Loblaw: Losses never looked so good. Understanding Adjusted Earnings and Free Cash Flow.

Loblaw (TSE: L) announced earnings recently (Loblaw Press Release), opening with the statement by Galen Weston that "the second quarter of 2014 marked the opening of the next chapter for Loblaw, combining the number one food retailer in Canada with the number one pharmacy and beauty retailer."

The acquisition of Shoppers Drug Mart by Canada's largest grocery chain marks a clear avenue for future expansion by the retailer, and millions of dollars in synergies as it combines the operations of the two companies into a more efficient Canadian corporate behemoth.

Including the results from Shoppers, Loblaw announced revenue of $10,307 million, an increase of 37.1% over the second quarter of 2013. Adjusted basic net earnings per common share were also up 17.2% to $0.75 compared to $0.64 in the second quarter of 2013.

The headline numbers, however, highlight that the company lost $1.13 per share in the second quarter of 2014, due primarily to costs associated with the purchase of Shoppers. This distinction provides us with an important lesson in "adjusted earnings," which can be used regularly by a number of publicly traded companies.

Adjusted earnings figures are used when a company believes that earnings for a particular financial period are distorted either positively or negatively by "one-off" or unusual events. In this case, the distortion is the artificially high loss caused by costs incurred due to buying Shoppers Drug Mart. Since Loblaw will not be incurring those costs regularly in the future, it does not believe that those costs reflect the company's true performance in the last quarter. To help shareholders better understand the company's true operational performance, it reports what the company would have made if you exclude the irregular costs. In this case, the difference is quite large, from an actual loss of $1.13 per share, to a profit of $0.75 per share.

Intelligent Investors should beware of adjusted numbers, and investigate why the adjustments were made, and if they seem reasonable. In this case, it is clearly understood that the costs are associated with the purchase and integration of another major Canadian retailer. This will not be a standard or common occurrence for Loblaw in most quarters, so the adjustment is most likely reasonable.

Many investors, such as Olstein, are calling for an end to adjusted earnings, as they think it misleads investors. However, the Intelligent Investor simply needs to investigate why the earnings are being adjusted, and how often the company utilizes adjustments. If the company regularly adjusts earnings by a large margin, be careful, but otherwise, the practice can be perfectly reasonable.

To help better understand how the company is performing, it is always helpful to look at Free Cash Flow during the quarter. Free Cash Flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. This can be calculated by taking operating cash flow, and subtracting capital expenditures. In the case of Loblaw, the company had Free Cash Flow of $801 million for the quarter, a very healthy number.

Loblaw now has its fingers in a number of very profitable business pies. It is engaged in the financial business through its thriving credit card division (PC Financial now has over $2.5 billion in credit card receivables), the clothing business through Joe Fresh, the real estate business through Choice Properties, the drug business through Shoppers Drug Mart, and of course, the good old fashioned grocery business through entities such as Loblaws, No Frills, and Real Canadian Superstore.

For those Intelligent Investors looking for portfolio diversity, a decent dividend, and strong Free Cash Flow, take some time to look at Loblaw.

Happy Investing!

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 : )

Look Here for Dividend Growth. Many Investors are Looking for General Electric to Raise its Dividend Again.

General Electric could be well on its way to becoming a dividend aristocrat again. Having once paid a dividend of 31cents per quarter, the company was forced to slash its dividend to 10cents during the height of the financial crisis. MarketWatch, among others, have begun reporting that the company is poised to raise its dividend again. 


GE, (NYSE: GE), has now boosted its dividend for the last three quarters and it now stands at a healthy 15cents per share. Half of what it once was, but rising quickly. The CEO, Jeff Immelt, noted that the company's financial health is back on track, and that he hopes to have GE back to issuing annual dividend increases... something the Intelligent Investor should look for. 


The company has a much simpler group of businesses than it did pre-recession, having downsized its financial wing, and spun off its entertainment division into a joint-venture. On the horizon is big growth in its energy infrastructure unit, which has been making key strategic acquisitions during recent years. So, to include some dividend growth in your portfolio, and help you diversify away from your Canadian bread and butter, take a look at General Electric. 


For more information: 
http://www.marketwatch.com/story/investors-look-for-dividend-hikes-from-general-electric-and-3m-this-earnings-season-2011-07-04?reflink=MW_news_stmp 


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

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.