Bank of America is Banking on a Strong Economy

Summary:

1. Bank of America benefited from the solid economic situation in the United States.
2. The Consumer banking and Wealth Management Divisions are steady growth vectors.
3. The bank has shown its ability to grow its revenue while controlling its expenses.

We started the most recent earnings seasons with several results coming from the financial sectors. Among them, investors had the chance to receive some substantial pay check raises. BlackRock (BLK) raised its payout by 8.7% and Wells Fargo (WFC) raised it by 12%. The most impressive increase came from Bank of America (BAC) with a 25% increase. Surfing on a strong US economy, BAC has posted a solid quarter. Is it time to buy some shares? Let’s take a deeper look!

Understanding the Business

Bank of America Corporation is a bank holding and a financial holding company. The company provides financial products and services to people, companies and institutional investors. The company shows over $1 trillion in assets and has the most consumer deposit share in the U.S. BAC Consumer Banking division. It represents 38% of its net income, 32% for Global Banking, 15% for Global Markets and 15% for Global Wealth and Investment management.

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The Evolution of a Stock Price over 30 Years

One way to understand how the stock market works is to look at how it was built throughout time. As a dividend growth investor, I focus on picking shares from strong companies that show several growth vectors. I want to make sure those companies not only paid dividend in the past, but that will also continue to pay and increase it in the future.

I started investing in 2003. This gives me 15 years of investing experience including 2 bull markets and only one crash. I’ve followed the techno crash on my computer while I was working on my bachelor’s degree in finance, but that doesn’t really count as I had no money invested back then.

I remember feeling that my first investments weren’t growing fast enough for me. A high single-digit to low teens return each year didn’t appear that impressive back then. Today, I understand that the path through dividend growth investing is a long hike through the mountains. Sometimes you go up, sometimes you go down. It’s important to take pause and admire the nature. Eventually, you will rise to the top and feel like a king. But that takes lots of time and effort.

I thought of looking at 3M Co (MMM) over the past 30 years to give younger investors a perspective of what is looks like to be a long-term focused investor.

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Is DOC Healthy Dividend is Enough For a Long-Term Treatment?

There is no doubt the Healthcare sector is a growth sector for the upcoming decade. As the population ages in the U.S., the amount spent on healthcare will skyrocket. The CMS projects a 63% increase in healthcare expenditures during the next 10 years. DOC is well positioned with its growth-by-acquisition strategy. DOC has focused on tenants’ quality and continuously improving its tenants grade. Between 2015 and 2018, DOC has also reduced the weight of its top 10 tenants from 34% to 27%.

Now that DOC shares have tumbled by almost 20% ytd (-17% as of May 15^th), is this 6% yield REIT worth your attention?

Understanding the Business

As the name suggests, DOC is a self-managed healthcare real estate investment trust that acquires, owns, and manages healthcare properties that are leased to physicians, hospitals, and healthcare delivery systems and other healthcare providers. You can download the complete list of solid dividend paying REITs here.

Their properties are likely to be on campus with a hospital or located nearby with partnerships in place. DOC currently manages 280 properties worth about $4.3B. 96.6% are leased with an average contract term of 8.3 years.

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BHP Billiton: Interesting yield with some volatility

As it is the case with the rest of the basic materials sector, BHP Billiton (BHP) saw a strong rebound after 2016. The mining company didn’t only see its shares outperforming the sector, BHP shares show twice the ETF’s return.

Source: Ycharts

Bolstered by strong demand in China and supported by various projects  across the globe, BHP is growing full speed ahead. Is it too late to jump on this commodity train? Let’s take a deeper look.

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Announcement of an All-Stock Merger with Scana & Dominion is down 20%

Understanding the Business

Dominion Resources changed its name in 2017 (was previously named Dominion Energy). It is one of US largest producers and transporters of energy, with a portfolio of approximately 25,700 megawatts of electric generation, 15,000 miles of natural gas transmission, gathering, storage and distribution pipeline and 6,600 miles of electric transmission and distribution lines.

