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BUY AND HOLD PORTFOLIO GAINS GROUND

By Gordon Pape, Editor and Publisher

If you’re an invest-it-and-forget-it person, this Buy and Hold Portfolio is for you. It was created in June 2012 so we are currently celebrating its fifth anniversary. The portfolio contains a bond ETF and a mix of Canadian and U.S. stocks, which will rarely change.

On the equity side, I focus on blue-chip stocks that offer long-term growth potential plus, in all cases but one, regular dividend payments. The original weighting was 10% for each stock with the bond ETF given a 20% position.

I used several criteria to choose the stocks including a superior long-term growth profile, industry leadership, good balance sheet, and relative strength in down markets.

The objective was to generate decent cash flow, minimize downside potential, and provide slow but steady growth. The target rate of return is 8% annually.

These are the current securities we hold with some comments on how they performed since my last review based on results to Nov. 30. Prices are as of mid-day on June 23.

iShares Canadian Universe Bond Index ETF (TSX: XBB). Bonds rallied back a little after their fall sell-off and this ETF has gained $0.44 since our last review. We received distributions totalling $0.42 per unit.

BCE Inc. (TSX, NYSE: BCE). BCE shares did not show a lot of movement in the latest six months, gaining just $0.76. However, we benefitted from a dividend increase of 5.1%, effective with the March payment. Because of timing, we received three dividends during the period of totalling $2.12 per share.

Brookfield Asset Management (TSX: BAM.A, NYSE: BAM). We saw a strong rebound in Brookfield shares in the latest period, with a gain of $6.07 (13.4%) in the six months. We received two dividends totalling US$0.28 per share.

CN Rail (TSX: CNR, NYSE: CNI). CN Rail continued its strong run, gaining another $16.38 (18.1%) during the period. Because of timing, we received three dividends in six months, for $1.20 per share. The dividend was increased by 10% effective with the March payment.

Enbridge (TSX, NYSE: ENB). It has not been a good six months for Enbridge. The shares are off almost $5 from the time of our last review. The only consolation was a 4.6% dividend increase in May. We received two dividends totalling $1.19 per share during the period.

Toronto Dominion Bank (TSX, NYSE: TD). We saw a modest advance of $1.52 (2.4%) in the price of TD stock during the period. The quarterly dividend was increased by $0.05 per share (9.1%) in April.

Alphabet (NDQ: GOOGL). This company, which comprises the Google empire, got off to a bad start after we added it to the portfolio last year. But it has come back in an impressive way, adding $201.35 per share (yes, that’s correct) in the past six months to put us well into the black. The stock does not pay a dividend.

UnitedHealth Group (NYSE: UNH). This health insurer stock was added to the portfolio in January 2015. It has done very well for us, gaining US$25.75 in the latest review period. The quarterly dividend was increased by US$0.20 to $0.75 per share, effective with the June payment.

Walt Disney Corp. (NYSE: DIS). Disney stock posted a small gain of US$3.94 in the latest period. We received a semi-annual dividend of US$0.78 per share in December.

Cash. At the time of the last review, our cash reserves, including retained dividends, were $1,414.18. We invested that money at 2% in an account with EQ Bank, earning $14.14 in interest.

Here is the current status of the portfolio. For consistency, the Canadian and U.S. dollars are considered to be at par. However, the currency differential magnifies U.S. dollar gains and losses for Canadians. Trading commissions are not factored in although in a buy and hold portfolio they are not significant in any event.

IWB Buy and Hold Portfolio (a/o June 23/17)

Symbol

Weight %

Shares

Average Price

Book Value

Current Price

Market Value

Retained Dividends

Gain/Loss %
XBB

16.0

445

$31.40

$13,973.05

$31.79

$14,146.55

$261.51

+ 3.3
BCE

9.7

145

$43.21

$6,265.35

$59.18

$8,581.10

$343.76

+42.4
BAM.A

13.6

235

$22.80

$5,359.00

$51.30

$12,055.50

$79.10

+126.4
CNR

12.7

105

$44.11

$4,179.00

$106.81

$11,215.05

$139.85

+171.7
ENB

8.5

145

$41.23

$5,978.50

$52.07

$7,550.15

$316.13

+31.6
TD

10.7

145

$41.23

$5,978.60

$65.40

$9,483.00

$365.62

+70.8
GOOGL

8.9

8

$794.49

$6,355.92

$982.85

$7,862.80

$0

+23.7
UNH

9.4

45

$112.47

$5,061.15

$185.10

$8,329.50

$253.14

+69.6
DIS

10.1

85

$47.12

$4,005.20

$104.11

$8,849.35

$509.89

+133.7
Cash

0.4

$299.60

$313.74
Total

100.0

$57,455.37

$88,386.74

$2,269.00

+57.8
Inception

$49,945.40

+81.5

 

Comments: The new portfolio value (market price plus retained dividends/distributions) is $90,655.74, compared to $83,430.63 at the time of the last review. That represents a gain of 8.7% over the period.

Since inception, we have a total return of 81.5%. That represents an average annual compound rate of return of 12.7%, which is comfortably ahead of our 8% target.

Changes: We will invest some of our retained dividends as follows.

XBB ? We will purchase five units for a total cost of $158.95. That will bring our total to 450 and reduce retained cash to $102.56.

BCE ? We’ll add five shares for a cost of $295.90. We now own 150 shares, with a cash balance of $47.86.

ENB ? We will take advantage of the price retreat to buy five shares for a cost of $260.35. We now own a total of 150 shares and have cash remaining of $55.78.

TD ? Here again, we will buy five shares for a cost of $327. Our total is now 150 shares, with cash of $38.62.

DIS ? Finally, we’ll add five shares of Disney for an expense of $520.55. That will use all of our retained dividends and we will take $10.66 from our cash account to make up the difference.

Readers are reminded not to do small trades unless you have a fee-based account. Use dividend reinvestment plans instead.

We have cash remaining of $1,019.99. We will keep that in our EQ Bank account, which is currently paying 2.3%.

Here is a look at the updated portfolio. I will review it again in December.

IWB Buy and Hold Portfolio (updated June 23/17)

Symbol

Weight %

Shares

Average Price

Book Value

Current Price

Market Value

Retained Dividends
XBB

15.9

450

$31.40

$14,132.00

$31.79

$14,305.50

$102.56
BCE

9.9

150

$43.74

$6,561.25

$59.18

$8,877.00

$47.86
BAM.A

13.4

235

$22.80

$5,359.00

$51.30

$12,055.50

$79.10
CNR

12.5

105

$44.11

$4,179.00

$106.81

$11,215.05

$139.85
ENB

8.7

150

$41.59

$6,238.85

$52.07

$7,810.50

$55.78
TD

10.9

150

$42.04

$6,305.60

$65.40

$9,810.00

$38.62
GOOGL

8.7

8

$794.49

$6,355.92

$982.85

$7,862.80

$0
UNH

9.3

45

$112.47

$5,061.15

$185.10

$8,329.50

$253.14
DIS

10.4

90

$50.29

$4,525.75

$104.11

$9,369.90

$0
Cash

0.3

$303.08

$303.08
Total

100.0

$59,021.60

$89,938.83

$716.91
Inception

$49,945.40

 

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

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EUROPE LOOKS ATTRACTIVE ? FINALLY

A lot has been happening in Europe and this week contributing editor Gavin Graham takes a close look at the rapidly evolving situation and the implications for investors. Gavin has had a long and successful career in money management and is a specialist in international securities. He held senior positions in financial organizations in London, Hong Kong, and Toronto. He is a Trustee of Pointbreak, a provider of low-cost specialist ETFs. He divides his time between Toronto and the U.K.

