13

 

$19.13

 

Totals

 

 

$17,242.28

 

$20,573.13

$690.15

Inception

 

 

$14,984.55

 

 

 

Top

VALEANT GIVES GROWTH-BY-ACQUSITION A BLACK EYE

Contributing editor Shawn Allen is with us this week with a timely look at the topic of companies that pursue a strategy of growth-by-acquisition. Shawn has been providing stock picks on his website at www.investorsfriend.com since the beginning of the year 2000 and has a great success record. He is based in Edmonton. Here is his report.

Shawn Allen writes:

Valeant Pharmaceuticals has recently given growth-by-acquisition a very black eye. Some analysts have described it as a roll-up strategy and implied that such roll-ups inherently do not create real value or are unsustainable.

It seems clear that Valeant has turned out to be a failed growth-by-acquisition company. There are many reasons for this failure. Valeant used excessive debt. It probably vastly over-paid for acquisitions after engaging in bidding wars in some cases. It relied on a strategy of massive price increases on the products of the acquired companies, a strategy that eventually gained the severe ire of the U.S. Congress and others. And it was aggressive in presenting what appears to have been an inflated view of adjusted earnings, which effectively pumped up its stock price to unrealistic levels. The approximate 90% plunge in Valeant’s stock price has understandably resulted in many investors and analysts developing a bad taste for a strategy of aggressive growth-by-acquisition.

However, any sweeping condemnation of the entire strategy of growth-by-acquisition is completely unwarranted.

In Canada there are a number of companies that have been spectacularly successful following primarily a growth-by-acquisition strategy. Three of the best examples are companies that were recommended by IWB.

  • Stantec Inc. is up over 200% since it was recommended as a Buy for IWB subscribers by former contributor Tom Slee in 2006. Stantec has always followed a growth-by-acquisition model.
  • Alimentation Couche-Tard has also grown largely by acquisition. Its stock price is up about 238% since Tom Slee recommended it to IWB subscribers just three years ago in March 2013.
  • Constellation Software is a highly acquisitive company that is up about 400% since Gordon recommended it in October of 2012.

All three of these companies have successfully followed a growth-by-acquisition strategy for many years. All three are extremely well managed. They have used debt but not to excessive levels. They have all avoided over-paying for acquisitions. The great majority of their acquisitions have been of private companies as opposed to companies that already trade on the stock exchange. They have avoided getting into bidding wars. None of the three has issued large amounts of shares in making acquisitions. Stantec’s share count is up by 16% in the past ten years, Constellation’s is up by 7%, and Couche-Tard’s is actually down by 8%.

These examples prove that a growth-by-acquisition strategy can be very lucrative for investors when done properly. Despite the experience with Valeant, the fact that a company is pursuing a “roll-up” strategy should not necessarily be taken as a criticism.

 

Top

SHAWN ALLEN’S UPDATES

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

Originally recommended by Tom Slee on March 4/13 (#21309) at C$17.62, US$17.13. Closed Friday at C$57.88, US$44.47.

Background: With an equity market cap of $33 billion, Couche-Tard has somewhat quietly become a giant among Canadian companies. It operates 7,979 convenience stores throughout North America, with 82% of these offering gasoline and diesel. It operates in 41 U.S. states and in all 10 provinces in Canada. About 80,000 people are employed in North America. The company also has a strong presence in Europe where it is a leader in convenience store and fuel sales in the Scandinavian and Baltic countries and has a significant presence in Poland. It has about 19,000 employees in Europe.

Although it was founded and headquartered in Canada, the company now derives almost two-thirds of its revenue from the United States. For that reason, it reports in U.S. dollars.

Recent developments: Couche-Tard continues to make acquisitions. It recently closed the purchase of 444 service stations in Ireland, which comprise the leading convenience and fuel retailer in that country. The company is also acquiring an additional 315 stores in Denmark from Shell. In a larger valued transaction it agreed in March to acquire 279 Esso-branded stations in Canada for Canadian $1.7 billion.

The company reported third-quarter results for the 2016 fiscal year (to Jan. 31). Net earnings for the quarter came in at $274 million ($0.48 per share, fully diluted, figures in U.S. currency). That was up 10% from $248 million ($0.44 per share) in the same period of fiscal 2015. Same-store merchandise revenues, a key metric in the retail sector, were up 5% in the U.S., 4.3% in Europe, and 3.5% in Canada.

Valuation: At Wednesday’s closing price of $57.19, the price to book value ratio of 5.2 is ostensibly unattractive but mathematically this simply reflects the high return on equity (ROE) combined with the relatively high p/e ratio. The p/e is 22.3, which is somewhat high but is justified by the very attractive ROE of 26%. The dividend yield is very modest at 0.5% and reflects a payout ratio of just 10% of earnings, as profits are largely retained to fund their growth-by-acquisition strategy without the need to issue new shares.

Revenues per share have grown at a compounded annual average of 16% in the past five fiscal years. Adjusted EPS growth over the last five years has averaged 29%.

Outlook: Earnings are being negatively affected due to lower Canadian and European currency values. These non-U.S. currencies represent about one third of the company’s revenues. However, the earnings per share in Canadian dollars benefits from this currency movement so the stock could rise in Canadian dollar terms.

U.S. operations should continue to report higher same-store fuel volumes as gasoline consumption is rising rapidly with the low prices. Profits from recent acquisitions should boost earnings.

