Well, if you see a teaser pitch for Canadian Edge you know, at least, that the stocks being teased are, well, Canadian. So that helps us out — it means we can hopefully put just a couple litres of fuel into our Thinkolateur and we ought to be well on our way to some nice, North of the Border answers.
Canadian Edge was a longtime favorite of Gumshoe readers in years past, thanks largely to the fairly conservative Roger Conrad and, perhaps as much, to the excellent few years that the high-yield Canadian Income Trusts had through the mid-2000s before that tax haven structure was squashed by the government.
The Trusts are gone for the most part, and so is Roger Conrad, but his longtime lieutenant David Dittman is running the letter now, and he’s saying that Canada presents huge opportunities for investors seeking growth and safety. So what are they selling?
Here’s a snippet of the ad:
“The 8 Safest Stocks to Own for the Next Six (Crazy) Years
“Among the most profitable firms on Earth, they have made investors 20x as much money as the S&P 500 over the past six years.
“Less than 3% of all stocks worldwide did this well. But we’ve got 8 of them in our 19-stock Conservative Portfolio….
“Despite their stability, they’ve returned an average of 265% over the past six-plus years. And they pay such high dividends that even after this run-up, they still throw off an average yield of 5.3%. Collectively, they blow two major investing “rules” to pieces:
- Safe investments = wimpy gains? Not this time.
- Only risky stocks produce hefty returns? Wrong again!
“These reliable blue chips demolish these sacred laws, delivering remarkably high returns… along with virtually no risk….
“At Canadian Edge, we focus on the two strongest segments of the Canadian investment universe: high-yielding blue chips and even-higher-yielding income trusts.
“My team and I have spent the past 10 years crafting a portfolio of Canadian trusts, stocks and funds in energy, banking, utilities and real estate.
“Once you try these unique investments, believe me, you’ll never want to go back to the crazy uncertainty of ‘south of the border’ markets.”
Dittman goes on for a while explaining how he came across these top eight companies — mostly, it sounds like he looked back at Canadian Edge’s past performance and found the stocks that had gone up the most over the years while still maintaining their top “safety” rating.
And he says that although this kind of situation “shouldn’t exist” — the safest companies should not be those that went up the most — the stocks have clobbered any index, with average annualized returns of 22%. And he thinks they’re still top-rated for safety and still compelling investments — here’s more:
“We think that these juggernauts will do just as well over the next six years as well, for two reasons:
“First, they are all conservative companies in predictable lines of business. Once stocks like these achieve momentum, they tend to keep on chugging. They never turn on a dime, because they aren’t trendy tech or retail stocks with fickle customers. Some are regulated, others receive special tax breaks and a few even have their profits mandated by law.
“Second, every one of these 8 companies is linked to one of the great growth stories of our time: the emergence of Canada as a major global energy source rivaling Saudi Arabia. This will lift the whole Canadian economy.”
Then we learn that Dittman is “giving away” his top pick — that’s Keyera Corporation (KEY.TO in Canada, KEYUF on the pink sheets), a “giant among Canadian midstream businesses” which he says has a dividend yield of 4.1%. And then he teases thee more picks — he doesn’t throw out hints about the other four, unfortunately (though if you’ve any favorites, feel free to throw ’em on the pile in the comments section below), but we’ll see if we can’t name those three for you. And no, we won’t charge you $600 a year for the privilege — we do delight in adding new members to our loyal cadre of Irregulars, but we’ll tell you what we think for free even if you don’t wish to pay us.
We’ll run down the three sets of hints and ID the stocks, and see if we can share a bit of opinion with you along the way … first one …
“Did you know there’s an all-out ‘Battle of the Super-Stores’ raging north of our border?
“The fight is on and it’s intense. America’s newest retail darling Target has “invaded” Canada (formerly mighty Walmart’s “turf”). It has already built 82 outlets there and plans to top 100 stores ASAP. In response, Walmart is frantically bolstering its Canadian operations to meet the new competition.
“King of the Landlords. Here’s how to collect rent from both “combatants” in the “Store War”…. This outfit is not only Walmart’s biggest rent collector in Canada—it’s Target’s number one landlord, too. This is a rare opportunity to profit from the two largest, richest retailers in history with a single trade, as they battle it out in Canada with massive store expansion on the line. It also rates a 6 and has given us 230% gains to date, along with a satisfying 5.8% yield. A strong buy that looks to get stronger.”
