INVESTORS LOOK OVERSEAS
Transcription
INVESTORS LOOK OVERSEAS
1 Internet Wealth Builder – May 11, 2015 Volume 20, Number 18 I N T H I S Issue #21518 I S S U E Investors look overseas 1 Trudeau declares tax war 3 Energy bounce back looks fragile 3 Ryan Irvine updates Macro Enterprises, Parex Resources, High Arctic Energy Services, Hammond Power Solutions 4 Gordon Pape’s updates: JCMorgan Chase, Wells Fargo, Shaw Communications, BCE Inc. 6 B U I L D I N G The W E A L T H Internet Wealth Builder Editor and Publisher: Gordon Pape Circulation Director: Kim Pape-Green Customer Service: Katya Schmied, Terri Hooper Copyright 2015 by Gordon Pape Enterprises Ltd. All material in the Internet Wealth Builder is copyright Gordon Pape Enterprises Ltd. and may not be reproduced in whole or in part in any form without written consent. All recommendations are based on information that is believed to be reliable. However, results are not guaranteed and the publishers and distributors of the Internet Wealth Builder assume no liability whatsoever for any material losses that may occur. Readers are advised to consult a professional financial advisor before making any investment decisions. Reprint permissions: Contact customer service. Mail: 16715-12 Yonge St Suite 181 Newmarket ON L3X 1X4 Email: [email protected] No IWB next week. Next issue: May 25 Customer Service: 1-888-287-8229 May 11, 2015 INVESTORS LOOK OVERSEAS By Gordon Pape, Editor and Publisher The lacklustre returns on North American stock exchanges so far this year have prompted more investors to look overseas – and they like what they are finding. With the year more than one-third over, both New York and Toronto have been uninspiring. The TSX is showing a year-to-date return of just 3.7%. On Wall Street, the S&P 500 has added just 2.8% while the gain on the Dow is 2.1%. The Nasdaq Composite is the star so far, ahead by 5.8%. Meanwhile, several overseas markets have been racking up doubledigit gains including Paris, Frankfurt, Amsterdam, Hong Kong, and Tokyo. Not surprisingly, more people want to get in on this action. Some of them are seeking information on offshore investing options by using the new Ask The Experts feature on our BuildingWealth.ca website. For example, Jim B. wrote: “The quantitative easing efforts in Europe hopefully will continue to foster economic growth. The low value of the euro also must help large European corporations' sales to the U.S. in particular. Are there any European ETFs that you could recommend? Especially those that might be underweight European financial institutions.” European markets have been surprisingly strong this year despite the ongoing Greek tragedy that could yet end with that country’s exit from the euro. As contributing editor Gavin Graham pointed out in a recent column, European GDP growth is gradually improving and the threat of deflation appears to be receding. Europe is by no means out of the woods but there are signs of progress and that has encouraged investors. Canadian ETF providers have only recently zeroed in on Europe as a specific area of interest, having previously lumped it in with the broader EAFE index ETFs (Europe, Australasia, and the Far East). Three Europe-only ETFs were launched in 2014, as follows: Vanguard FTSE Developed Europe FTSE Index ETF (TSX: VE). This one focuses on large and mid-cap stocks in developed European markets. The largest weightings are in the U.K. (31.1%), France (14.3%), Germany (also 14.3%), and Switzerland (14.2%). Financial stocks are the number one sector at 22.7% followed by consumer goods at 17.8%, health care (12.5%), and industrials (12.4%). Top holdings are Nestle, Novartis, Roche, Royal Dutch Shell, and HSBC. The fund was launched at the end of June last year and was showing a year-to-date Continued on page 2… Building Wealth’s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd. All rights reserved. (12.4%). Top holdings are Nestle, Novartis, Roche, Royal Dutch Shell, and HSBC. The fund was launched at the end of June last year and was showing a year-to-date gain of 11.5% as of the close on May 5. The MER is a very low 0.23%. 