Conclusion: The company goes from strength to strength. It is one of Canada’s best-managed firms. Its stock price should keep rising over the years as it continues to grow.

Action now: Buy.

Canadian Tire Corporation Ltd. (TSX: CTC.A, OTC: CDNAF)

Originally recommended by Tom Slee on June 13/11 (#21121) at C$61.58, US$62.90. Closed Friday at C$144.39, US$108.28.

Background: Canadian Tire, with 499 stores, is quite familiar to almost all Canadians. But it has grown and changed substantially over the past decade or two. Acquisitions have added the 381-store Mark’s chain of casual and work clothing and footwear as well as the former Forzani Group, which now has 432 sports stores operating under the brand names of Sport Chek, Sports Expert, Atmosphere, Athlete’s World, Pro Hockey Life, and others. In 2013, Canadian Tire created a separately traded REIT to hold much of its real estate but it retains about an 83% ownership.

Stock performance: Although it experiences occasional pullbacks, the stock price has increased relatively steadily for the past five years. It’s up 20% year to date. The price has more than doubled since retired contributing editor Tom Slee recommended the company in 2011. The fact that the stock is at a record high is not necessarily a cause for concern. Strong, successful companies have a habit of reaching new highs periodically. Despite the higher stock price, the company has been relatively aggressive in buying back shares.

Recent developments: Profits per share rose 3% in the first quarter. That’s weaker than the prior two quarters, which had double digit increases. But it was still a strong performance in the face of the sharply lower Canadian dollar given that Canadian Tire purchases much of its inventory in U.S. dollars and that it has largely not raised its prices to offset the lower loonie. Instead, it has worked with suppliers and made some changes to its product mix to largely offset the impact of the lower dollar. Same-store sales increases were ahead about 1% at Canadian Tire and Mark’s but were up a very impressive 12% at Sport Chek and 7.6% overall at its sports stores.

Valuation:Analyzed at Wednesday’s closing price of $142. The price to book value ratio seems reasonable at 2.2 but is materially higher than it has been in recent years. The dividend yield is modest at 1.6%, reflecting the relatively low payout ratio of 27% of adjusted earnings. The ROE is attractive at 13.1%. Earnings growth per share over the past five calendar years has been quite strong at a compounded average of 10% per year. Sales per share growth was quite good at a compounded average of 7.3% in the past five years. Trailing 12 months adjusted p/e is neutral in attractiveness at 17.

Risks and outlook:Canadian Tire appears set for continued growth over the years. However, the lower Canadian dollar is a headwind despite management’s best efforts to offset the impact. There is also, as always, some risk of more intense competition. The weakness in the economy of Alberta is also a headwind.

Dividend: The dividend was increased by 9.5% effective with the January payment to $0.575 per quarter ($2.30 annually).

Conclusion: Canadian Tire is a strong business that is very well managed. Its stock price has more than doubled since the summer of 2011 but it is still reasonably priced given the earnings performance. However, the valuation is now somewhat less attractive due to the price increase and given the headwinds of the lower Canadian dollar and the weaker Alberta economy, we rate this a Hold at this time.

Action now: Hold.

Toll Brothers (NYSE: TOL)

Originally recommended on Nov. 11/13 (#21340) at $31.94. Closed Friday at $29.15. (All prices in U.S. dollars.)

Background: Toll Brothers is primarily a land developer and builder of executive and luxury homes. The average home price is about $700,000 in most of its regions. In California, its average home price is much higher at $1.5 million.

The company operates in 19 states in four regions of the United States. It has 3,900 full-time employees. It also has other businesses of increasing importance, including selling lots to other builders, building luxury high rise condos in large cities, and building and renting apartment units in selected large cities.

Stock performance: TOL’s share price fell substantially from about $36 in December to as low as the $24 range in early February. The stock has now recovered to about $29. The company responded to the price drop by aggressively increasing its share buy back program.

Recent developments: Earnings and revenues per share each rose about 37% in the latest quarter. Earnings have been rebounding, albeit with volatility, in line with the recovery of the U.S. economy, American home prices, and new home starts. Toll’s adjusted earnings were up 7.6% in 2015 after doubling in fiscal 2014. Signed contracts were relatively flat in the latest quarter with only a 3% increase. This would suggest that earnings will flatten when those houses are delivered and booked as revenue in nine to 12 months. However, this weaker growth comes after the previous three quarters saw growth in the value of contracts in the range of 24% to 30%.

Valuation:Analyzed at Wednesday’s closing price of $29.09. The p/e ratio is 13.3 and the price to book value ratio is 1.25. Return on equity (ROE) is 9.8% and has been rising, albeit with some volatility, for several years with the housing recovery. In isolation, these ratios would suggest a Buy rating.

Risks and outlook:The profit outlook is for strong growth of about 20% in the next few quarters based on contracts signed about one year previous to each quarter.

Dividend: The stock does not pay a dividend.

Conclusion: The overall thesis in buying Toll Brothers is that it is a well-managed company selling at a somewhat discounted price, which provides a way to benefit from the continuing recovery in U.S. home building starts and prices.

Action Now: Buy.

– end Shawn Allen

 

Top

GORDON PAPE’S UPDATES

Badger Daylighting (TSX: BAD, OTC: BADFF)

Originally recommended on Nov. 23/14 (#21441) at C$32.77, US$27.72. Closed Friday at C$24.16, US$18.49.