Well, given those clues you could stretch it to match either of the two largest and most appealing retail REITs in Canada, Riocan or Calloway — Calloway has more Walmarts in its properties, Riocan has more Targets (and it’s not close for either). Riocan has the closest match because it’s a big long-term winner and would have to, I think, be considered substantially safer than Calloway simply because it’s not as dependent on a single tenant like Calloway is with Walmart — and it’s also not as focused in other ways, with enclosed malls and office buildings in addition to their big box and strip mall properties.
Both have followed the same trend over the last five years, strong growth then a collapse during the market crash and a strong recovery, with weakness hitting a couple months ago when everyone started to get worried about rising interest rates again, but Calloway has been more of a high-flier, with more dramatic climbs and drops, and it’s also smaller and younger. Calloway is the one that the Angel Publishing folks have singled out as their pick in their “Wal-Lord” teasers over the last year or two, but I think that, as Roger Conrad touted a few years ago, Canadian Edge is probably still giving the edge to Riocan. Yield is almost exactly 5.8% (Calloway’s is slightly over 6% now), and the big infusion of Targets really came when Target opportunistically bought up the rights to the cheap leases owned by the Zeller’s chain in 2010 and turned many of them into Target stores.
Conrad and Dittman, incidentally, touted Riocan for years before now, and when they first started actively teasing it they said they “conservatively estimated” that “this Trust could end up skyrocketing by more than 400% over the next few quarters.” And that sure didn’t happen, but it would have been foolish to expect a large, multi-billion-dollar REIT to grow anywhere near that much anyway — the stock did go up by about 50% over a few years before dipping back down recently, so it has done fine and, like most REITs, I think you should always be pretty conservative and expect that more than half of the overall return will come in the form of the dividends.
Riocan has been looking for growth in the US, with expansion into Texas and the Northeast in recent years, so it’s not a “pure play” on Canada even if it is that country’s largest real estate investment trust. Ticker is REI.UN in Toronto, pink sheets is RIOCF — or if you’re interested in Calloway, which has really been riding Walmart’s expansion, that’s CWT.UN in Toronto and CWYUF on the pink sheets. Toronto tickers with that .UN or -UN denote trusts, in this case they’re effectively the same as real estate investment trusts in the US, they don’t pay corporate taxes but pass through income to unitholders, who then are on the hook for taxes and don’t get any special dividend tax rate (real estate trusts, a more traditional version of this pass-through entity, account for most of the remaining trusts in Canada now that all the oil and gas and operating business trusts have been effectively forced to become taxable corporations).
How about another? You bet!
“Pipeline Powerhouse. This company moves nearly a third of the total capacity of the Athabasca region. On top of that, it transports 50% of Alberta’s conventional oil production—plus nearly a third of its lucrative natural gas liquids. We’re up 586% on this stock to date. It yields a solid 5.2% and holds our top safety rating of 6.”
This one is an old Gumshoe favorite as well, Pembina Pipeline (PBA in NY, PPL in Toronto). I suggested this one to the Irregulars about four years ago and it’s been a steady grower and steady dividend payer since, with modest dividend increases of a few percent each year. They’re growing nicely by adding new capacity pretty consistently, they have a strong and concentrated presence in Western Canada for both gas midstream processing and oil and heavy oil pipelines, and here’s what I said about them in my annual review back in January (my opinion hasn’t really changed since, I still don’t own it personally):
“Steady and solid, not likely to double again but a good 5%+ yield from a non-MLP pipeline company with decent growth in key Western Canada production areas. I’ve never owned this one personally, but like their potential quite a lot here under $30 or, better yet, on any dips.”
I learned about this company initially from a Canadian Edge teaser pitch many years ago, so I expect they’ve probably held onto this one for a long time — which is how you get to a 586% gain, I think you’d have to have held for ten years or so and reinvested dividends to get that kind of return from Pembina.
And the last one that they hint at for us among their “incredible ironclads?”
