BMO Bank of Montreal Posts Strong Earnings. BMO U.S. Banking Operations Contribute to Profit. BMO Dividend is Strong.

BMO Bank of Montreal (TSE: BMO) released very promising results recently. Bloomberg Markets reports that profit at the Canadian bank rose 19 percent on higher investment banking earnings and positive results from its recent U.S. acquisitions.


Income at BMO rose to $793 million, or $1.27 per share for the quarter. BMO has now increased its profit for nine straight quarters and is showing incredible consistency and stability in its operations. It now has the longest streak for increasing profits among the six large Canadian banks. It is clear now that the Canadian banks are in very good shape. BMO is now Canada's 4th largest bank by assets.


In the United States, the BMO completed its $4.1 billion takeover of Marshall & Ilsley on July 5. This doubled its total U.S. branches and deposits in the area. Incredibly the bank now has more branches in Chicago than Toronto. Marchall & IIsley contributed $32 million in profits to the bank this quarter. Much better than previous losses it was experiencing.


Happy Investing : )

How to Value Stocks? The Dividend Discount Model (DDM), a Rational but Clumsy Approach that Focuses on Dividend Growth.

Often investors ask me how they should "value" a stock. There are a number of interconnected ways that the Intelligent Investor can value a stock and determine what they believe to be a fair value for it. One way that has fallen out of favour in more recent years is the traditional approach of the "Dividend Discount Model."

(Fair Stock Price) = (Current Annual Dividend) / (r) - (g)

Be aware, the dividend discount model has a number of assumptions that must be made by the investor in order to arrive at your "fair price," but it is a nice start, and it at least ensures that the investor engages in some rational analysis at the start of their quest for the right company.

The first assumption that the Intelligent Investor must make when using the dividend discount model (ddm) is something called the "discount rate," (r). I like to think of the discount rate as the amount of money that you could rationally be making if you simply invested elsewhere, plus inflation. For this rate, I like to use a corporate bond index, other investors often use other metrics, but like I said, the ddm has many inherent assumptions that must be made. Currently, the rate on High Yield Corporate Debt in the United States is 7.35% (Bloomberg).

The second assumption that must be made by the Intelligent Investor is the growth rate of dividends, (g). Here, it is wise to use the historical 5 year average of the stock you are examining. However, remember that dividends can be reduced! So be very conservative in your estimates of dividend growth. The more stable the company and business, the more accurate this will be. To add an extra level of caution, I also like to subtract the current inflation rate, which is always making your money less valuable in the future than it is now. Currently, inflation is 3.1% in Canada.

Now here is a real world example to illustrate how the model works.

Coca-Cola is a name most are familiar with.

Therefore,

(Fair Stock Price) = (Current Annual Dividend) / (r) - (g)

FSP = $1.88 / (0.0735) - (0.09 - 0.031)
FSP = $1.88 / (0.0735) - (0.059)
FSP = $1.88 / (0.0145)
FS = $129.66

Clearly, since Coca-Cola (NYSE: KO) is trading at $69.31, Coca-Cola's Fair Value seems extremely high. Why did the model produce this result. Two main reasons. First, very low current bond rates have created little reward for investors seeking an alternative to stocks. This makes stocks seem more valuable. Secondly, Coca-Cola's unusually high average of dividend increases. Coca-Cola has a very strong record of increasing its dividend every year, which makes it appear particularly valuable when a model that favours dividends is utilized. 

Happy Investing : )

Loblaw, Shoppers, GE Announce Earnings for the Quarter. Corporate Profits are Healthy in Canada and the U.S.

General Electric (NYSE: GE)

Revenues and profits soared for the world's largest manufacturer of jet engines and turbines for power plants. Second quarter profit came in at $3.69 billion, up from $3.03 billion last year. On a per share basis this is 35 cents versus 28 cents. This is a healthy gain for a company once written off by many during the recent recession.