Background: This Calgary-based company has developed a proprietary method for excavating using pressurized water to liquefy soil, which is then removed with a vacuum system and deposited into a storage tank housed on specialized trucks. This method is especially useful in areas where there are extensive underground pipes and cables since it eliminates the danger of severing vital lines.

Stock performance: Badger’s shares were hit hard by the drop in the price of oil and the resulting cutback in capital spending by energy companies. At the time of my last review in December, the shares had dropped to C$23.19, US$16.84 and I rated the stock as a Hold. The shares subsequently recovered, briefly trading at close to $28 in March before pulling back to the current level.

Recent developments: First-quarter results released earlier this month show the company is still having problems adjusting to the changed environment. Revenue was down 13.3% compared to the same period in 2015, coming in at $88.2 million. The company tied the drop directly to reduced business from oil and gad producing regions in the U.S. and Canada but it also blamed an unusually warm winter for the revenue drop.

“A normal cold winter with good frost levels greatly increases Badger utilization as it takes considerably longer to dig in frozen ground,” the company said. “Western Canada had very little frost so digging was quicker and Badger billed less hours.” 

Net profit was only $3.7 million ($0.10 per share) compared to $11.4 million ($0.31 per share) in the same period last year. Cash flow from operations decreased by 36% from $23.4 million in the first quarter of 2015 to $15 million in the first quarter of 2016 following reduced revenue and lower gross profit.

Earlier, Badger’s management had commented: “2016 will be another year of running hard to stay in place”. That’s the way things are shaping up. Management says it does not expect much improvement in financial results until the second half of the year. “The reality is that the oil and natural gas sector has not yet stabilized and the general construction season does not start until sometime in the second quarter,” the outlook report states. “When the oil and natural gas sectors begin to stabilize expected activity in the non-oil and natural gas sector will allow Badger to return to growth.”

Dividend: Despite the difficult conditions, Badger’s board of directors approved a 10% dividend increase to $0.033 per month ($0.396 annually), effective with the June payment. The company said the strength of the balance sheet, reduced capital costs, and the expectation of future growth made the move feasible. It was the first dividend hike for the company since September 2012. The shares yield 1.6% at the current price.

Conclusion: It would be unrealistic to expect any significant improvement in the share price for the next few months. However, at this stage it appears the worst is behind us and the company’s financials should start to improve in the second half of the year.

Action now: Hold if you already have a position. I do not recommend making new purchases at this time.

Polaris Minerals (TSX: PLS, OTC: POLMF)

Originally recommended by Irwin Michael on April 30/07 (#2717) at C$9.90, US$8.94. Closed Friday at C$1.35, US$1.00.

Background: Polaris started business in mid-2000 and was listed on the Toronto Stock Exchange in January 2006 following a successful Initial Public Offering. The company is engaged in the development and operation of construction aggregate quarries in Canada. It supplies distribution facilities in the United States through coastal shipping. The company’s active construction aggregate interests consist of its Orca Sand and Gravel Quarry in British Columbia and two associated receiving terminals in Richmond and Long Beach, California. The company also owns the Black Bear Project located in close proximity to the Orca Quarry, and a controlling interest in the Eagle Rock Quarry Project, located on the south coast of Vancouver Island.

Stock performance: This security has not worked out well for us. It was originally recommended by former contributing editor Irwin Michael in April 2007 at $9.90 and initially performed well. However, the shares were hit hard by the sell-off of 2008-09 and have never recovered. Over most of the time since they have traded in a range of $1 to $3.

Recent developments: The first-quarter financial report was not encouraging. Sales volumes were down 28% compared to the same period in the prior year. Revenue was down 24% to $7.9 million, which the company blamed on heavy rainfall and planned maintenance at a customer delivery point.

The bottom line showed a net loss of $2.5 million (-$0.03 per share). That compared to a tiny profit of $90,000 in the first quarter of 2015.

Conclusion: In the financial report, the company noted that the results for any individual quarter are not necessarily indicative of results to be expected for that year. “Sales and earnings are typically sensitive to regional and local weather, market conditions, and, in particular, to cyclical variations in construction spending,” management said.

However, Polaris barely managed to finish above break-even in 2015, booking net income of $0.9 million. The weak start to this year suggests things won’t be much better.

Action now: Sell. We’ve been patient for a long time with this one. That patience has now run out. Book the capital loss and move on.

 

Top

YOUR QUESTIONS

Stock dividends

Q – Is there a way to determine before you purchase if a stock pays its dividend as interest or as a true dividend, which is taxed at a lower rate. – Gord Z.

A – Most stocks pay what you refer to as a “true dividend”, meaning it is eligible for the dividend tax credit if paid by a taxable Canadian corporation. Dividends from U.S. companies are taxed at regular rates.

Dividends from a few Canadian companies are treated as interest for tax purposes. Mortgage investment companies such as Firm Capital and Genworth fall into this category.

Distributions from trusts and limited partnerships may have differing tax treatments including return of capital, dividends, interest, and capital gains. REITs would be in this group.

If you are unsure, ask your financial adviser or contact the investor relations department of the company in which you are interested. – G.P.

TFSA contributions

Q – In lieu of putting cash into a TFSA account and then buying the shares of a security, can one transfer an existing security held in a non-registered account? How is this done? I presume value of the security on the day of the transfer should not exceed the maximum contribution of $5,500. This would be a nice way to avoid paying capital gains tax if the security does well. – Mike M.