Most importantly, the company has made a business shift from energy production to distribution over the past decade. It is still an important energy producer, but its distribution business is gradually increasing. D has built a predictable business model with 90% of its revenues coming from regulated operations.

Growth Vectors

Source: Ycharts

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GM is an Icon… But Can It Be More Than That?

Summary

• GM has greatly improved its financial health and is back on “growth mode”.
• GM has eyes on the future to fuel its growth (electric & autonomous car).
• There are several clouds looming (competition, high debts, underfunded pension plans).

Are you ready to give it a second chance? This is often a question investors must ask themselves when they look at a company that already cut their dividend. Did management really understand what put them there in the first place? While General Motors (GM) has done a marvelous job at getting back from the dead, I’m not sure it can be qualified as a “safe dividend payer” yet. GM was once admired by many as the world’s #1 automotive constructor. After its fall in 2008-2009, the company worked very hard to bring its iconic brand to the top. It did a great job, but is it enough?

Understanding the Business

General Motors doesn’t need a presentation. Even my 6-year-old can tell the difference between a GM and a Ford since there are so many of their cars on the market. GM is not only a leader in the automotive industry, it is also a leader in the high-margin pickup truck sub-segment.

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There is only one way to put it: Microsoft is Killing It

Summary

• PC sales are sluggish? Microsoft just moved towards the cloud at fast pace.
• MSFT strong relationships with Corporate America will help the company integrate many other services.
• The tech giant successfully switch from a one time software sale to a subscription based product with Office 365.

Microsoft (MSFT) has polarized investors for a while now. On one side, bears are telling the world that PC sales are going nowhere. Bears even come up with this theory that the PC era is dead and it will bring MSFT in its hole. I can’t argue with PC sluggish sales, bears are right on this point:

Source: Statista

Nonetheless, I disagree with their investment thesis. Microsoft is a resourceful company and saw PC sales headwinds coming at them a while ago. Over the past few years, it has moved its one time software sales approached towards subscriptions based with the creation of Office 365 (sales were up +41% during the latest quarter). It built a strong cloud environment climbing to #2 in the public business and integrating multiple solutions for businesses. I think Microsoft shares will easily hit the $100 mark, here’s why.

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6%+ Yield and 40%+ Upside? I’m In!

Summary

• Here is a company with over 100 years of experience paying a 6%+ yield.
• Management aims for a 5-9% annual distribution increase for years to come.
• At the current price, BEP shows a strong upside potential along with a healthy dividend. What’s not to like?

If you think that you have missed the mini-market correction because the S&P 500 rapidly bounced back, think again; there is plenty of opportunity lying right in front of you. One of them is Brookfield Renewable Partners LP (BEP) or (BEP.UN.TO).

Investment Thesis

I truly believe the future of energy will be found across hydroelectric, solar, and wind power. 80% of BEP’s portfolio is focused on hydroelectric power. The company has power plants across North America, South America, Europe, and Asia. BEP enjoys large scale capital and expertise to manage its projects across the world. Management aims at a 5-9% annual distribution increase for years to come. At the current price, BEP shows a strong upside potential along with a healthy dividend. What’s not to like?

Understanding the Business

The company is a rare pure play in the renewable energy sector. With over 2,000 employees, $27 billion in power assets and $285B in AUM, BEP is also one of the largest players in this industry. Good news; BEP is only down about 12% (as of March 14^th) since the beginning of the year and it is almost trading at its early 2017 level.

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CubeSmart – Leveraging Growth in the Self-Storage Industry

Summary

• One of the top three self-storage REITs with good properties and an expanding portfolio
• Growing strongly through both organic and inorganic routes
• Macroeconomic factors like a growing population and rising rents acting as tailwinds

This article has been written by Sneha Shah for The Dividend Guy.

Investment Thesis

One of the main reasons to invest in REITs is their attractive returns  (at least 90% of its income is required to be distributed). REITs, which focus on self-storage properties, are even better as they are less sensitive to economic downturns than other real estate product types.