Revenues fell slightly to about $36 billion as it sold the majority of its stake in NBC Universal to Comcast Corp. Considering, however, that analyst estimates for GE had been $35 billion, the slight decline is good news. The major developments in the company during the quarter were in the area of its energy business, which made acquisitions totalling over $11 billion. In the future, the upside potential in this business for GE could be substantial.

For more on GE check out Reuters News Service.

Loblaw Companies Ltd. (TSE: L)

Canadian grocery heavyweight Loblaw Companies Ltd. announced stronger second quarter results today. Loblaw's earnings came in at $197 million, or 67 cents on a per share basis. Last year, Loblaw's earned $181 million or 64 cents per share. Revenues also rose by a small margin to $7.28 billion.

However, all is not good news at Loblaw. Already competing against Wal-Mart, Sobeys, Metro, and Costco, the company will soon by vying with Target, which will surely take a bite out of both its grocery business and new Joe Fresh line.

Employee wages, however, have been under intense pressure at the retailer and the UFCW has been unable to effectively keep wages much higher than they are at competitors. Cheaper labour costs will undoubtedly give Loblaw a fighting edge, even though its employee morale is said to be in the basement at most stores.

Shoppers Drug Mart (TSE: SC)

Canada's largest drug store chain announced higher quarterly results today. Even without a permanent CEO, the company edged out many of its rivals and reported a second quarter profit of $148 million, or 68 cents per share. Last year, the company earned $146 million or 67 cents per share. Since analysts were looking for a per share profit of $67 cents for Shoppers, they beat estimates by a penny, and, overall, performed reasonably well.

Performing particularly well were its "front-of-store" sales, which include the items most commonly thought of at Shoppers next to prescriptions... cosmetics etc. Non-prescription sales at Shoppers were up 3.8 percent, which more than made up for a decline in prescriptions of 1 percent.

Many Shoppers' shareholders, including myself, have been worried as of late about the decline in prescriptions due to generic drug pricing in Ontario, and the loss of the company's CEO, but as the numbers indicate, profits are rising, albeit slightly, and good money is being made. Hopefully a new CEO is found soon,  but until then, just stay the course with this Canadian retail gem.

Happy Investing : )

J. Crew Coming to Canada. Reitmans, Le Chateau, and Others Beware... Consumers are Fickle.

American clothing retailer J. Crew will be opening its first Canadian store this August. The new location will be in Toronto at the Yorkdale Shopping Centre. In addition to Target, there is going to be a slew of U.S. retailers heading north to take advantage of a more stable and seemingly robust consumer base.

Other Canadian clothing retailers like Reitmans, Joe Fresh, (TSE: RET) and Le Chateau (TSE: CTU.A) are really going to start feeling the pinch as there is only so much consumer spending power to go around in a country of 33 or so million people. Both stocks have been hammered as of late and could pose a potential buying opportunity to any adventuresome investors who dare to enter the clothing space, which is notorious for being fickle and difficult for investment consultants like myself to predict. To be sure, Reitmans has a large dividend of about 5 percent, but a clothing company can burn through money very quickly with advertising and price wars a constant threat.

So Intelligent Investors beware, another competitor in the clothing space means more hands in the consumers' pockets.

Happy investing, and for more info go to:

http://www.cbc.ca/news/business/story/2011/06/24/j-crew-toronto.html

TMX Group Posts Great Results, but Merger with London Exchange Still Ahead.

The Intelligent Investor Top 10 Pick, TMX Group (TSE: X), the operator of the Toronto, Montreal, and Boston Exchanges, today announced positive and well-received financial results. For the first quarter of 2011, revenue for the exchange group was $175 million, up 17 % over last year. Net income was $64 million, up 13 percent, and earnings per share was $0.84, up 9 percent. 


Many investors have been worried that TMX Group's business is slowly being eaten away by Canada's major banks, which began their own competing stock trading platform recently. These fears, though somewhat true, have clearly not materialized as seriously as many thought. TMX is posting strong trading volumes and has developed a number of key growth areas, such as options, futures, and natural resource exchanges. To be sure, in the company's quarterly report, it states that its "energy business continued to flourish," and that volumes at its Boston Options Exchange soared 79 percent... very good news!