A – You can make a contribution in kind to a TFSA if you have an account with a broker. The process is as you describe – the value of the contribution is the fair market value of the security on the day it goes into the plan. However, the security is deemed to have been sold on the day of the transfer so any capital gain will be taxable. Capital losses created in this way may not be claimed. – G.P.

 

Top

MEMBERS’ CORNER

The nuclear option

Member comment: Following up on your comment last week, SNC Lavalin has a significant stake in the nuclear business. It acquired AECL (CANDU technology) from the Federal government and is currently heavily involved in the Bruce Power and OPG refurbishment as well as nuclear expansion in the U.K. For some investors, that is an opportunity, for others it is a significant liability. – Peter M.

Response: Thanks to our reader for this information. SNC Lavelin is actively involved in the nuclear energy business. One of its current major projects is as a participant in the refurbishment of the Darlington Nuclear Generating Station in Ontario. When the project is completed, the station will comply with new nuclear safety standards and will produce about 20% of the province’s energy needs. However, it’s significant that no new nuclear reactors are being planned anywhere in this country despite the fact we invented the CANDU technology. – G.P.

In This Issue

WHERE NOW FOR OIL?

By Gordon Pape, Editor and Publisher

Oil briefly crossed the US$50 a barrel threshold on Thursday. It couldn’t stand the rarefied atmosphere and pulled back but it shouldn’t be long before it tests the level again.

We’re still a long way from the $100+ a barrel level that prevailed before the price war broke out in 2014. But the price is up about 85% from the $27 mark it hit in January, which was the lowest since 2003.

The move over $50 set off a wave of speculation as to whether the rebound will continue, with some analysts expressing doubts and others predicting the price could go as high as $65 by year-end.

The bulls base their case on the expectation that demand will continue to grow. According to the U.S. Energy Information Administration, gasoline consumption in that country in 2015 was 140.43 billion gallons or about 384.74 million gallons a day. That was only 1.5% below the record high of 390 million gallons per day recorded in 2007. Lower prices have clearly resulted in significantly higher domestic demand. Overseas, the International Energy Agency (IEA) says demand from non-OECD Asian countries like China and India will continue to grow with volumes increasing from 23.7 million barrels per day (mb/d) in 2015 to 28.9 mb/d in 2021.

“China will be central to demand growth, partly because of the underlying rise of oil demand but also due to its build-up of strategic reserves which will reach at least 500 mb by 2020,” the IEA says on its website. “This trend for China is set to continue to 2040, as oil demand from the transportation sector is growing strongly there as well as in other non-OECD countries such as India.”

The bears point out that supply continues to increase with countries like Iran and Iraq boosting their output. Now that the wildfires in the Fort McMurray area no longer threaten the Oil Sands facilities, production there is starting to ramp up again. Meantime, U.S. shale oil producers are just waiting for prices to stabilize above $50 so they can increase their output, which can be done quickly. The result of all this, the bears contend, will be to keep prices down.

That said, most people seem to agree that we have seen the bottom of the current cycle. Barring an unexpected global recession, the oil price is unlikely to slip back to below $40 a barrel. It may stabilize around the current level for a while but the longer-term trend will probably be higher.

That suggests that you should gradually add a couple of energy stocks to your portfolio if you don’t already own some. One of my favourites in the exploration and production (E&P) group is Vermillion Energy (TSX, NYSE: VET), which I recommended in June 2014 at C$75.79, US$64.68. That was when oil was trading at over $100 and almost no one saw the big drop looming. The price of the stock has dropped significantly since but after falling to a low of $29.71 on the TSX in January it’s now trending higher. Here’s what you need to know.

Background: Vermillion Energy is an exploration and production company based in Calgary. It has over 60% weighting to oil and exposure to Brent-linked pricing. In 2015, it produced 54,922 barrels of oil equivalent per day (boe/d). VET has internationally diversified assets with properties in Canada, France, Australia, Germany, and the Netherlands. The company is an efficient operator and has strong growth prospects in the medium-to-long-term.

Stock performance: From the fall of 2008 to spring 2014, the stock was in a steady upward trend. At one point it approached $80 a share in Toronto. However, the oil shock sent it into a deep decline. It has looked better recently, although it still trades below the 200-day moving average.

Financials: Like most oil producers, Vermillion is operating in the red. First-quarter results showed a loss of $85.8 million ($0.76 per share), however that was a big improvement over the fourth quarter of 2015 when the company lost $142.1 million ($1.28 per share). Fund flows from operations (FFO) were $93.7 million ($0.83 per share), down 31% quarter-over-quarter and 22% year-over-year. The quarter-over-quarter decrease was attributable to lower commodity prices and an inventory build in Australia, partially offset by lower operating expenses.

The company has been aggressively cutting costs. It achieved savings of nearly $90 million in 2015 and is aiming to deliver another $30 to $40 million in cost reductions this year. However, the key to returning to profitability obviously is a sustainably higher oil price.

Advantages: The company has several important advantages when compared to other Canadian E&Ps. For starters, it is internationally diversified so a significant percentage of its production is exposed to world prices (e.g. for Brent crude and European natural gas). Second, the company has done everything possible to protect its balance sheet, including retiring some debt. In a message to shareholders earlier this month, management said that if there is a meaningful recovery in commodity prices this year (and they are currently higher than the first quarter average), the company will direct “the vast majority of incremental cash flow to debt reduction rather than increasing capital spending”.

Third, Vermillion is one of the few oil and gas companies that has not reduced its dividend. It is still $0.215 per month ($2.58 a year), which translates to a yield of 6%. There is no guarantee that the company can continue to hold the line, of course, and it makes this clear in its financial reports. But after protecting the balance sheet, the directors have made retaining the dividend their number one priority.