Gavin Graham writes:

At the beginning of this year, I wrote a piece for the Internet Wealth Builder looking at what might happen politically and economically for Europe and the U.S. this year. It used former Defense Secretary Donald Rumsfeld’s idea of making forecasts: there are things we know (knowns), thing we know we don’t know (known unknowns) and things we don’t know we don’t know (unknown unknowns).

The outlook for Europe was complicated by several elections in major economies (known unknowns) including the Netherlands (March), France (Presidential in May and parliamentary in June), and Germany (federal elections in September). There was also the possibility of Italy calling parliamentary elections early ahead of the June 2018 deadline.

For the U.S., the known unknown was President Trump assuming office in January and the unknown unknown was how he would conduct himself, given his lack of a track record as an elected official. Other known unknowns included Brexit, the threat of Islamic terrorism, the migrant crisis, and the course of the Chinese economy.

Populism defeated in Europe ? for now

Six months on, the situation is somewhat clearer as far as Europe is concerned. Right wing populists, as represented by Geert Wilders in the Netherlands and Marine Le Pen’s National Front in France, have failed to gain power. Meanwhile, the Italian Five Star party led by former comedian Beppe Grillo suffered a bad result in local elections, making it more likely that Eurocrat Matteo Renzi will serve out his term as Prime Minister.

German Chancellor Angela Merkel’s CDU party, which had been enduring a run of bad results in regional elections through 2015-16, rebounded to gain control of Germany’s most important state, North Rhine-Westphalia, for only the second time in forty years in regional elections last month, defeating its main rival, the SPD.

The victory in France of pro-European technocrat Emanuel Macron, the former economy minister in President Hollande’s government, with a new party, La Republique En Marche (The Republic is on the march) that has only been in existence for a year, was regarded as a hopeful sign by many observers. M. Macron wants to reform France’s sclerotic labour market, including addressing the 35-hour week, reduce regulations, and cut taxes. At the same time, he wants to forge a closer union with Germany, which may involve issuing bonds guaranteed by the EU rather than individual countries.

The U.K. faces major uncertainty

The unknown unknown in Europe was the decision by British prime minister Theresa May to call a snap election in April. Having passed the legislation in March to begin the two-year process of leaving the EU, Ms. May decided she needed a larger majority than the 17 seats she inherited from her predecessor, David Cameron, to pass whatever deal was negotiated with Brussels. The 20 percent lead she enjoyed in the opinion polls over the shambolic Labour opposition led by hard leftist Jeremy Corbyn, most of whose own MPs had voted to reject him as leader in 2016, probably helped convince her that the time was ripe.

Instead, the lengthy seven-week election campaign saw the Conservatives run one of the worst efforts seen since World War II. Meanwhile, Mr. Corbyn launched into campaigning (the one thing he does well) on a very socialist manifesto involving renationalization of utilities and the railways, tax increases for companies and anyone earning more than C$125,000 per year, and the abolition of tuition fees.

When the results were announced, Ms. May had lost her majority. She increased the Conservative share of the vote by 6% but Mr. Corbyn increased Labour’s share by 10%! Most of these votes for both major parties came from the populist U.K. Independence Party (UKIP), whose charismatic leader Nigel Farage had retired (again) after winning the Brexit referendum. UKIP’s share sank from 14% in 2015 to 2% in 2017, but former UKippers split equally, while Mr. Corbyn energized young people, who hadn’t voted in the referendum. (UKippers are UKIP voters, so called supposedly because they are traditional type people who eat kippers for breakfast!)

Ms. May still has the largest party and can form a government with the aid of the 10 Democratic Unionist MPs from Northern Ireland, who favour Brexit. But her authority has gone, and a wave of tragedies, including several terrorist attacks in London and Manchester and the dreadful fire in a social housing block in west London, which killed over 80 people, have left the impression that the government is floundering, just when negotiations on Brexit are beginning.

European economies doing better

With most of the political risks seemingly surmounted and the U.K. weakened in Brexit negotiations, investors have been returning to the European markets. The spread of bond yields in France and Italy over those in Germany fell to the lowest level in over six months last week at 0.39% in France and 1.65% in Italy.

The iShares Europe ETF (NYSE: IEV), which comprises the 350 largest European stocks including those in the U.K. and Switzerland, is up 17% in U.S. dollar terms year-to-date. This compares with a gain of just under 10% for the S&P 500 and a flat performance for the S&P/TSX Composite, which has been dragged down by its large energy weighting. This out performance has been helped by a 6% appreciation of the value of the euro against the U.S. dollar this year, even though the U.S. Federal Reserve raised interest rates twice by a total of 0.5% to 1.25%. Meantime, Mario Draghi of the European Central Bank (ECB) has left rates unchanged at -0.4%.

While growth in the Eurozone economies has improved, with most forecasts now expecting GDP expansion above 2% in 2017, Mr. Draghi was reluctant to reveal details of the end of the ECB’s ?60 billion a month Quantitative Easing (QE) program at the most recent meeting in June. However, he did make it known that it would be coming to an end in 2018, although how sharp the tapering will be has yet to be revealed. Perhaps mindful of the upset caused by Ben Bernanke’s revelation in 2013 that the Fed was considering reducing bond purchases (the famous “taper tantrum”), the ECB is keeping its cards close to its chest. However, investors seem happy that QE is finally coming to a close in Europe, while most observers seem to expect only one more hike in interest rates in the U.S. this year, as the domestic economy slows down. The direction of travel seems more important than the actual level of interest rates.

Be optimistic but remain cautious

While events have apparently moved in favour of the maintenance of the status quo in Europe, investors should bear in mind the underlying problems still faced by the continent. Deflation, slow growth, and weak demographics remain headwinds, and populism still poses a threat if growth doesn’t pick up.

The Republican and Socialist parties in France, which have formed every government for sixty years, didn’t make it into the second round of presidential voting and Marine Le Pen received 35% of the vote, while over 20% of ballots were blank or spoiled. The Socialist party in the Netherlands, part of almost every government since the war, was almost wiped out. The collapse in the UKIP vote in the UK was because both Labour and the Conservatives promised to withdraw from the single market and the customs union, effectively stealing UKIP’s policy. However, for the moment investors are prepared to ignore these concerns, and the markets have done well.