The huge question to be answered regarding the TMX Group, of course, is its merger with the London Stock Exchange. Would this merger be a good deal for shareholders? It would allow the companies to experience greater economies of scale and realize substantial cost savings, while at the same time allow it to expand internationally in Europe and developing countries that will be in need of financing for natural resource development, a speciality of both London and Toronto.


For the Intelligent Investor, TMX Group's recent results should be seen as a sign of the company's continued viability, profitability, and success in both Canada, and hopefully international markets as well. Not to mention, with its healthy dividend of almost 4 percent, owning this company pays. 


Happy Investing, and for more information on this topic:


http://www.tmx.com/en/pdf/TMXGroup2011Q1Release.pdf

The Intelligent Investor Top 10: Growth and Income.

The Intelligent Investor Top 10:

As a new addition to the Intelligent Investor Blog, I am adding a top ten stock holdings list. Updates and news on the top ten companies to own for the longer-term will be regularly and continually updated. As a measure of personal conviction, and for full-disclosure, I will personally have a position in each and every company on the list. 


The list will be for growth and income oriented investors who wish to generate above-average total returns through both capital appreciation and rising dividends. Questions and comments on the businesses, or the list as a whole, are both invited and appreciated as it forces investors, including myself, to defend and reinforce their ownership. As an intelligent investor, if you cannot present a rational and prudent reason for owning a business, SELL IT! 


Some positions in the list are for there for defensive reasons, while others are for growth. It is always important to possess a little bit of both. No matter how right we think we are, it is important to remember that even the Intelligent Investors can never be right 100 percent of the time.


THE INTELLIGENT INVESTOR PORTFOLIO:

1. I SHARES SHORT-TERM BOND ETF XSB
2. RIOCAN REAL ESTATE REI.UN
3. I SHARES S&P 500 ETF - CDN CURRENCY XSP
4. SUNCOR ENERGY SU
5. SHOPPERS DRUG MART SC
6. BANK OF MONTREAL BMO
7. GENERAL ELECTRIC GE
8. IMPERIAL OIL IMO
9. TMX GROUP X
10. JOHNSON AND JOHNSON JNJ

Other personal positions will be added to the list when, and if, they replace one of the Top 10 holdings.


Happy Investing : ) 

Canadian Banks Generating Huge Profits: CIBC and National Bank Lead the Way.

Earnings season for the Canadian banks were off to a great start on Thursday when CIBC (TSE:CM) reported a $799 million profit. This was more than what industry experts were expecting and could bode very well for investors in Canada's other major banks as well.

Last year, the bank reported earnings of $652 million during the same three month period. This growth is an indication of an improved lending environment in Canada, as well as an improved environment for investment fund managers, of which CIBC Mutual Funds is a large player. When stock markets increase in value, the amount of money that CIBC charges its clients to manage money (usually around 2-2.5%) goes up as well. 

CIBC said it would maintain an 87 cent per share dividend, but investors were hoping that they would boost it, giving the other banks motivation to do the same. Currently CIBC is only paying out about 45 percent of its earnings to shareholders, which is a very reasonable number and a number that could be increased in the future. For the intelligent investor, the ability for CIBC to raise its dividend in the future is a sign of financial health and a good catalyst for a rise in the share price in the future. 

In addition, the company has more than enough capital on hand to make acquisitions or initiate share buybacks. Share buybacks are great for shareholders as they increase earnings per share by reducing the number of shares, which increases your share of the business pie.  

National Bank (TSE: NA) also reported a record profit of $312 million. Last year, quarterly profits came in at $215 million. This massive increase will surely bode well for shareholders when the company reviews its dividends and perhaps decides to increase the amount of money that they want to pay out to shareholders. 