Outlook: The company projects average production of 62,500 to 63,500 boe/d in 2016. This is significantly higher than the 2015 average of just under 55,000 boe/d. The first-quarter figure was actually higher than guidance at 65,389 boe/d.

Capital spending this year is now estimated at $235 million, a big pullback from last fall’s guidance of $350 million.

Conclusion: Vermillion is in a good position to profit from a recovery in the oil market and its international exposure sets it apart from most other mid-size Canadian producers.

Action now: The stock is a Buy for investors who are willing to assume above-average risk in return for higher return potential. The shares closed on Friday at C$43.11, US$33.04.

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

Top

MINI PORTFOLIO GOING STRONG

By Gordon Pape

It’s time to take a fresh look at the IWB Mini-Portfolio that I created in November 2012. It was designed for those with a limited amount of money to invest who wanted a better return than they could get from a GIC without a lot of risk.

The idea for this portfolio came from two readers who held GICs that were up for renewal. They were unhappy with the rates that were quoted and were seeking alternatives.

Three and a half years later, the situation is almost unchanged. The rates being quoted for GICs are about the same as when the portfolio began. The big banks are offering 1.5% – 1.6% for five years while the best rate from a small institution is 2.75%.

The mini portfolio that I created includes three securities: the common stock of BCE Inc. and Scotiabank, plus the 5.75% convertible debentures from Firm Capital Mortgage Investment Corporation.

The portfolio was last reviewed in November, at which time it was showing an average annual compound rate of return of 9.9%. Here’s a look at the components, based on prices at mid-day on May 27.

BCE Inc. (TSX, NYSE: BCE). BCE shares have performed well and are up $3.77 since our last review. We also received two dividends totaling $1.3625 per share (the company raised its dividend by 5% effective with the March payment). The total return in the period under review is just over 9%.

Bank of Nova Scotia (TSX, NYSE: BNS). Scotiabank shares also did well, gaining $3.08 over six-plus months. We received two dividends totaling $1.42 per share for a total return of 7.3% for the period. There was a dividend increase of 2.9% at the beginning of the year.

Firm Capital Mortgage 5.75% Convertible Debentures (TSX: FC.DB.A). These debentures pay interest at the rate of 5.75% semi-annually, on April 30 and Oct. 31. We received a semi-annual interest payment of $28.75 for each $1,000 debenture at the end of April. We have 55 shares for the equivalent of 5.5 debentures so that amounted to $158.13. The market price moved higher by $1.49 during the period.

We also received interest of $2.10 from the cash invested in a high-interest savings account.

Here is how the Canadian Mini Portfolio stood at mid-day on May 27.

IWB Canadian Mini Portfolio (a/o May 27/16)


Stock

Shares

Average Price

Book Value

Market Price

Market Value

Retained Income

Gain/Loss
%

BCE

135

$42.90

$5,791.25

$60.50

$8,167.50

$351.29

+47.1

BNS

100

$55.52

$5,551.90

$64.74

$6,474.00

$252.60

+21.2

FC.DB.A

55

$101.41

$5,577.50

$102.00

$5,610.00

$388.76

+ 7.6

Interest

 

 

$17.03

 

$19.13

 

 

Totals

 

 

$16,937.68

 

$20,270.63

$992.65

+25.5

Inception

 

 

$14,984.55

 

 

 

+41.9

Comments: The total portfolio value, including retained income, is $21,263.28. That is up almost 7% from the last review. Since inception, the portfolio has gained 41.9%, which works out to an average annual compound rate of return of 10.5%. We’re beating our GIC target by a wide margin.

Changes: We have enough retained earnings to add another five shares of BCE for a cost of $302.50. That will bring our total position to 140 shares and reduce the cash to $48.79.

We’ll keep our interest and retained income of $709.28 in a high-interest savings account with EQ Bank paying 2.25%.

Here’s a look at the revised portfolio. I’ll revisit it in November.

IWB Canadian Mini Portfolio (revised May 27/16)


Stock

Shares

Average Price

Book Value

Market Price

Market Value

Retained Income

BCE

140

$43.53

$6,093.75

$60.50

$8,470.00

$48.79

BNS

100

$55.52

$5,551.90

$64.74

$6,474.00

$252.60

FC.DB.A

55

$101.41

$5,577.50

$102.00

$5,610.00

$388.76

Interest

 

 

$19.13

 

$19.13

 

Totals

 

 

$17,242.28

 

$20,573.13

$690.15

Inception

 

 

$14,984.55

 

 

 

Top

VALEANT GIVES GROWTH-BY-ACQUSITION A BLACK EYE

Contributing editor Shawn Allen is with us this week with a timely look at the topic of companies that pursue a strategy of growth-by-acquisition. Shawn has been providing stock picks on his website at www.investorsfriend.com since the beginning of the year 2000 and has a great success record. He is based in Edmonton. Here is his report.

Shawn Allen writes:

Valeant Pharmaceuticals has recently given growth-by-acquisition a very black eye. Some analysts have described it as a roll-up strategy and implied that such roll-ups inherently do not create real value or are unsustainable.