How to benefit from European growth

Investors wanting a single easy way to play the rebound in Europe could do worse than to buy IEV, although this is not a recommendation. With 20% of its assets in financials, and 28% in the U.K., the ETF is exposed to any further weakness in sterling or a recurrence of Eurozone problems.

The iShares MSCI Eurozone ETF (NYSE: EZU) has 32.3% in France and 29.5% in Germany and is a pure play on the euro area markets, but still has almost 20% in financials. While Eurozone banks are in better shape than before the Greek debt crisis, the rescue of Banco Popular by Banco Santander for ?8 billion last week shows the dangers of overvalued assets on bank balance sheets has still not been addressed successfully.

The four European ADRs that I have recommended in either the IWB or the Income Investor are drinks giant Diageo (NYSE: DEO), Swiss drugs company Novartis (NYSE: NVS), consumer products group Unilever (NYSE: UL), and telecoms group Vodafone (NDQ: VOD). All have done well this year. Diageo is up 18%, Novartis 11.8%, Unilever 34.8% (helped by the rejected bid from 3G and Berkshire), and Vodafone a remarkable 56%. They remain a lower risk way to play improving European fundamentals while giving a reasonable yield.

Investors may also want to consider Dream Global REIT (TSX: DRG), which I recommended in The Income Investor. It is a specialist property company that invests in offices in major cities in Germany, Austria, and Belgium. Despite its 13% price increase this year, it still yields 7.5%. All are Buys.

 

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GAVIN GRAHAM’S UPDATES

Industrial Alliance Group (TSX: IAG; OTC: IDLLF)

Originally recommended by Tom Slee on April 1/13 (#21313) at C$37.36, US$35.56. Closed Friday at C$53.66, US$43.23.

Background: Industrial Alliance is one of the four largest life and health insurance companies in Canada. The firm, which is based in Quebec City, offers a wide range of products, beyond ordinary insurance policies. These include mutual and segregated funds, savings and retirement plans, securities, auto and home insurance, mortgages and car loans, and other financial products and services for both individuals and groups. The company was founded in 1892 and is celebrating its 125th anniversary this year.

Performance: We last updated the stock just over a year ago when it was trading in Toronto at $41.72. At the time, we rated it as a Buy. The shares hit a high of $59.41 in March but dropped back to below $50 at the beginning of June. They have rebounded since then, closing Friday at $53.66.

Industry status: The life insurance companies have been doing well as long-term bond yields have risen over the last year, with Industrial Alliance up 25%. As I have explained on several occasions, the liability side of the lifecos’ balance sheets is determined by the long-term cost of capital, represented by the supposedly risk free 10-year government bond yield. The lower the yield, the greater the cost of meeting the promises made to buyers of life insurance.

Long-term bond yields hit 60-year lows last year. The U.S. 10-year yield fell to 1.37% at one point in July, and the 10-year Government of Canada touched 1.25%. That meant life insurance companies’ liabilities had risen enormously while their assets, some of which are equities, had not appreciated anything like as much.

Since June 2016, the yield on the 10-year U.S. Treasuries has risen 45 basis points to 2.15% and the 10-year Canada is up 25 bp to 1.5%. Short-term yields in the U.S. have risen even faster, by 70 bp to 1.25%, leading to a flattening of the yield curve and squeezing the margin between short-term and long-term lending. But this is more of a concern for the banks than the lifecos.

Recent developments: IA reported net income for the first quarter of $110.3 million ($1.03 per share). The return on common equity (ROCE) was 13.4%. That compared with earnings of $98.3 million ($0.96 per share) and ROCE of 9.8% in the first quarter of 2016. Core earnings were $1.07 per share versus $1.04 last year and ROCE was unchanged at 12%.

Outstanding sales in its mutual funds business, which switched from outflows of $291 million to net inflows of $200 million, and strong growth in group wealth and insurance businesses contributed to the good result.

The company purchased HollisWealth from Scotiabank in December 2016. It is a leading Canadian insurance and stock brokerage business and a mutual fund distributor, with $34 billion in assets under administration (AUA) and 800 licensed advisors The deal, due to close in the third quarter, will position IA as the largest non-bank wealth management advisory firm in Canada, increasing its AUA by 75% to $75 billion. The company issued 2.5 million shares at $55.65 to raise $139 million to fund the acquisition.

IA’s solvency ratio was 222% although the HollisWealth deal will reduce it by 14% to 208%. Encouragingly, the “strain” (cost of new insurance business) was 6% compared to a forecast of 0-15% for 2017, due to higher sales and a better mix of business written.

IA has increased its dividends and book value by 270% against 160% for the Big Three (Manulife, Sun Life, and Great West Life) over the last dozen years, but its price to book value is still only 1.4 times, compared to two times prior to the financial crisis.

Action now: IA remains a Buy as the rise in bond yields is reinforced by the growth in its wealth management business.

Manulife Financial (TSX, NYSE: MFC)

Originally recommended by Tom Slee on Feb 6/12 (#21215) at C$12.34, US$12.42. Closed Friday at C$23.61, US$17.81.

Background: Manulife is the largest life and health insurance company in Canada. It also operates in the U.S. under the John Hancock banner and has a strong presence in Asia. At the end of 2016, the company had approximately 35,000 employees, 70,000 agents, and thousands of distribution partners, serving more than 22 million customers.

Performance: The stock is up 32% in the past year although it has traded in Toronto in a fairly narrow range of between $23 and $25 for most of 2017.

Recent developments: Manulife recorded earnings of $1.35 billion ($0.66 per share) for the first quarter (to March 31). The ROCE was 13.5%. This compared with earnings of $1.05 billion, ($0.51 per share) and ROCE of 10.8% for the first quarter of 2016.

Excluding investment gains and losses, Manulife had core earnings of $1.1 billion ($0.53 per share) and ROCE of 11.1% in the first quarter of this year compared to $0.9 billion ($0.44 per share) and ROCE of 9.3% in 2016.

The 29% increase in earnings per share (20% for core EPS) was due to strong growth in its two core businesses: Asia and wealth and asset management (WAM). There was a 31% increase in annualized premium equivalent sales in Asia compared to the first quarter of 2016, with double-digit growth in most territories. This was helped by the agreement with Standard Chartered Bank in Hong Kong, which has made Manulife the largest manager of Mandatory Provident Fund assets and the largest in terms of net sales.

Manulife also recorded $4.3 billion net inflows in its WAM business compared to $1.7 billion last year. The company exceeded $1 trillion in assets under management and administration for the first time and its solvency ratio was 233%, up from 230% at end December 2016.

Action now: Manulife remains a Buy with the company’s prospects boosted by its strong Asian presence.

Empire Company (TSX: EMP.A; OTC: EMLAF)

Originally recommended on Jan. 18/16 (#21603) at C$24.32, US$17.77. Closed Friday at C$18.94, US$14.99.

Background:This Nova Scotia-based firm is the parent company of the Sobey’s and Safeway supermarket chains, and owns a 41.4% stake in Crombie REIT, which largely owns Sobey’s anchored retail malls. The company has approximately $24.3 billion in annualized sales and $8.7 billion in assets. Empire and its subsidiaries, franchisees, and affiliates employ approximately 125,000 people.