Both National Bank and CIBC have provided an excellent window into the health of the Canadian financial landscape. As a Canadian investor, it is important to ensure that one of Canada's financial conglomerates, whether it be CIBC, National Bank, Royal Bank (TSE:RY), Scotiabank (TSE:BNS), TD (TSE:TD), or the Bank of Montreal (TSE:BMO), make up a portion of your investment portfolio. The balance sheets are healthy, business is booming, and dividend increases are sure to start coming down the road. Just be careful not to get too greedy and overpay for them on a day when other investors have bid up the share prices. Wait for a down day and gradually buy your way in.

Happy Investing : )

For more information on this topic check out:

http://www.vancouversun.com/news/CIBC+earnings+ahead+expectations+share/4344970/story.html

http://www.winnipegfreepress.com/business/cibc-q1-exceeds-expectations-116904108.html

Canadian Tire Rewards: A New Plan Long Overdue.

Canadian Tire might finally be in the process of eliminating its iconic Canadian Tire rewards money. The company, listed as CTC.A on the Toronto Stock Exchange, announced that it will be introducing a pilot program for a new points reward card program.

Introduced in 1961, Canadian Tire's loyalty program has been extremely popular and a highly successful way of reinforcing its brand in the consumer's mind. Personally, I remember collecting Canadian Tire money in earnest when I was younger, and many people still have drawers with the loyalty money stored in it for some future purchase. Sometimes, Canadians abroad have even been known to use it in in place of Canadian currency to buy goods from unsuspecting vendors.

Canadian Tire's vice-president stated that the money will not be eliminated in the foreseeable future, but the writing seems to be on the wall now. Other highly successful loyalty programs like AirMiles, PC Points, Aeroplan Miles, Shoppers Optimum Points, and Petro-Points are all handled via Point-of-Sale terminals and plastic cards. Electronic rewards programs are far more effective for marketing purposes because the purchases and buying habits of each customer can be stored and analyzed to help the store serve and target-market each customer segment more effectively. With the current Canadian Tire loyalty program, this valuable information is lacking. In addition, the processing, production, and transportation of the paper loyalty program simply costs the company more to operate than an electronic system without the key benefits of a loyalty program like PC Points or Optimum Points.

As an intelligent investor, it is good to see your business developing better and more efficient methods of attracting and retaining customers. Shoppers Drug Mart (TSE: SC) and Loblaws (TSE: L) have already realized the benefits of an electronic loyalty program, it is about time that Canadian Tire decided to do the same. Other elements of Canadian Tire's business have also been doing well, in particular its finance business, which has grown a great deal in the last 5 years. In addition, it has largely been able to resist the Wal-Mart effect on its bottom-line and kept most other competitors at bay due to its strong association with seasonal activities like hockey and barbecuing in the eyes of the Canadian consumer, as well as an excellent automotive business. To be sure, as a limited element of a portfolio, Canadian Tire is a quality choice. It has very low debt levels and a fair amount of assets in the form of property and cash holdings.

For more information on this topic, just go to:

http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/why-we-love-and-hate-canadian-tire-money/article1915577/page1/

Below is Canadian Tire's Assets and Debt Levels, Excellent for a Retailer:

How to Select Dividend Paying Stocks for Your Portfolio.

How to select a quality dividend stock is a necessary skill for enterprising investors. There are a number of key characteristics to look for before investing in a dividend-paying company.

Firstly, the intelligent investor should begin by looking at company's that have strong brand names. These brand names keep customers coming back in good times and bad, and they provide a moat that keeps new competitors at bay. A strong brand name also provides the company with the ability to generate higher profit margins than its competitors for the same goods. 

The textbook example of a company that can generate healthy and steady profits due to its brand name is Coca-Cola (NYSE:KO). Coke's products are known worldwide and the company's ability to charge higher prices than its generic competitors, such as President's Choice, Cott, and RC Cola, is proof that the public perceives the brand itself as something worth shelling out money for. To be sure, Coke's operating margin (or profit generated on each dollar in revenue before taxes) is consistently about 25%! This means that after all expenses, the company nets 25 cents in profit from every dollar it takes in. That leaves a lot of room for error before the company would start losing money on its over-priced sugar water. 

Coke's Operating Margin. 