It seems clear that Valeant has turned out to be a failed growth-by-acquisition company. There are many reasons for this failure. Valeant used excessive debt. It probably vastly over-paid for acquisitions after engaging in bidding wars in some cases. It relied on a strategy of massive price increases on the products of the acquired companies, a strategy that eventually gained the severe ire of the U.S. Congress and others. And it was aggressive in presenting what appears to have been an inflated view of adjusted earnings, which effectively pumped up its stock price to unrealistic levels. The approximate 90% plunge in Valeant’s stock price has understandably resulted in many investors and analysts developing a bad taste for a strategy of aggressive growth-by-acquisition.

However, any sweeping condemnation of the entire strategy of growth-by-acquisition is completely unwarranted.

In Canada there are a number of companies that have been spectacularly successful following primarily a growth-by-acquisition strategy. Three of the best examples are companies that were recommended by IWB.

  • Stantec Inc. is up over 200% since it was recommended as a Buy for IWB subscribers by former contributor Tom Slee in 2006. Stantec has always followed a growth-by-acquisition model.
  • Alimentation Couche-Tard has also grown largely by acquisition. Its stock price is up about 238% since Tom Slee recommended it to IWB subscribers just three years ago in March 2013.
  • Constellation Software is a highly acquisitive company that is up about 400% since Gordon recommended it in October of 2012.

All three of these companies have successfully followed a growth-by-acquisition strategy for many years. All three are extremely well managed. They have used debt but not to excessive levels. They have all avoided over-paying for acquisitions. The great majority of their acquisitions have been of private companies as opposed to companies that already trade on the stock exchange. They have avoided getting into bidding wars. None of the three has issued large amounts of shares in making acquisitions. Stantec’s share count is up by 16% in the past ten years, Constellation’s is up by 7%, and Couche-Tard’s is actually down by 8%.

These examples prove that a growth-by-acquisition strategy can be very lucrative for investors when done properly. Despite the experience with Valeant, the fact that a company is pursuing a “roll-up” strategy should not necessarily be taken as a criticism.

 

Top

SHAWN ALLEN’S UPDATES

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

Originally recommended by Tom Slee on March 4/13 (#21309) at C$17.62, US$17.13. Closed Friday at C$57.88, US$44.47.

Background: With an equity market cap of $33 billion, Couche-Tard has somewhat quietly become a giant among Canadian companies. It operates 7,979 convenience stores throughout North America, with 82% of these offering gasoline and diesel. It operates in 41 U.S. states and in all 10 provinces in Canada. About 80,000 people are employed in North America. The company also has a strong presence in Europe where it is a leader in convenience store and fuel sales in the Scandinavian and Baltic countries and has a significant presence in Poland. It has about 19,000 employees in Europe.

Although it was founded and headquartered in Canada, the company now derives almost two-thirds of its revenue from the United States. For that reason, it reports in U.S. dollars.

Recent developments: Couche-Tard continues to make acquisitions. It recently closed the purchase of 444 service stations in Ireland, which comprise the leading convenience and fuel retailer in that country. The company is also acquiring an additional 315 stores in Denmark from Shell. In a larger valued transaction it agreed in March to acquire 279 Esso-branded stations in Canada for Canadian $1.7 billion.

The company reported third-quarter results for the 2016 fiscal year (to Jan. 31). Net earnings for the quarter came in at $274 million ($0.48 per share, fully diluted, figures in U.S. currency). That was up 10% from $248 million ($0.44 per share) in the same period of fiscal 2015. Same-store merchandise revenues, a key metric in the retail sector, were up 5% in the U.S., 4.3% in Europe, and 3.5% in Canada.

Valuation: At Wednesday’s closing price of $57.19, the price to book value ratio of 5.2 is ostensibly unattractive but mathematically this simply reflects the high return on equity (ROE) combined with the relatively high p/e ratio. The p/e is 22.3, which is somewhat high but is justified by the very attractive ROE of 26%. The dividend yield is very modest at 0.5% and reflects a payout ratio of just 10% of earnings, as profits are largely retained to fund their growth-by-acquisition strategy without the need to issue new shares.

Revenues per share have grown at a compounded annual average of 16% in the past five fiscal years. Adjusted EPS growth over the last five years has averaged 29%.

Outlook: Earnings are being negatively affected due to lower Canadian and European currency values. These non-U.S. currencies represent about one third of the company’s revenues. However, the earnings per share in Canadian dollars benefits from this currency movement so the stock could rise in Canadian dollar terms.

U.S. operations should continue to report higher same-store fuel volumes as gasoline consumption is rising rapidly with the low prices. Profits from recent acquisitions should boost earnings.

Conclusion: The company goes from strength to strength. It is one of Canada’s best-managed firms. Its stock price should keep rising over the years as it continues to grow.

Action now: Buy.

Canadian Tire Corporation Ltd. (TSX: CTC.A, OTC: CDNAF)

Originally recommended by Tom Slee on June 13/11 (#21121) at C$61.58, US$62.90. Closed Friday at C$144.39, US$108.28.

Background: Canadian Tire, with 499 stores, is quite familiar to almost all Canadians. But it has grown and changed substantially over the past decade or two. Acquisitions have added the 381-store Mark’s chain of casual and work clothing and footwear as well as the former Forzani Group, which now has 432 sports stores operating under the brand names of Sport Chek, Sports Expert, Atmosphere, Athlete’s World, Pro Hockey Life, and others. In 2013, Canadian Tire created a separately traded REIT to hold much of its real estate but it retains about an 83% ownership.