Performance: We last reviewed this stock in July 2016 when it was trading at $20.05. The stock rebounded to the $21 range from its 10-year lows near $15 that it hit in December, before pulling back a bit. But it is still down about 20% from where I recommended it 18 months ago.

Recent developments: The botched takeover of the Safeway grocery chain in western Canada in 2013 was supposed to be a transformational acquisition. Instead, it resulted in the estimated $200 million in annual savings being wasted due to badly handled introductions of own brand products and a change in loyalty programs. All that coincided with the downturn in the energy-based Alberta and Saskatchewan economies and increased competition from low cost rivals.

The new CEO, Michael Medline, was formerly CEO of Canadian Tire. He has announced a reorganization named “Project Sunrise” with the aim of generating $500 million in annual savings by 2020.

Mr. Medline has spent the time since he arrived in January meeting staff and visiting stores to get input on what has not worked and why, and is replacing Empire’s five regional divisions with one national organization with functional heads. There will be extensive cuts to back office staff, with initial charges being taken when the annual results are reported on June 28. The remainder will be expensed over the rest of calendar 2017, but no cuts will be made in frontline staff in the stores.

Mr. Medline said “the future Sobey’s will operate with a simpler, leaner structure, more efficient core processes and tools, and will better leverage its $24 billion national scale.”

Peter Sklar, retail analyst at BMO Nesbitt Burns, said it was encouraging that the company was taking steps to streamline its costs, though the magnitude was significantly larger than he had anticipated. This may improve Empire’s competitiveness as it could invest in price promotion and marketing but he doubted the full savings would flow to its bottom line.

While of mainly historical interest, the results for the third quarter (to Feb. 28) saw same store sales for stores open over twelve months down 3.7% or 3.1% excluding fuel. Adjusted net earnings were down 58% to $34.1 million ($0.13 per share) from $82.5 million ($0.30 per share). Sales were down 2.3% to $5.89 billion. Empire attributed the decline to the merchandising expenses to turn around its Safeway stores, sensitivity in western Canada to pricing due to the slowdown, and food price deflation.

Mr. Medline noted: “Our results are not where we need them to be. We have the employees and assets to put much better numbers up on the board. It is up to management to put in place a game plan to aggressively address our cost and customer issues to return Empire to sustainable and profitable growth.”

Success in retailing is down to doing the small things well on a sustainable basis and Mr. Medline’s track record at Canadian Tire indicates that he has the ability to do this at Empire, which is still generating cash and can either sell shops to Crombie or sell some of its Crombie shares to use if it needs to raise more capital.

Action now: Empire is a Buy on based on Mr. Medline carrying out the turnaround and its strong balance sheet.

 

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GORDON PAPE’S UPDATES

WSP Global (TSX: WSP, OTC: WSPOF)

Originally recommended by Tom Slee as Genivar Inc. on July 9/12 (#21224) at C$22.40, US$22.18. Closed Friday at C$53.75, US$39.34.

Background: WSP is an international engineering and design firm that provides a wide range of services, from urban planning to environmental remediation. Based in Montreal, the company employs approximately 36,000 people, including engineers, technicians, scientists, architects, planners, surveyors, and environmental specialists, as well as other design, program and construction management professionals. It has more than 500 offices across 40 countries, on five continents.

Performance: We last reviewed the stock about a year ago, at which time it was trading at $39.18. We rated it as a Hold on the basis of flat earnings per share and the lack of any evidence of renewed growth after a long slowdown and hundreds of lay-offs. The shares dipped below $38 shortly thereafter and then began a slow but somewhat sputtering rise. It was only in April that they gained strong upward momentum. The stock is now trading near its all-time high.

Recent developments: The company has been showing solid growth in recent quarters. First-quarter results saw revenue of $1.6 billion, up 10.2% compared to the same period of 2016. Adjusted net earnings were $49.8 million ($0.49 per share). That was up 48.5% on a per share basis from the year before.

The company had a backlog of almost $6 billion at the end of the quarter, representing 10.6 months of revenue. That was up $316.5 million from the fourth quarter of 2016.

Dividend: Despite the improved results, the company did not increase its dividend, which remains at $0.375 per quarter ($1.50 per year) for a yield of 2.8% at the current price.

Action now: Hold. The improvement in the finances is encouraging but the stock appears to be a little overpriced at this level.

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YOUR QUESTIONS

Wants more diversification

Q – I’m 57, self-employed, long time subscriber. I want to work for as many years as possible (you are my role model in this regard). My RRSP (about $180,000) and RESP for my eight-year-old daughter (about $16,000) are both invested in the Mawer Balanced Fund, as per your Recommended List.

I’m generally happy with it but understand that it’s probably not right to be in only one fund with this amount of money, and I want to potentially do better than that fund. Which of your recommended portfolios is the best fit for me providing I don’t draw from the RRSP and RESP for the next 10 years? ? A.B.

A – The Mawer Balanced Fund has an outstanding record ? it has outperformed the peer group over all time periods out to 20 years. There are not many funds that can say that.

That said, I understand you would like some diversification. Here are my suggestions.

First, leave your daughter’s RESP alone. A balanced fund is a good choice for these plans. As she approaches college age, say around 14-15, start shifting some money into a fixed income fund to reduce risk. The Mawer Bond Fund would work fine.

For your own investments, you may wish to put more money into the U.S. market. The Mawer Balanced Fund has only 19% of its assets there. You might want to move some money into the company’s U.S. Equity Fund. For more diversification, consider adding the Mawer Emerging Markets Fund and the Mawer International Equity Fund as well.

If you want to track one of my portfolios, the RRSP Portfolio would be my suggestion, based on your age and priorities. But that would mean revamping your whole portfolio. By adding a couple of extra Mawer funds you can get more diversification at no expense, since you are transferring assets within an RRSP. ? G.P.

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MEMBERS’ CORNER

Too many model portfolios?

Member comment: I suggest that your newsletters offer too many model portfolios. From my perspective, it is a slow erosion of the content that I am interested in. As the number of model portfolios slowly increases over time and each one is reviewed twice a year, there is less and less front-page space for market commentary.

Both the IWB and The Income Investor are evolving as time passes and that is fine. The question is whether this evolution is planned and taking the newsletters in a direction that you and your readers want. Or, is it simply changing because yet another model portfolio seems like a good idea?

It is a trend that I have noticed for a number of years now and has me concerned. Perhaps it is a good time to poll your readers. If you do, I would suggest you make it clear to them that there is a trade-off. As one part of the newsletter increases (i.e. model portfolios) then another part must decrease (market commentary and security analysis).

I value your commentary and analysis ? keep up the good work. ? Ross N.

Response: Our reader raises an important issue and I would very much welcome your views on this point. Do we have too many model portfolios? Too few? Just right? Please send along your thoughts. Our goal is always to provide the most useful information possible. Member input is a critical factor in determining where we place our emphasis. ? G.P.