“Enriching Renewables. Canada is awash in renewable resources—the kind that actually work in the real world. This outfit boasts a $17 billion portfolio of 209 power-generating assets, 84% of which generate hydroelectric power (from 70 river systems), while 12% generate wind power. This adds profitable balance to our oil and gas holdings. Generous to shareholders, management intends to grow distributions by 3% to 5% per year. We’re up 137% since 2008, and pocketing a 5.8% yield. This pick also holds our top safety rating of 6. We like the vision of this company’s leaders. One trade positions you for strong long-term growth.”
This one is Brookfield Renewable Energy Partners, a publicly traded partnership (BEP in NY, BEP.UN in Toronto). Much like other spinoffs of Brookfield, which is a phenomenally successful asset management firm with a focus on natural resources and property, this one is controlled by the parent Brookfield Asset Management (BAM). They’ve also spun out several other income-focused stocks over the years, mostly in office or retail properties, and they also run the oft-teased Brookfield Infrastructure Partners (BIP), which owns power lines, ports, rail terminals, toll roads and similar assets around the world.
BEP is a decent yielder, it’s currently paying out 5.7%, and they’ve managed to grow in size and keep boosting that dividend thanks in large part to debt — as they’ve brought on new assets and borrowed more money interest costs and depreciation have chewed up a lot of the income, so the partnership hasn’t recently been profitable, but it has had enough operating cash flow to pay out that solid dividend. Pretty much all big energy companies, whether renewable energy or no, depend on substantial amounts of capital to build or buy their extremely capital-intensive assets, whether they’re conventional power plants or hydroelectric plants or wind farms, so the leverage is not necessarily a huge concern but if energy demand dips or demand for “green” energy falls there could be problems with a lot of these companies over time. They tend to have long-term sales contracts, so it’s unlikely to be an immediate issue.
BEP is the largest of this type of company that I’m aware of, there are a few other renewable energy “utilities” like this that trade in Canada, but most of them are no more profitable and they’re all much smaller — BEP does have a strong parent backing them and they have a market cap of around $7 billion, so they’re likely to be much more solid than their competitors even if they might have trouble growing aggressively from this level.
All of these companies are income-focused, which is not necessarily a bad thing but does mean that they’re all sensitive to the same pressure from potentially rising interest rates — so don’t assume that because it’s a pipeline, a retail REIT, and a renewable energy company that they are a diversified group. Here’s the chart for what the three have done this year so far:
So you can see that although Pembina has done pretty well, with folks having some optimism about the future potential and liking the stability, Riocan and Brookfield Renewable have had almost exactly the same chart despite being in very, very different businesses. That’s because over the course of the Spring and Summer investors started to fret about rising interest rates, which hurts REITs and other yield-focused vehicles in a couple ways: First, because these companies are asset-intensive and have to borrow money, it will raise their borrowing costs over time; and second, because these are income-focused investments that investors buy because they need yield, they compete with other income investments like bonds. If bond rates rise, bonds become relatively more attractive for these kinds of investors, so the income-focused equities like REITs would have to offer a higher yield to compensate for their risk relative to bonds. If they can’t boost their dividend aggressively when rates are rising, that would mean the only way to raise the dividend yield is by dropping the share price.
That’s not necessarily a straight line, and there are reasons to own equities like these even with rising rates (a REIT or similar company can and usually will raise the dividend as the business grows or improves, but a bond coupon doesn’t rise), but if (and that’s still a pretty big “if”) we do face a real rising rate environment, something we haven’t seen on a sustained basis for decades, that would be bad news for a lot of these kinds of companies. On the flip side, of course, we have the largest and wealthiest generation of retirees in history here in the US, and they are very likely to continue to need high-yielding investments like these to generate income in retirement, and they may well be scared out of bonds by rising rates (existing bondholders get crushed by rising rates, since the value of the bonds they already hold will fall), so demand for dividend paying stocks will get a boost from that as well.
If you can navigate those competing priorities and prognostications, well, you’re smarter than most people on Wall Street — everyone’s guessing about what it will mean for the market if and when this multi-decade bull market in bonds ends, and there are a lot of moving parts, but just remember that the moves in these equities this year tell us that most income-focused stocks will react en masse if and when market sentiment about future rates changes.