Stock performance: Although it experiences occasional pullbacks, the stock price has increased relatively steadily for the past five years. It’s up 20% year to date. The price has more than doubled since retired contributing editor Tom Slee recommended the company in 2011. The fact that the stock is at a record high is not necessarily a cause for concern. Strong, successful companies have a habit of reaching new highs periodically. Despite the higher stock price, the company has been relatively aggressive in buying back shares.

Recent developments: Profits per share rose 3% in the first quarter. That’s weaker than the prior two quarters, which had double digit increases. But it was still a strong performance in the face of the sharply lower Canadian dollar given that Canadian Tire purchases much of its inventory in U.S. dollars and that it has largely not raised its prices to offset the lower loonie. Instead, it has worked with suppliers and made some changes to its product mix to largely offset the impact of the lower dollar. Same-store sales increases were ahead about 1% at Canadian Tire and Mark’s but were up a very impressive 12% at Sport Chek and 7.6% overall at its sports stores.

Valuation:Analyzed at Wednesday’s closing price of $142. The price to book value ratio seems reasonable at 2.2 but is materially higher than it has been in recent years. The dividend yield is modest at 1.6%, reflecting the relatively low payout ratio of 27% of adjusted earnings. The ROE is attractive at 13.1%. Earnings growth per share over the past five calendar years has been quite strong at a compounded average of 10% per year. Sales per share growth was quite good at a compounded average of 7.3% in the past five years. Trailing 12 months adjusted p/e is neutral in attractiveness at 17.

Risks and outlook:Canadian Tire appears set for continued growth over the years. However, the lower Canadian dollar is a headwind despite management’s best efforts to offset the impact. There is also, as always, some risk of more intense competition. The weakness in the economy of Alberta is also a headwind.

Dividend: The dividend was increased by 9.5% effective with the January payment to $0.575 per quarter ($2.30 annually).

Conclusion: Canadian Tire is a strong business that is very well managed. Its stock price has more than doubled since the summer of 2011 but it is still reasonably priced given the earnings performance. However, the valuation is now somewhat less attractive due to the price increase and given the headwinds of the lower Canadian dollar and the weaker Alberta economy, we rate this a Hold at this time.

Action now: Hold.

Toll Brothers (NYSE: TOL)

Originally recommended on Nov. 11/13 (#21340) at $31.94. Closed Friday at $29.15. (All prices in U.S. dollars.)

Background: Toll Brothers is primarily a land developer and builder of executive and luxury homes. The average home price is about $700,000 in most of its regions. In California, its average home price is much higher at $1.5 million.

The company operates in 19 states in four regions of the United States. It has 3,900 full-time employees. It also has other businesses of increasing importance, including selling lots to other builders, building luxury high rise condos in large cities, and building and renting apartment units in selected large cities.

Stock performance: TOL’s share price fell substantially from about $36 in December to as low as the $24 range in early February. The stock has now recovered to about $29. The company responded to the price drop by aggressively increasing its share buy back program.

Recent developments: Earnings and revenues per share each rose about 37% in the latest quarter. Earnings have been rebounding, albeit with volatility, in line with the recovery of the U.S. economy, American home prices, and new home starts. Toll’s adjusted earnings were up 7.6% in 2015 after doubling in fiscal 2014. Signed contracts were relatively flat in the latest quarter with only a 3% increase. This would suggest that earnings will flatten when those houses are delivered and booked as revenue in nine to 12 months. However, this weaker growth comes after the previous three quarters saw growth in the value of contracts in the range of 24% to 30%.

Valuation:Analyzed at Wednesday’s closing price of $29.09. The p/e ratio is 13.3 and the price to book value ratio is 1.25. Return on equity (ROE) is 9.8% and has been rising, albeit with some volatility, for several years with the housing recovery. In isolation, these ratios would suggest a Buy rating.

Risks and outlook:The profit outlook is for strong growth of about 20% in the next few quarters based on contracts signed about one year previous to each quarter.

Dividend: The stock does not pay a dividend.

Conclusion: The overall thesis in buying Toll Brothers is that it is a well-managed company selling at a somewhat discounted price, which provides a way to benefit from the continuing recovery in U.S. home building starts and prices.

Action Now: Buy.

– end Shawn Allen

 

Top

GORDON PAPE’S UPDATES

Badger Daylighting (TSX: BAD, OTC: BADFF)

Originally recommended on Nov. 23/14 (#21441) at C$32.77, US$27.72. Closed Friday at C$24.16, US$18.49.

Background: This Calgary-based company has developed a proprietary method for excavating using pressurized water to liquefy soil, which is then removed with a vacuum system and deposited into a storage tank housed on specialized trucks. This method is especially useful in areas where there are extensive underground pipes and cables since it eliminates the danger of severing vital lines.

Stock performance: Badger’s shares were hit hard by the drop in the price of oil and the resulting cutback in capital spending by energy companies. At the time of my last review in December, the shares had dropped to C$23.19, US$16.84 and I rated the stock as a Hold. The shares subsequently recovered, briefly trading at close to $28 in March before pulling back to the current level.

Recent developments: First-quarter results released earlier this month show the company is still having problems adjusting to the changed environment. Revenue was down 13.3% compared to the same period in 2015, coming in at $88.2 million. The company tied the drop directly to reduced business from oil and gad producing regions in the U.S. and Canada but it also blamed an unusually warm winter for the revenue drop.

“A normal cold winter with good frost levels greatly increases Badger utilization as it takes considerably longer to dig in frozen ground,” the company said. “Western Canada had very little frost so digging was quicker and Badger billed less hours.” 