CubeSmart is amongst the top three national owners and operators of self-storage facilities in the United States. Its portfolio of high quality properties in good locations and a diversified customer base have enabled long term value creation for its shareholders. CubeSmart has been regularly increasing its payout over the last seven years and is just three years away from making it to the Dividend Achievers list. It offers a yield of over 4% and its strong cash flows imply investors have nothing to fear about future payouts as well.

Understanding the Business

Founded in 2004, CubeSmart (CUBE) is a real estate investment trust (REIT) that engages in the ownership, operation, acquisition and development of self storage facilities in the US. It operates a portfolio of 908 stores, more than half of which is owned by CubeSmart, in 23 states and District of Columbia. Its high quality portfolio focuses on supply constrained markets with good demographics.

The REIT earns its revenues principally from rent received from customers under month-to-month leases, which provides good short-term visibility and the ability to upwardly adjust rents in case of inflation.

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Novo Nordisk – A Safe Dividend Play with Decent Growth Prospects

Summary

• Robust presence in the global Diabetes care market, with 27% market share
• Extensive geographical presence, strong product pipeline and 90 years of R&D expertise
• Emerging market and new products are key growth drivers

This article has been written by Sneha Shah for The Dividend Guy.

Investment Thesis

Healthcare stocks offer a safe dividend stream for investors given their nearly recession-proof nature. The sector offers immense potential owing to a growing senior population that drives demand for medical products.

Novo Nordisk is a leading global pharmaceutical company having a strong leadership position in diabetes care.  About 27.7 million people use its diabetes care products worldwide. The company has developed strong R&D expertise and a strong product pipeline pumping out market leading medicines. It is also slowly but steadily expanding its footprint in emerging markets, given the pricing challenges that healthcare companies are currently facing in the USA.

Given Novo Nordisk’s leadership, the company stands in a good position to benefit from a growing population suffering from chronic diseases like diabetes, obesity and others.

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It’s Never Enough When It’s Apple

Summary

• Apple just finished another record year
• Haters gonna hate
• Shareholders gonna smile

I remember the first time I purchased shares of Apple (AAPL). At first, it was supposed to be a short-term investment as there was a timely opportunity. I bought my first shares before the split, when the stock was trading under $400 (therefore, under $57 after the 1:7 split). At that time, many rumors were going around.

“Apple’s iPhone is going to be eaten-up by Samsung’s smartphone”

“The company is a one trick pony”

“We have reached Apple’s full potential; it will only go down from now on”

A few years and over 100% return later, Apple is struck by similar bad mouth sayings.

“The iPhone X is a failure”

“Apple’s battery sucks”

“The company is programming smartphones obsolescence, Apple is evil”

It’s funny to see that for each Apple fan, there is probably a hater. It’s only fair. But as a serious investor, you should neither be a fan or a hater. Emotion has no place when it’s time to take a look at a stock. Now that we have set our feelings aside, let’s take a deeper look at Apple.

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Diageo: Shiny Bottles Lead to Shiny Dividends

Summary

• Diageo is a leader in premium spirits industry, it will surf the current economic tailwind.
• Emerging markets start to get some traction as middle class seeks recognitions and claim a higher status through their lifestyle.
• Unfortunately, DEO is overpriced right now.

Investment Thesis

DEO will benefit from the good standing of the current economy. Consumers around the world are optimistic in their future, and they are more willing to spend. DEO enjoys strong pricing power, and its brand portfolios are protected with premium names. Diageo also invests in an important sales team in order boost its product’s popularity at all times. The company will continue to pay a solid 2.50% dividend. Finally, the rising income in emerging markets will eventually lead to additional customers for Diageo and its premium spirits. Unfortunately, the DDM calculation doesn’t justify the current price.

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BUD-WEIS-ER, Frogs & Fuss Aren’t Enough for Me to Drink

Summary

• After its merger with SAB Miller, Anheuser-Busch InBev has proven to the world that it will “own the beer market” across the world.
• The company is dominant in many countries with 50%+ market share in Brazil, Latin America and Belgium.
• Unfortunately, the dividend perspectives don’t justify the current price.