Another key characteristic to look for in a company is one that consistently raises its dividend. Coke, for instance, has raised the amount of money that it pays out to shareholders for 48 years in a row. That means that as a shareholder, you have gotten a raise every year for almost 5 decades! Not bad for essentially selling the same product over and over again. 

In order for a company to continually raise its dividend, it has to either be able to raise the price it charges for its products, sell its product to more customers, or reduce expenses. Ideally, price increases and higher sales would be great. When it comes to price increases, tobacco companies have been among the leaders throughout the years. Philip Morris International (NYSE:PM) sells cigarettes in international markets outside of North America. Almost every year, the company is able to raise prices and maintain its customer base. Cigarettes are what economists call an "inelastic" product, which means that customers are NOT very sensitive to increases in price. As the owner of a company, being able to raise prices is a good thing, especially if there is a steady or declining market for your product. 

If you are buying a company for its dividend payments it is important to ensure that the company is not giving its shareholders more than it can afford. Johnson & Johnson (NYSE:JNJ), for instance, has raised its dividend for almost 50 years in a row and it still generates far more income than it pays out. In 2010 the company paid out 1.93 per share in earnings, but it generated 4.70 in earnings. That leaves plenty of room for it to grow its dividends in the future. 

And most importantly, never over-pay for any business. If you are looking to generate a steady stream of income payments, look for healthy yields above current 10 year bond rates, otherwise owning the company might not be worth the extra risk. 

Zellers Sold to Target for $1.8 Billion: The U.S. solidifies its strangle-hold on retail in Canada.

The Hudson's Bay Company has recently sold Zellers to U.S. retailer Target (NYSE:TGT) for $1.8 Billion. Target plans to convert about 150 stores and sell the remaining 70 Zellers locations to another buyer.

Considering that the Zellers chain was on it's last breath following HBC's sale to U.S.-owned NRDC Equity Partners in 2008, the news is not surprising. Rumours have been circling about a sale of the chain to Target for years now, and steep competition from Wal-Mart (NYSE:WMT) left the chain struggling to find customers.

Though the retail market in Canada is thriving, the recent sale of the chain reminds us of the terrible truth that American corporations have a strangle-hold on the Canadian marketplace. Wal-Mart, Costco (NASDAQ:COST), Best-Buy (NYSE:BBY), and a slieu of other global behemoths have largely gobbled up their Canadian competitors. With the exception of Canadian Tire (TSE:CTC.A), Loblaws (TSE:L), and a few others, there are very few Canadian owned retail locations.

Sadly, expansion southwards has not gone as well for Canadian companies. Only Tim Horton's (TSE:THI) and Couche-Tard (TSE-ATD.B) have really been able to crack the U.S. market. There are a number of reasons for this, but much of it is attributable to lacking economies of scale for companies in Canada as compared to the U.S., where there is a ready market 10 times the size as in Canada. U.S. retailers can utilize their large networks at home to leverage their expansion north, whereas Canadian retailers have to leverage a much smaller network to expand into the highly competitive American market.

Interestingly, both Tim's and Couche-Tard are great investments for Canadians, especially considering the prospect for extensive expansion plans and continued growth. Both stocks should be on your watch-list awaiting a dip in their share prices. As for Target, the shares are reasonably priced, but in the retail sector both Wal-Mart and Costco have more potential for continued success.

Canadian Dividend Growth.

Given the importance of rising dividend income in your portfolio, below is a list of Canadian stocks with a great record of increasing their payments to you:

Bank of Montreal
IGM Financial
TransCanada Corporation
Great West Lifeco
Bank of Nova Scotia
Enbridge
Royal Bank of Canada
Toronto-Dominion Bank
Fortis
Manulife Financial
Toromont
RIOCAN Real Estate Trust
Canadian National Railway

The large number of financial stocks in the above list brings to attention the limited scope of the Canadian marketplace. It is, therefore, important to look outside of Canada as well. In my next post, I will highlight some great names from south of the border as well. Outside of the American financial industry of course : )