Well, it’s been awhile since my last post, but I thought I’d get everyone up to speed with the dividend portfolio (which is usually the easiest to write about – except for this entry). So, since we last wrote about the portfolio almost 4 months ago, I’ve been buying and selling companies within the dividend portfolio but have been trying to figure out how to account for it on this blog. Within my own personal account, the dividend portfolio is serving it’s purpose – to provide an extra income source throughout the year. On the blog though, I’ve decided that we’ll try our best to keep transactions up to date although hopefully, there shouldn’t be too much turn-over from year to year. So, here’s the changes that have been made:
- Sold Extendicare (EXE.TO / EXETF)
- Sold Canadian Old Sands (COS.TO)
- Bought Canadian Imperial Bank of Commerce (CM)
- Bought Potash Corp Saskatchewan (POT)
- Bought Rogers Communications (RCI.B)
For comparison purposes, for those that we sold, we’ll sell the funds we’re benchmarking the portfolio against as well.
A Swing and a Miss with Extendicare
I’ve discussed the addition of Extendicare (EXE.TO / EXETF) to the portfolio a few times (here and here). The main thesis was that the US operations could potentially be worth multiple times what the total market cap of the entire company was at the time. As of my last dividend update in September, I was starting to get excited that a buyout would be announced soon – the company had just settled on deficiencies found from the OIG investigations and that should have paved the way for an agreement within the next 6 months. While the initial references (fool.com and cornerofbershireandfairfax) that got me interested in the company were aiming for $14 / share or more, I would’ve been happy with a $3-5 rise – which would’ve brought the share price between $10-15.
I was Right!
Well, as it turns out, Extendicare announced (in November – just minutes prior to their 3rd quarter earnings release) that they had sold the U.S. business for close to $1B CAD. When I first read the headline, I couldn’t believe my impeccable timing – with a market cap just before the announcement of $715M (88M shares outstanding * $8.11 CAD), wasn’t the stock bound to go up?
And, then I was oh so wrong….
The stock actually dropped 20% on the news. Even though the company was able to sell the US Operations for the $1B, the net proceeds ended up to be ~$250M. With the drop in stock price to $6.50, take away the $250M, and the market was valuing the Canadian Operations at about $325M (or 10-11x AFFO) which when I look at it now, was comparable to similar long-term care providers like Leisureworld (LW). At the end of the day, obviously a better sale price would have greatly propped the stock up. A quick back of the napkin calculation shows that given the value of the Canadian Operations, the initial $8 price tag would have needed to be supported by a $1.5B sale. The fact that the buyer was a private investment firm would already indicate to me that they should be able to get at least a 15% return on this investment – and it’s upsetting that Extendicare’s management should have continued along the path of leasing out their properties to operators much like Formation Capital will.
Besides that, I can blame myself for getting blinded by all the high-valuation predictions – but not just on the US operations side, but also on the Canadian side. A lot of the bottoms up valuations was based on the dividend yield vs. the actual AFFO from the Canadian operations. Using that as the basis, would have provided better understanding as to whether or not the US operations could be sold for $1B (to break even) or $2B (required to get to my $11 target). In any event, after listening to the conference call, I did not get the warm and fuzzy feeling from management as to what they plan to do with the extra capital (they announced they want to deploy the capital but was not specific as to where and to what), so I’ve decided to sell the stock. Management does not seem to have shareholder interest in mind (forget that I don’t think they tried very hard to get the best price – no share buyback or increased dividend was mentioned) and the quick calculation shows that unless they deploy the $250M quickly, the dividend is barely supported by the current operations.
Ed Note: While writing this post the company proved me wrong on both counts by a) authorizing a repurchase of up to 10% of the outstanding shares and b) acquisition of Revera Home Health business that should up AFFO by $0.10 now making the dividend safe.
More Luck Than Actual Skill
I don’t typically follow macroeconomic trends – my belief is that if you pick a good company and understand it, then you shouldn’t be influenced by external factors. Afterall, even in down markets, not everything goes down. However, since I’m learning income investing along the way, I’ll make exceptions to the rule. A couple of blogs I follow – The Greater Fool and Jeff Rubin’s Smaller World blog – both discussed falling oil prices as a result of multiple aspects – rising USD, decreased oil demand etc. What was conveyed though, was that oil companies that have a high extraction cost would have a more difficult time turning a profit as oil prices dropped. Lower profit would lead to lower dividends which would probably also lead to a drop in share price.
Finding some truth to this (especially in the short term), I decided to sell the Canadian Oil Sands (COS.TO) and as it turns out, not a moment too soon. While I did not predict the 50%+ drop in oil prices off its high, the company certainly felt the brunt of falling prices. Right on cue, the company cut its dividend from 35 cents a quarter to 20 cents sending the stock tumbling down below $10. Of course, word came out that the company’s budget was based on $75 oil, which was well above the $40-50 oil was trading at. Then last week, the company slashed their dividend again, this time down to 5 cents a quarter which was the obvious course of action given that no money was being made with oil so low, and the company unlikely to borrow funds to fund the dividend. Ironically, the stock has rebounded above $10 – either because of the slight rebound in oil prices or takeover rumours. I’ll just say I’m happy to “luckily” get out of that one slightly unscathed.
Back to Our Regularly Scheduled Programming
I won’t go into detail as to the additions – but basically purchased companies that had a dividend yield ~ 4% or more and that I could understand a bit better as to how the dividend was funded. I realized the portfolio is starting to get overweight with financials (CIBC, Royal, XFN), but even looking at the comparison funds, they each hold a large % in financials.
So, here’s how the portfolio has turned out – since we started this just more than a year ago…
…and compared to our benchmark dividend funds
|Starting Book Value:||$140,000|
|Current Market Value:||$148,069||$148,983||$147,308||$149,242|
|Annualized RoR (less dividends):||6.04%||6.72%||5.47%||6.91%|
|Received Dividends (Lifetime):||$6,379||$2,704||$2,139||$5,427|
|Total Market Value + Dividends||$154,447||$151,687||$149,448||$154,669|
|Annualized RoR (with dividends):||10.77%||8.73%||7.06%||10.94%|
How a little bit of time has changed things – seems like the RBC fund has caught up to the TD funds, not only providing a better return but also more dividends. The good news is that I’m surprisingly on par with the leader – and the income portfolio has served its purpose providing me with nearly 20% more dividend income than RBC.
The bad news is all four (my own income portfolio included) has lagged the TSX which has returned 12% (not including the 2% dividend) over the past 12 months! Now, I haven’t run the same scenario of purchasing XIU or VCN at the same time as the stock purchases, but the rough guess would show that just buying one of the TSX ETFs would have provided a greater overall return. It’s debate-able if comparing an income fund to an index is allowed – after all, we did create this portfolio for its income producing properties. In that respect, I’d consider this to be a pretty successful Year 1 attempt; with a little more knowledge gained and many more lessons to come.