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In This Issue

BUY AND HOLD PORTFOLIO GAINS GROUND

By Gordon Pape, Editor and Publisher

If you’re an invest-it-and-forget-it person, this Buy and Hold Portfolio is for you. It was created in June 2012 so we are currently celebrating its fifth anniversary. The portfolio contains a bond ETF and a mix of Canadian and U.S. stocks, which will rarely change.

On the equity side, I focus on blue-chip stocks that offer long-term growth potential plus, in all cases but one, regular dividend payments. The original weighting was 10% for each stock with the bond ETF given a 20% position.

I used several criteria to choose the stocks including a superior long-term growth profile, industry leadership, good balance sheet, and relative strength in down markets.

The objective was to generate decent cash flow, minimize downside potential, and provide slow but steady growth. The target rate of return is 8% annually.

These are the current securities we hold with some comments on how they performed since my last review based on results to Nov. 30. Prices are as of mid-day on June 23.

iShares Canadian Universe Bond Index ETF (TSX: XBB). Bonds rallied back a little after their fall sell-off and this ETF has gained $0.44 since our last review. We received distributions totalling $0.42 per unit.

BCE Inc. (TSX, NYSE: BCE). BCE shares did not show a lot of movement in the latest six months, gaining just $0.76. However, we benefitted from a dividend increase of 5.1%, effective with the March payment. Because of timing, we received three dividends during the period of totalling $2.12 per share.

Brookfield Asset Management (TSX: BAM.A, NYSE: BAM). We saw a strong rebound in Brookfield shares in the latest period, with a gain of $6.07 (13.4%) in the six months. We received two dividends totalling US$0.28 per share.

CN Rail (TSX: CNR, NYSE: CNI). CN Rail continued its strong run, gaining another $16.38 (18.1%) during the period. Because of timing, we received three dividends in six months, for $1.20 per share. The dividend was increased by 10% effective with the March payment.

Enbridge (TSX, NYSE: ENB). It has not been a good six months for Enbridge. The shares are off almost $5 from the time of our last review. The only consolation was a 4.6% dividend increase in May. We received two dividends totalling $1.19 per share during the period.

Toronto Dominion Bank (TSX, NYSE: TD). We saw a modest advance of $1.52 (2.4%) in the price of TD stock during the period. The quarterly dividend was increased by $0.05 per share (9.1%) in April.

Alphabet (NDQ: GOOGL). This company, which comprises the Google empire, got off to a bad start after we added it to the portfolio last year. But it has come back in an impressive way, adding $201.35 per share (yes, that’s correct) in the past six months to put us well into the black. The stock does not pay a dividend.

UnitedHealth Group (NYSE: UNH). This health insurer stock was added to the portfolio in January 2015. It has done very well for us, gaining US$25.75 in the latest review period. The quarterly dividend was increased by US$0.20 to $0.75 per share, effective with the June payment.

Walt Disney Corp. (NYSE: DIS). Disney stock posted a small gain of US$3.94 in the latest period. We received a semi-annual dividend of US$0.78 per share in December.

Cash. At the time of the last review, our cash reserves, including retained dividends, were $1,414.18. We invested that money at 2% in an account with EQ Bank, earning $14.14 in interest.

Here is the current status of the portfolio. For consistency, the Canadian and U.S. dollars are considered to be at par. However, the currency differential magnifies U.S. dollar gains and losses for Canadians. Trading commissions are not factored in although in a buy and hold portfolio they are not significant in any event.

IWB Buy and Hold Portfolio (a/o June 23/17)

Symbol

Weight %

Shares

Average Price

Book Value

Current Price

Market Value

Retained Dividends

Gain/Loss %
XBB

16.0

445

$31.40

$13,973.05

$31.79

$14,146.55

$261.51

+ 3.3
BCE

9.7

145

$43.21

$6,265.35

$59.18

$8,581.10

$343.76

+42.4
BAM.A

13.6

235

$22.80

$5,359.00

$51.30

$12,055.50

$79.10

+126.4
CNR

12.7

105

$44.11

$4,179.00

$106.81

$11,215.05

$139.85

+171.7
ENB

8.5

145

$41.23

$5,978.50

$52.07

$7,550.15

$316.13

+31.6
TD

10.7

145

$41.23

$5,978.60

$65.40

$9,483.00

$365.62

+70.8
GOOGL

8.9

8

$794.49

$6,355.92

$982.85

$7,862.80

$0

+23.7
UNH

9.4

45

$112.47

$5,061.15

$185.10

$8,329.50

$253.14

+69.6
DIS

10.1

85

$47.12

$4,005.20

$104.11

$8,849.35

$509.89

+133.7
Cash

0.4

$299.60

$313.74
Total

100.0

$57,455.37

$88,386.74

$2,269.00

+57.8
Inception

$49,945.40

+81.5

 

Comments: The new portfolio value (market price plus retained dividends/distributions) is $90,655.74, compared to $83,430.63 at the time of the last review. That represents a gain of 8.7% over the period.

Since inception, we have a total return of 81.5%. That represents an average annual compound rate of return of 12.7%, which is comfortably ahead of our 8% target.

Changes: We will invest some of our retained dividends as follows.

XBB ? We will purchase five units for a total cost of $158.95. That will bring our total to 450 and reduce retained cash to $102.56.

BCE ? We’ll add five shares for a cost of $295.90. We now own 150 shares, with a cash balance of $47.86.

ENB ? We will take advantage of the price retreat to buy five shares for a cost of $260.35. We now own a total of 150 shares and have cash remaining of $55.78.

TD ? Here again, we will buy five shares for a cost of $327. Our total is now 150 shares, with cash of $38.62.

DIS ? Finally, we’ll add five shares of Disney for an expense of $520.55. That will use all of our retained dividends and we will take $10.66 from our cash account to make up the difference.

Readers are reminded not to do small trades unless you have a fee-based account. Use dividend reinvestment plans instead.

We have cash remaining of $1,019.99. We will keep that in our EQ Bank account, which is currently paying 2.3%.

Here is a look at the updated portfolio. I will review it again in December.

IWB Buy and Hold Portfolio (updated June 23/17)

Symbol

Weight %

Shares

Average Price

Book Value

Current Price

Market Value

Retained Dividends
XBB

15.9

450

$31.40

$14,132.00

$31.79

$14,305.50

$102.56
BCE

9.9

150

$43.74

$6,561.25

$59.18

$8,877.00

$47.86
BAM.A

13.4

235

$22.80

$5,359.00

$51.30

$12,055.50

$79.10
CNR

12.5

105

$44.11

$4,179.00

$106.81

$11,215.05

$139.85
ENB

8.7

150

$41.59

$6,238.85

$52.07

$7,810.50

$55.78
TD

10.9

150

$42.04

$6,305.60

$65.40

$9,810.00

$38.62
GOOGL

8.7

8

$794.49

$6,355.92

$982.85

$7,862.80

$0
UNH

9.3

45

$112.47

$5,061.15

$185.10

$8,329.50

$253.14
DIS

10.4

90

$50.29

$4,525.75

$104.11

$9,369.90

$0
Cash

0.3

$303.08

$303.08
Total

100.0

$59,021.60

$89,938.83

$716.91
Inception

$49,945.40

 

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

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EUROPE LOOKS ATTRACTIVE ? FINALLY

A lot has been happening in Europe and this week contributing editor Gavin Graham takes a close look at the rapidly evolving situation and the implications for investors. Gavin has had a long and successful career in money management and is a specialist in international securities. He held senior positions in financial organizations in London, Hong Kong, and Toronto. He is a Trustee of Pointbreak, a provider of low-cost specialist ETFs. He divides his time between Toronto and the U.K.

