Chatter Around the World – 81

Chatter Around the World is a curated weekly update of articles related to economics, investing, dividends and personal finance. In these weekly updates, I also capture my blog updates and news related to my portfolio holdings.

UST

US Treasuries continue to drop

New Blog Posts

Let’s dive into the links that caught my attention this week.

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Recent Sell

After being a goal for long time, we finally sold majority of my wife’s expensive mutual fund holding. The fund in question is Scotia Canadian Balanced Fund, which had an expense ratio of 2.04%. That number is nothing to sneeze at and the expenses pile up over time. More details on this below. Going forward, we will be balancing our portfolios better integrated so that we align closer to our combined goals.

Why Sell?

  • Expensive fund: The fund is extremely expensive at over 2%. Two percent is a large amount of money for what is simply an index tracking fund. To put things into perspective, for every $10,000 invested, that results in $200 per year. Over the course of next 30 years, that is $6,000. Now multiply that by every $10,000 invested in the fund and you will notice how the expenses can get out of hand!
  • Lack of diversification: Another important factor in selling this fund is the lack of diversification. The fund is invested completely in the Canadian market (55% in stocks and 45% in bonds). While the stock/bond diversification is good, we are exposed too highly to one country (Canada) and any recession or economic hardship hitting Canada will result in serious under-performance and loss of our hard earned money.

Investment Strategy

We will be using the cash from this sale to invest in index funds via ETFs. ETFs are a lot more inexpensive (its not uncommon to find a fund tracking S&P/TSX for 0.05%) and we will also be picking more than one or two funds to achieve some diversification in exposure to both stocks and bonds. We are also planning on keeping things simple so that my wife can maintain the portfolio going forward. Overall, the plan is to maintain a simple diversified index fund based portfolio in my wife’s account while I invest in individual stocks of blue chip companies.

In the coming days, I will be posting details of which funds we will be picking for the investment in this account. Stay tuned!

Canadian National Dividend Increase

CNR
Canadian National Railway (CNR.TO) (CNI) announced that its board of directors had approved increasing its dividends by 25%. The quarterly cash dividend will increase from $0.25 to $0.3125 per share payable on Mar 31, 2015 for shareholders on record as of Mar 10 & ex-div date of Mar 6. Yield going forward based on today’s closing price is 1.47%.

From the earnings release statement:

Fourth-quarter and full-year 2014 financial highlights

  • Fourth-quarter 2014 net income was C$844 million versus net income of C$635 million for the same period of 2013.
  • Q4-2014 diluted earnings per share (EPS) increased 36 per cent to C$1.03 from diluted EPS of C$0.76 for the final quarter of 2013.
  • Full-year 2014 net income was C$3,167 million, or C$3.85 per diluted share, compared with net income of C$2,612 million, or C$3.09 per diluted share, for 2013.
  • Full-year 2014 adjusted diluted EPS increased 23 per cent to C$3.76, with adjusted 2014 net income of C$3,095 millionversus adjusted net income of C$2,582 million in 2013. (1)
  • Full-year 2014 volumes reached record levels, with carloadings up eight per cent and revenue ton-miles up 10 per cent.
  • Q4-2014 operating income increased 30 per cent to C$1,260 million, and full-year 2014 operating income rose 19 per cent to C$4,624 million.
  • The fourth-quarter 2014 operating ratio improved by 4.1 points to 60.7 per cent; the full-year 2014 operating ratio improved by 1.5 points to 61.9 per cent.
  • 2014 free cash flow totalled C$2,220 million, compared with free cash flow of C$1,623 million for 2013. (1)

Claude Mongeau, president and chief executive officer, said: “CN is optimistic about its future prospects. The Company is aiming to deliver double-digit EPS growth in 2015 over adjusted diluted 2014 EPS of C$3.76. In addition, CN plans to increase its capital spending by roughly C$300 million for a total 2015 investment of approximately C$2.6 billion. Given CN’s strong balance sheet and its solid outlook for earnings and free cash flow generation, I am pleased to announce that the Company’s Board of Directors has approved a 25 per cent increase in CN’s 2015 quarterly common-share dividend. CN has increased its dividend per share by 17 per cent per year on average since its privatization in 1995.

My portfolio consists of 40 shares of CN, which increases my annual dividends from $40 to $50, an increase of $10.

Recent Buy

Canadian National Railway

I decided to add to my position in Canadian National Railway (CNR.TO) (CNI). Canadian National Railway is the larger of the two Canadian railroad companies and the second largest publicly traded railroad companies in North America. The company commands 20,000 miles of tracks and is strategically well placed to move oil from Alberta, the Bakken fields and to/from the refineries in the Gulf Coast. A holding of Bill Gates’ Cascade Investments, this stock has made Mr. Gates and his investment firm very rich over the years. I added 20 shares in the Canadian listed stock, which adds C$20.00 to my dividend income annually going forward. The company is scheduled to release its earnings report tomorrow after market close and is also expected to raise dividends.

Recent Buy Decision

  • Railroads are the pulse of the economy and are critical in the transportation of industrial, lumber, crude, merchandise and agricultural products. An essential part of every portfolio, railroads make a small portion of my portfolio and I decided to add to my position.
  • A wide moat industry – the players are well established and it is hard for upstarts to disrupt the incumbents
  • CNR has a very strategically well diverse network servicing the Pacific, Atlantic and Gulf coasts.
  • Dividend growth rate is stellar in most major railroad companies, even though initial starting yield is low.

Risks

  • The stock is currently not cheap. At PE over 23, the stock is overvalued. However, I am investing for the long term and a strong company like CNR is hard to find at cheap prices. I will be averaging down on this cost basis over the coming months/years.
  • The crash in oil presents some headwinds for the railroads. While the running costs decrease due to fall in oil prices, the bulk of payload growth is crude oil. The crash will probably result in cutbacks, M&A, terminations in oil production companies, meaning that the revenues for the railroads might be affected over the coming quarters.
  • Development of pipelines presents more headwinds. Transporting via pipelines is cheaper, safer and more reliable (no delays due to weather or other unforeseen circumstances) and railroads will feel the pinch once more infrastructure is in the ground.

Further Reading

Read this full dividend stock analysis for details on the value of the company, including more detailed outlook, advantages and disadvantages to the industry.

Full Disclosure: Long CNR.TO. My full portfolio is available here.

Is a PepsiCo Spin Off Coming?

PepsiCo

PepsiCo (PEP) is a global powerhouse in the snack and beverage business. The company boasts a plethora of brand names are recognizable anywhere in the world. A company with a market cap of $145B, PepsiCo boasts a brand value of upto $20B. Although the brand value does not match its main competitor Coca Cola (KO), it remains well ahead of other beverage companies such as Dr Pepper Snapple (DPS). PepsiCo remains a great challenger to all its competitors and is very well received in growing emerging economies.

(Source: PepsiCo.com)

According to PepsiCo’s 2013 Annual Report, the company is almost evenly split between the food and beverage segments and the also geographically well diversified, with half of its net revenues coming from North America and the rest from International locations.

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