Investment Thesis

Do you remember those BUD-WEIS-ER frogs in the company’s commercial a long time ago? I’m not sure I was old enough to drink beer back then but I surely enjoyed the frogs. In fact, Anheuser-Busch InBev (BUD) always had this magic touch to create viral ads. Over the years, the beer maker has expanded its brand portfolio to the limit of the world.

BUD is a leader in a stable market that is not ready to decrease. The company is producing over 500 million of hectolitres (as compared to 204 million for Heineken) and enjoys economy of scale. The brewer will continue to grow through acquisitions and will also increase its presence in emerging market, notably in China. BUD is a solid dividend payer with a 3.50% yield offering income seeking investors the opportunity to invest in a well-diversified company. Unfortunately, BUD seems overvalued at this time.

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Consolidated Edison – Great Utility, Very Bad Price

Summary

#1 Consolidated Edison is a classic play in the utility sector with growth vectors in the natural gas distribution business.

#2 ED shows 43 consecutive years with a dividend increase making it a dividend aristocrat.

#3 While the company and its dividend are solid, the stock is definitely overvalued.

Over the past 30 days, Consolidated Edison’s (ED) stock has been evolving in red territories. The utility company shows a loss in value of about 10% between December 2017 and January 15^th 2018. After a fabulous run in the current bull market, most utilities are slowing down. I think it’s time to take a look at Consolidated Edison to see if the current stock drop is a buy opportunity.

Understanding the Business

Consolidated Edison is a classic utility company operating in the New York State. It operates under 4 different segments:

Electric (71% of revenue)

Gas (14% of revenue)

Steam (5% of revenue)

Non-Utility (10% of revenue)

November ED presentation

While the chart above shows a whole segment for clean energy, the company generates only 4% of its revenue from this business segment. The core business remains it regulated utilities activities with 93% of its revenues.

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T. Rowe Price: a Performing Assets Manager for a Bullish Market

Summary

#1 I believe financials will continue to be strong in 2018 and TROW will be part of the party.

#2 TROW is a dividend aristocrat with 31 years of dividend increase under its belt.

#3 In 2018, TROW will reach 1 trillion dollars in assets under management.

I must admit, I rarely let one fly under my radar. But this time, I feel that T. Rowe Price (TROW) did the trick. While the stock has remained dormant for about 4 years, 2017 was a big wake-up for investors. Between January 2013 and January 2017, TROW lagged the S&P 500 by about 40% (15.58% vs 56.98%). However, TROW jumped by 40% in 2017. It seems the asset manager is unlocking value after being ignored by the market for a while. Is it the result of an overheating bullish market looking for new preys or is it really because TROW has shown some impressive results since the very beginning but we just didn’t see it? After all, TROW has been a model of performance since its IPO back in 1986:

Understanding the Business

T. Rowe Price is one of the world largest asset managers with $991 billion in assets under management (as at November 30^th 2017). What really matters for assets managers is obviously how much they manage (Assets Under Management, AUM) as they are making fees on investors nest egg. By comparison, Blackrock (BLK), the world largest asset manager, shows 5.7 trillion.

T.Rowe Price shows a classic model with a wide variety of investing products going from fixed income to equity. The bulk of its business is done through financial intermediaries (third parties such as financial institutions selling its products) and institutional investors.

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JM Smucker – I Can’t Afford This Breakfast Treat

Summary

#1 SJM is particularly strong in the breakfast category with peanut butter, coffee and fruit spread strong brands.

#2 The company shows 15 consecutive years with a dividend increase.

#3 Unfortunately, there aren’t enough growth vectors to justify the current valuation.

Investment Thesis

We rarely have the opportunity to pick a losing stock in 2017. It always catches my attention when a dividend growth company is down while the market is surging. Is there a buying opportunity or is it a falling knife? JM Sucker (SJM) shows a strong business model and owns many #1 brands in the food business. The company continues to innovate and aim for additional growth through acquisitions. What’s wrong with the company? Let’s take a deeper look to see is SJM could fit your portfolio.