Gavin Graham writes:

At the beginning of this year, I wrote a piece for the Internet Wealth Builder looking at what might happen politically and economically for Europe and the U.S. this year. It used former Defense Secretary Donald Rumsfeld’s idea of making forecasts: there are things we know (knowns), thing we know we don’t know (known unknowns) and things we don’t know we don’t know (unknown unknowns).

The outlook for Europe was complicated by several elections in major economies (known unknowns) including the Netherlands (March), France (Presidential in May and parliamentary in June), and Germany (federal elections in September). There was also the possibility of Italy calling parliamentary elections early ahead of the June 2018 deadline.

For the U.S., the known unknown was President Trump assuming office in January and the unknown unknown was how he would conduct himself, given his lack of a track record as an elected official. Other known unknowns included Brexit, the threat of Islamic terrorism, the migrant crisis, and the course of the Chinese economy.

Populism defeated in Europe ? for now

Six months on, the situation is somewhat clearer as far as Europe is concerned. Right wing populists, as represented by Geert Wilders in the Netherlands and Marine Le Pen’s National Front in France, have failed to gain power. Meanwhile, the Italian Five Star party led by former comedian Beppe Grillo suffered a bad result in local elections, making it more likely that Eurocrat Matteo Renzi will serve out his term as Prime Minister.

German Chancellor Angela Merkel’s CDU party, which had been enduring a run of bad results in regional elections through 2015-16, rebounded to gain control of Germany’s most important state, North Rhine-Westphalia, for only the second time in forty years in regional elections last month, defeating its main rival, the SPD.

The victory in France of pro-European technocrat Emanuel Macron, the former economy minister in President Hollande’s government, with a new party, La Republique En Marche (The Republic is on the march) that has only been in existence for a year, was regarded as a hopeful sign by many observers. M. Macron wants to reform France’s sclerotic labour market, including addressing the 35-hour week, reduce regulations, and cut taxes. At the same time, he wants to forge a closer union with Germany, which may involve issuing bonds guaranteed by the EU rather than individual countries.

The U.K. faces major uncertainty

The unknown unknown in Europe was the decision by British prime minister Theresa May to call a snap election in April. Having passed the legislation in March to begin the two-year process of leaving the EU, Ms. May decided she needed a larger majority than the 17 seats she inherited from her predecessor, David Cameron, to pass whatever deal was negotiated with Brussels. The 20 percent lead she enjoyed in the opinion polls over the shambolic Labour opposition led by hard leftist Jeremy Corbyn, most of whose own MPs had voted to reject him as leader in 2016, probably helped convince her that the time was ripe.

Instead, the lengthy seven-week election campaign saw the Conservatives run one of the worst efforts seen since World War II. Meanwhile, Mr. Corbyn launched into campaigning (the one thing he does well) on a very socialist manifesto involving renationalization of utilities and the railways, tax increases for companies and anyone earning more than C$125,000 per year, and the abolition of tuition fees.

When the results were announced, Ms. May had lost her majority. She increased the Conservative share of the vote by 6% but Mr. Corbyn increased Labour’s share by 10%! Most of these votes for both major parties came from the populist U.K. Independence Party (UKIP), whose charismatic leader Nigel Farage had retired (again) after winning the Brexit referendum. UKIP’s share sank from 14% in 2015 to 2% in 2017, but former UKippers split equally, while Mr. Corbyn energized young people, who hadn’t voted in the referendum. (UKippers are UKIP voters, so called supposedly because they are traditional type people who eat kippers for breakfast!)

Ms. May still has the largest party and can form a government with the aid of the 10 Democratic Unionist MPs from Northern Ireland, who favour Brexit. But her authority has gone, and a wave of tragedies, including several terrorist attacks in London and Manchester and the dreadful fire in a social housing block in west London, which killed over 80 people, have left the impression that the government is floundering, just when negotiations on Brexit are beginning.

European economies doing better

With most of the political risks seemingly surmounted and the U.K. weakened in Brexit negotiations, investors have been returning to the European markets. The spread of bond yields in France and Italy over those in Germany fell to the lowest level in over six months last week at 0.39% in France and 1.65% in Italy.

The iShares Europe ETF (NYSE: IEV), which comprises the 350 largest European stocks including those in the U.K. and Switzerland, is up 17% in U.S. dollar terms year-to-date. This compares with a gain of just under 10% for the S&P 500 and a flat performance for the S&P/TSX Composite, which has been dragged down by its large energy weighting. This out performance has been helped by a 6% appreciation of the value of the euro against the U.S. dollar this year, even though the U.S. Federal Reserve raised interest rates twice by a total of 0.5% to 1.25%. Meantime, Mario Draghi of the European Central Bank (ECB) has left rates unchanged at -0.4%.

While growth in the Eurozone economies has improved, with most forecasts now expecting GDP expansion above 2% in 2017, Mr. Draghi was reluctant to reveal details of the end of the ECB’s ?60 billion a month Quantitative Easing (QE) program at the most recent meeting in June. However, he did make it known that it would be coming to an end in 2018, although how sharp the tapering will be has yet to be revealed. Perhaps mindful of the upset caused by Ben Bernanke’s revelation in 2013 that the Fed was considering reducing bond purchases (the famous “taper tantrum”), the ECB is keeping its cards close to its chest. However, investors seem happy that QE is finally coming to a close in Europe, while most observers seem to expect only one more hike in interest rates in the U.S. this year, as the domestic economy slows down. The direction of travel seems more important than the actual level of interest rates.

Be optimistic but remain cautious

While events have apparently moved in favour of the maintenance of the status quo in Europe, investors should bear in mind the underlying problems still faced by the continent. Deflation, slow growth, and weak demographics remain headwinds, and populism still poses a threat if growth doesn’t pick up.

The Republican and Socialist parties in France, which have formed every government for sixty years, didn’t make it into the second round of presidential voting and Marine Le Pen received 35% of the vote, while over 20% of ballots were blank or spoiled. The Socialist party in the Netherlands, part of almost every government since the war, was almost wiped out. The collapse in the UKIP vote in the UK was because both Labour and the Conservatives promised to withdraw from the single market and the customs union, effectively stealing UKIP’s policy. However, for the moment investors are prepared to ignore these concerns, and the markets have done well.