Net profit was only $3.7 million ($0.10 per share) compared to $11.4 million ($0.31 per share) in the same period last year. Cash flow from operations decreased by 36% from $23.4 million in the first quarter of 2015 to $15 million in the first quarter of 2016 following reduced revenue and lower gross profit.

Earlier, Badger’s management had commented: “2016 will be another year of running hard to stay in place”. That’s the way things are shaping up. Management says it does not expect much improvement in financial results until the second half of the year. “The reality is that the oil and natural gas sector has not yet stabilized and the general construction season does not start until sometime in the second quarter,” the outlook report states. “When the oil and natural gas sectors begin to stabilize expected activity in the non-oil and natural gas sector will allow Badger to return to growth.”

Dividend: Despite the difficult conditions, Badger’s board of directors approved a 10% dividend increase to $0.033 per month ($0.396 annually), effective with the June payment. The company said the strength of the balance sheet, reduced capital costs, and the expectation of future growth made the move feasible. It was the first dividend hike for the company since September 2012. The shares yield 1.6% at the current price.

Conclusion: It would be unrealistic to expect any significant improvement in the share price for the next few months. However, at this stage it appears the worst is behind us and the company’s financials should start to improve in the second half of the year.

Action now: Hold if you already have a position. I do not recommend making new purchases at this time.

Polaris Minerals (TSX: PLS, OTC: POLMF)

Originally recommended by Irwin Michael on April 30/07 (#2717) at C$9.90, US$8.94. Closed Friday at C$1.35, US$1.00.

Background: Polaris started business in mid-2000 and was listed on the Toronto Stock Exchange in January 2006 following a successful Initial Public Offering. The company is engaged in the development and operation of construction aggregate quarries in Canada. It supplies distribution facilities in the United States through coastal shipping. The company’s active construction aggregate interests consist of its Orca Sand and Gravel Quarry in British Columbia and two associated receiving terminals in Richmond and Long Beach, California. The company also owns the Black Bear Project located in close proximity to the Orca Quarry, and a controlling interest in the Eagle Rock Quarry Project, located on the south coast of Vancouver Island.

Stock performance: This security has not worked out well for us. It was originally recommended by former contributing editor Irwin Michael in April 2007 at $9.90 and initially performed well. However, the shares were hit hard by the sell-off of 2008-09 and have never recovered. Over most of the time since they have traded in a range of $1 to $3.

Recent developments: The first-quarter financial report was not encouraging. Sales volumes were down 28% compared to the same period in the prior year. Revenue was down 24% to $7.9 million, which the company blamed on heavy rainfall and planned maintenance at a customer delivery point.

The bottom line showed a net loss of $2.5 million (-$0.03 per share). That compared to a tiny profit of $90,000 in the first quarter of 2015.

Conclusion: In the financial report, the company noted that the results for any individual quarter are not necessarily indicative of results to be expected for that year. “Sales and earnings are typically sensitive to regional and local weather, market conditions, and, in particular, to cyclical variations in construction spending,” management said.

However, Polaris barely managed to finish above break-even in 2015, booking net income of $0.9 million. The weak start to this year suggests things won’t be much better.

Action now: Sell. We’ve been patient for a long time with this one. That patience has now run out. Book the capital loss and move on.

 

Top

YOUR QUESTIONS

Stock dividends

Q – Is there a way to determine before you purchase if a stock pays its dividend as interest or as a true dividend, which is taxed at a lower rate. – Gord Z.

A – Most stocks pay what you refer to as a “true dividend”, meaning it is eligible for the dividend tax credit if paid by a taxable Canadian corporation. Dividends from U.S. companies are taxed at regular rates.

Dividends from a few Canadian companies are treated as interest for tax purposes. Mortgage investment companies such as Firm Capital and Genworth fall into this category.

Distributions from trusts and limited partnerships may have differing tax treatments including return of capital, dividends, interest, and capital gains. REITs would be in this group.

If you are unsure, ask your financial adviser or contact the investor relations department of the company in which you are interested. – G.P.

TFSA contributions

Q – In lieu of putting cash into a TFSA account and then buying the shares of a security, can one transfer an existing security held in a non-registered account? How is this done? I presume value of the security on the day of the transfer should not exceed the maximum contribution of $5,500. This would be a nice way to avoid paying capital gains tax if the security does well. – Mike M.

A – You can make a contribution in kind to a TFSA if you have an account with a broker. The process is as you describe – the value of the contribution is the fair market value of the security on the day it goes into the plan. However, the security is deemed to have been sold on the day of the transfer so any capital gain will be taxable. Capital losses created in this way may not be claimed. – G.P.

 

Top

MEMBERS’ CORNER

The nuclear option

Member comment: Following up on your comment last week, SNC Lavalin has a significant stake in the nuclear business. It acquired AECL (CANDU technology) from the Federal government and is currently heavily involved in the Bruce Power and OPG refurbishment as well as nuclear expansion in the U.K. For some investors, that is an opportunity, for others it is a significant liability. – Peter M.

Response: Thanks to our reader for this information. SNC Lavelin is actively involved in the nuclear energy business. One of its current major projects is as a participant in the refurbishment of the Darlington Nuclear Generating Station in Ontario. When the project is completed, the station will comply with new nuclear safety standards and will produce about 20% of the province’s energy needs. However, it’s significant that no new nuclear reactors are being planned anywhere in this country despite the fact we invented the CANDU technology. – G.P.