Understanding the Business

JM Smucker is a packaged food company for both human and pets. The company is particularly strong in the breakfast category their peanut butter (Jif), fruit spreads (Smucker’s) and coffee (Folgers & Dunkin’ Donuts). The business counts many #1 and #2 brands:

Source: 2017 SJM annual report

In 2017, the business divisions reported net sales as follow:

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Nucor’s Impressive Dividend History Isn’t Enough

Summary

#1 Nucor shows 45 consecutive years with a dividend increase.

#2 Nucor is the largest steel producer and recycler in the U.S.

#3 The stock lags the market, but it’s not enough to convince me to pull the trigger.

Investment Thesis

Nucor (NUE) is a fascinating company. It is one of the rare basic materials company to show stability in a volatile environment. Nucor is a leader in the steel industry and it is also a dividend aristocrat with 45 consecutive years with a dividend increase. With the Trump administration’s plan to invest massively in infrastructure in the upcoming years, NUE will be among the first company to benefit from this tailwind. Unfortunately, the stock lagged the market in 2017 and it is still overvalued in my view. Let’s dig deeper to see if NUE fits your portfolio.

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Cardinal Health; In the Middle of the Storm

Summary

#1 Revenue increases, but not earnings.

#2 CAH is looking outside its business model to find growth.

#3 The company remains a leader in its market and a Dividend Aristocrat

What Makes Cardinal Health (CAH) a Good Business?

Cardinal Health is one of the three leaders in pharmaceutical distribution with AmerisourceBergen (ABC) and Mckesson (MCK). CAH operates under 2 business segments; the Pharmaceutical segment (89% of revenue) distributes branded and generic pharmaceutical, specialty pharmaceutical, over-the-counter healthcare and consumer products and the Medical segment (11% of revenue) distributes a range of medical, surgical and laboratory products, and provides services to hospitals, ambulatory surgery centers, clinical laboratories, and other healthcare providers. CAH operates in 60 countries and is a key player in the healthcare industry.

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Price-Earnings Ratio Expansion Explained – And Why You Should Care

The market is more expensive today than it was a year ago.

We all hear that, but do we really know what they are talking about? When we read about the average market Price-Earnings Ratio (PE Ratio) going up, what does that really mean? You pay more than you used to. This phenomenon is called “PE expansion.”  I’ve built this small guide to tell you what it is and why it has an impact on your portfolio.

A quick review of the PE Ratio

The PE ratio refers to the number of times you pay the profit per share of a company. For example, if a company reports earnings of $1 per share and the stock trades at $11, this means you pay 11 times its profit. In other words, the value of the company is equal to 11 times its profit today. If you own all shares of that company, you would need 11 years to get all of your money back, assuming profit doesn’t change.

What happens when you pay more

Imagine the same company with the same earnings suddenly trades at $13. An affluent of new investors want to buy shares of this company and they are ready to pay a more expensive price ($13). At that time, we are looking at the same company with the same profile and earnings. The only difference is that it costs $2 more per share. The only reason why you pay more today for the stock is because there are more people wanting it.

This could be because they think the company will go through a major breakthrough and that earnings will go up. This could be because interest rates are low and investors are ready to pay a higher price for a solid dividend payer (hence, pushing the yield lower at the same time).

A real-life example

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Mondelez: 5 Years After Spinning-Off Kraft

What Makes Mondelez (MDLZ) a Good Business?

When I think of Mondelez, I think… yummy! I must admit I’m a bit biased; Oreo Cookie & Cream are my favorite cookies. Besides making delicious cookies, Mondelez is one of the world’s largest snack manufacturer. The company is mostly known for its cookies and chocolate brands representing 71% of its revenue.

Source: MDLZ fact sheet

The company is driving 70% of what they call their “power brand” as follows:

Source: MDLZ fact sheet

Revenue

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