How to benefit from European growth

Investors wanting a single easy way to play the rebound in Europe could do worse than to buy IEV, although this is not a recommendation. With 20% of its assets in financials, and 28% in the U.K., the ETF is exposed to any further weakness in sterling or a recurrence of Eurozone problems.

The iShares MSCI Eurozone ETF (NYSE: EZU) has 32.3% in France and 29.5% in Germany and is a pure play on the euro area markets, but still has almost 20% in financials. While Eurozone banks are in better shape than before the Greek debt crisis, the rescue of Banco Popular by Banco Santander for ?8 billion last week shows the dangers of overvalued assets on bank balance sheets has still not been addressed successfully.

The four European ADRs that I have recommended in either the IWB or the Income Investor are drinks giant Diageo (NYSE: DEO), Swiss drugs company Novartis (NYSE: NVS), consumer products group Unilever (NYSE: UL), and telecoms group Vodafone (NDQ: VOD). All have done well this year. Diageo is up 18%, Novartis 11.8%, Unilever 34.8% (helped by the rejected bid from 3G and Berkshire), and Vodafone a remarkable 56%. They remain a lower risk way to play improving European fundamentals while giving a reasonable yield.

Investors may also want to consider Dream Global REIT (TSX: DRG), which I recommended in The Income Investor. It is a specialist property company that invests in offices in major cities in Germany, Austria, and Belgium. Despite its 13% price increase this year, it still yields 7.5%. All are Buys.

 

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GAVIN GRAHAM’S UPDATES

Industrial Alliance Group (TSX: IAG; OTC: IDLLF)

Originally recommended by Tom Slee on April 1/13 (#21313) at C$37.36, US$35.56. Closed Friday at C$53.66, US$43.23.

Background: Industrial Alliance is one of the four largest life and health insurance companies in Canada. The firm, which is based in Quebec City, offers a wide range of products, beyond ordinary insurance policies. These include mutual and segregated funds, savings and retirement plans, securities, auto and home insurance, mortgages and car loans, and other financial products and services for both individuals and groups. The company was founded in 1892 and is celebrating its 125th anniversary this year.

Performance: We last updated the stock just over a year ago when it was trading in Toronto at $41.72. At the time, we rated it as a Buy. The shares hit a high of $59.41 in March but dropped back to below $50 at the beginning of June. They have rebounded since then, closing Friday at $53.66.

Industry status: The life insurance companies have been doing well as long-term bond yields have risen over the last year, with Industrial Alliance up 25%. As I have explained on several occasions, the liability side of the lifecos’ balance sheets is determined by the long-term cost of capital, represented by the supposedly risk free 10-year government bond yield. The lower the yield, the greater the cost of meeting the promises made to buyers of life insurance.

Long-term bond yields hit 60-year lows last year. The U.S. 10-year yield fell to 1.37% at one point in July, and the 10-year Government of Canada touched 1.25%. That meant life insurance companies’ liabilities had risen enormously while their assets, some of which are equities, had not appreciated anything like as much.

Since June 2016, the yield on the 10-year U.S. Treasuries has risen 45 basis points to 2.15% and the 10-year Canada is up 25 bp to 1.5%. Short-term yields in the U.S. have risen even faster, by 70 bp to 1.25%, leading to a flattening of the yield curve and squeezing the margin between short-term and long-term lending. But this is more of a concern for the banks than the lifecos.

Recent developments: IA reported net income for the first quarter of $110.3 million ($1.03 per share). The return on common equity (ROCE) was 13.4%. That compared with earnings of $98.3 million ($0.96 per share) and ROCE of 9.8% in the first quarter of 2016. Core earnings were $1.07 per share versus $1.04 last year and ROCE was unchanged at 12%.

Outstanding sales in its mutual funds business, which switched from outflows of $291 million to net inflows of $200 million, and strong growth in group wealth and insurance businesses contributed to the good result.

The company purchased HollisWealth from Scotiabank in December 2016. It is a leading Canadian insurance and stock brokerage business and a mutual fund distributor, with $34 billion in assets under administration (AUA) and 800 licensed advisors The deal, due to close in the third quarter, will position IA as the largest non-bank wealth management advisory firm in Canada, increasing its AUA by 75% to $75 billion. The company issued 2.5 million shares at $55.65 to raise $139 million to fund the acquisition.

IA’s solvency ratio was 222% although the HollisWealth deal will reduce it by 14% to 208%. Encouragingly, the “strain” (cost of new insurance business) was 6% compared to a forecast of 0-15% for 2017, due to higher sales and a better mix of business written.

IA has increased its dividends and book value by 270% against 160% for the Big Three (Manulife, Sun Life, and Great West Life) over the last dozen years, but its price to book value is still only 1.4 times, compared to two times prior to the financial crisis.

Action now: IA remains a Buy as the rise in bond yields is reinforced by the growth in its wealth management business.

Manulife Financial (TSX, NYSE: MFC)

Originally recommended by Tom Slee on Feb 6/12 (#21215) at C$12.34, US$12.42. Closed Friday at C$23.61, US$17.81.

Background: Manulife is the largest life and health insurance company in Canada. It also operates in the U.S. under the John Hancock banner and has a strong presence in Asia. At the end of 2016, the company had approximately 35,000 employees, 70,000 agents, and thousands of distribution partners, serving more than 22 million customers.

Performance: The stock is up 32% in the past year although it has traded in Toronto in a fairly narrow range of between $23 and $25 for most of 2017.

Recent developments: Manulife recorded earnings of $1.35 billion ($0.66 per share) for the first quarter (to March 31). The ROCE was 13.5%. This compared with earnings of $1.05 billion, ($0.51 per share) and ROCE of 10.8% for the first quarter of 2016.

Excluding investment gains and losses, Manulife had core earnings of $1.1 billion ($0.53 per share) and ROCE of 11.1% in the first quarter of this year compared to $0.9 billion ($0.44 per share) and ROCE of 9.3% in 2016.

The 29% increase in earnings per share (20% for core EPS) was due to strong growth in its two core businesses: Asia and wealth and asset management (WAM). There was a 31% increase in annualized premium equivalent sales in Asia compared to the first quarter of 2016, with double-digit growth in most territories. This was helped by the agreement with Standard Chartered Bank in Hong Kong, which has made Manulife the largest manager of Mandatory Provident Fund assets and the largest in terms of net sales.

Manulife also recorded $4.3 billion net inflows in its WAM business compared to $1.7 billion last year. The company exceeded $1 trillion in assets under management and administration for the first time and its solvency ratio was 233%, up from 230% at end December 2016.

Action now: Manulife remains a Buy with the company’s prospects boosted by its strong Asian presence.

Empire Company (TSX: EMP.A; OTC: EMLAF)

Originally recommended on Jan. 18/16 (#21603) at C$24.32, US$17.77. Closed Friday at C$18.94, US$14.99.

Background:This Nova Scotia-based firm is the parent company of the Sobey’s and Safeway supermarket chains, and owns a 41.4% stake in Crombie REIT, which largely owns Sobey’s anchored retail malls. The company has approximately $24.3 billion in annualized sales and $8.7 billion in assets. Empire and its subsidiaries, franchisees, and affiliates employ approximately 125,000 people.

Performance: We last reviewed this stock in July 2016 when it was trading at $20.05. The stock rebounded to the $21 range from its 10-year lows near $15 that it hit in December, before pulling back a bit. But it is still down about 20% from where I recommended it 18 months ago.

Recent developments: The botched takeover of the Safeway grocery chain in western Canada in 2013 was supposed to be a transformational acquisition. Instead, it resulted in the estimated $200 million in annual savings being wasted due to badly handled introductions of own brand products and a change in loyalty programs. All that coincided with the downturn in the energy-based Alberta and Saskatchewan economies and increased competition from low cost rivals.

The new CEO, Michael Medline, was formerly CEO of Canadian Tire. He has announced a reorganization named “Project Sunrise” with the aim of generating $500 million in annual savings by 2020.

Mr. Medline has spent the time since he arrived in January meeting staff and visiting stores to get input on what has not worked and why, and is replacing Empire’s five regional divisions with one national organization with functional heads. There will be extensive cuts to back office staff, with initial charges being taken when the annual results are reported on June 28. The remainder will be expensed over the rest of calendar 2017, but no cuts will be made in frontline staff in the stores.

Mr. Medline said “the future Sobey’s will operate with a simpler, leaner structure, more efficient core processes and tools, and will better leverage its $24 billion national scale.”

Peter Sklar, retail analyst at BMO Nesbitt Burns, said it was encouraging that the company was taking steps to streamline its costs, though the magnitude was significantly larger than he had anticipated. This may improve Empire’s competitiveness as it could invest in price promotion and marketing but he doubted the full savings would flow to its bottom line.

While of mainly historical interest, the results for the third quarter (to Feb. 28) saw same store sales for stores open over twelve months down 3.7% or 3.1% excluding fuel. Adjusted net earnings were down 58% to $34.1 million ($0.13 per share) from $82.5 million ($0.30 per share). Sales were down 2.3% to $5.89 billion. Empire attributed the decline to the merchandising expenses to turn around its Safeway stores, sensitivity in western Canada to pricing due to the slowdown, and food price deflation.

Mr. Medline noted: “Our results are not where we need them to be. We have the employees and assets to put much better numbers up on the board. It is up to management to put in place a game plan to aggressively address our cost and customer issues to return Empire to sustainable and profitable growth.”

Success in retailing is down to doing the small things well on a sustainable basis and Mr. Medline’s track record at Canadian Tire indicates that he has the ability to do this at Empire, which is still generating cash and can either sell shops to Crombie or sell some of its Crombie shares to use if it needs to raise more capital.

Action now: Empire is a Buy on based on Mr. Medline carrying out the turnaround and its strong balance sheet.

 

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GORDON PAPE’S UPDATES

WSP Global (TSX: WSP, OTC: WSPOF)

Originally recommended by Tom Slee as Genivar Inc. on July 9/12 (#21224) at C$22.40, US$22.18. Closed Friday at C$53.75, US$39.34.

Background: WSP is an international engineering and design firm that provides a wide range of services, from urban planning to environmental remediation. Based in Montreal, the company employs approximately 36,000 people, including engineers, technicians, scientists, architects, planners, surveyors, and environmental specialists, as well as other design, program and construction management professionals. It has more than 500 offices across 40 countries, on five continents.

Performance: We last reviewed the stock about a year ago, at which time it was trading at $39.18. We rated it as a Hold on the basis of flat earnings per share and the lack of any evidence of renewed growth after a long slowdown and hundreds of lay-offs. The shares dipped below $38 shortly thereafter and then began a slow but somewhat sputtering rise. It was only in April that they gained strong upward momentum. The stock is now trading near its all-time high.

Recent developments: The company has been showing solid growth in recent quarters. First-quarter results saw revenue of $1.6 billion, up 10.2% compared to the same period of 2016. Adjusted net earnings were $49.8 million ($0.49 per share). That was up 48.5% on a per share basis from the year before.

The company had a backlog of almost $6 billion at the end of the quarter, representing 10.6 months of revenue. That was up $316.5 million from the fourth quarter of 2016.

Dividend: Despite the improved results, the company did not increase its dividend, which remains at $0.375 per quarter ($1.50 per year) for a yield of 2.8% at the current price.

Action now: Hold. The improvement in the finances is encouraging but the stock appears to be a little overpriced at this level.

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YOUR QUESTIONS

Wants more diversification

Q – I’m 57, self-employed, long time subscriber. I want to work for as many years as possible (you are my role model in this regard). My RRSP (about $180,000) and RESP for my eight-year-old daughter (about $16,000) are both invested in the Mawer Balanced Fund, as per your Recommended List.

I’m generally happy with it but understand that it’s probably not right to be in only one fund with this amount of money, and I want to potentially do better than that fund. Which of your recommended portfolios is the best fit for me providing I don’t draw from the RRSP and RESP for the next 10 years? ? A.B.

A – The Mawer Balanced Fund has an outstanding record ? it has outperformed the peer group over all time periods out to 20 years. There are not many funds that can say that.

That said, I understand you would like some diversification. Here are my suggestions.

First, leave your daughter’s RESP alone. A balanced fund is a good choice for these plans. As she approaches college age, say around 14-15, start shifting some money into a fixed income fund to reduce risk. The Mawer Bond Fund would work fine.

For your own investments, you may wish to put more money into the U.S. market. The Mawer Balanced Fund has only 19% of its assets there. You might want to move some money into the company’s U.S. Equity Fund. For more diversification, consider adding the Mawer Emerging Markets Fund and the Mawer International Equity Fund as well.

If you want to track one of my portfolios, the RRSP Portfolio would be my suggestion, based on your age and priorities. But that would mean revamping your whole portfolio. By adding a couple of extra Mawer funds you can get more diversification at no expense, since you are transferring assets within an RRSP. ? G.P.

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MEMBERS’ CORNER

Too many model portfolios?

Member comment: I suggest that your newsletters offer too many model portfolios. From my perspective, it is a slow erosion of the content that I am interested in. As the number of model portfolios slowly increases over time and each one is reviewed twice a year, there is less and less front-page space for market commentary.

Both the IWB and The Income Investor are evolving as time passes and that is fine. The question is whether this evolution is planned and taking the newsletters in a direction that you and your readers want. Or, is it simply changing because yet another model portfolio seems like a good idea?

It is a trend that I have noticed for a number of years now and has me concerned. Perhaps it is a good time to poll your readers. If you do, I would suggest you make it clear to them that there is a trade-off. As one part of the newsletter increases (i.e. model portfolios) then another part must decrease (market commentary and security analysis).

I value your commentary and analysis ? keep up the good work. ? Ross N.

Response: Our reader raises an important issue and I would very much welcome your views on this point. Do we have too many model portfolios? Too few? Just right? Please send along your thoughts. Our goal is always to provide the most useful information possible. Member input is a critical factor in determining where we place our emphasis. ? G.P.