2 Internet Wealth Builder – May 11, 2015 Overseas – continued from page 1… gain of 11.5% as of the close on May 5. The MER is a very low 0.23%. iShares MSCI Europe IMI Index ETF (TSX: XEU). This ETF also zeros in on developed markets but, unlike VE, includes small-cap stocks in the mix. Interestingly, it has the same top five holdings as the Vanguard fund with the exception of Royal Dutch Shell, which is replaced here by BP. The geographic mix is also similar, with the same top four countries and much the same asset allocation. Ditto for the sector breakdown, which has financials at the top at 22.5%. So it shouldn’t come as a surprise that the year-to-date performance is almost the same as that of VE at 11.3%. The management fee is 0.25%. There is also a hedged version of this fund, which trades under the symbol XEH. It has a better return so far in 2015, with a gain of 13.9%. BMO MSCI Europe High Quality Hedged to CAD Index ETF (TSX: ZEQ). The Vanguard and iShares entries are almost twins. This one is a little different and meets our reader’s request for a fund with low exposure to financial stocks. It is designed to track the MSCI Europe Quality 100% Hedged to CAD Index, which includes large and mid-cap stocks from developed markets. The emphasis is on stocks with high quality scores based on three main variables: high return on equity (ROE), stable year-over-year earnings growth, and low financial leverage. It’s the last variable that limits the fund’s exposure to the financial sector to a remarkably low 1.9%. Instead, the emphasis is on consumer staples (31.8%), health care (25.7%), and consumer discretionary (16%). The geographic breakdown is also different from the other two funds. The U.K. at 44.4% and Switzerland at 23.3% are the only two countries in double-digit territory. Germany and France are down around 5%. This fund has the highest management fee of the three at 0.4% and the lowest year-to-date return at 10%. It’s still too early to know which of these funds will be the best performer as all are less than a year old. But as things stand right now, I’d go with either the Vanguard or the iShares entry because of the lower MER and the more balanced geographic allocation. Another reader is interested in new developments in India. He wrote: “As India is expected to be one of the more successful countries in the emerging markets, what do you think of the iShares Indy 50 ETF?” – Alastair F. India has been generating a lot of excitement since the election a year ago of Prime Minister Narendra Modi. He pledged to reform government, cut bureaucratic red tape, and open the country to foreign investment. The country’s economy has also been helped by the oil price plunge – it is estimated that each drop of US$10 in the oil price is worth an extra 0.5% to the country’s GDP. Despite the optimism, India’s stock market has been unimpressive. The CNX 50 Index – the “Nifty 50” as it is called – was showing a year-to-date return of -2.2% as of the close of trading on May 5. The initial enthusiasm that followed Mr. Modi’s victory appears to have given way to sober second thoughts about the speed of the country’s forward progress. For investors who believe there are better days ahead, here are two Canadian-based ETFs that focus on India. iShares India Index ETF (TSX: XID). This is the ETF to which our reader is referring. It tracks the performance of India’s National Stock Exchange CNX Nifty Index, which covers 22 sectors of the country’s economy. The index has a history of high volatility so investors need to be prepared for a lot of ups and downs. The performance of this ETF reflects that; it lost 35% in 2011, rebounded 24% in 2012, was virtually flat in 2013, and surged 39% in 2014 on the strength of Mr. Modi’s election win. So far in 2015 it is showing a small loss of 1.1%. This ETF is simply a Canadian version of the U.S. iShares India 50 ETF (NYSE: INDY) and all its assets are invested in that fund. The MER of XID is 0.98% while that of INDY is 0.94% so there’s not much to choose from there. However, the Canadian version has produced much better returns because of currency differentials with a five-year average annual compound rate of return of 5.85% versus only 2.22% for the U.S. fund. Stay at home with this one. BMO India Equity Index ETF (TSX: ZID). This fund takes a different approach. It tracks the BNY Mellon India Select DR Index. It is comprised of India-domiciled companies that are traded as American and global depositary receipts on the New York Stock Exchange, Amex, Nasdaq, and London Stock Exchange. It is much more concentrated than the iShares funds, with more than half the assets in just four stocks: Infosys, Reliance Industries, HDFC Bank, and Larson & Toubro. This approach has made it a much better performer thus far in 2015 with a year-to-date gain of 5.05%. That’s not earth shaking but it’s better than the TSX or the S&P 500. Longer-term results are comparable to the iShares fund. The maximum annual management fee is a better value at 0.65%. Given the choice, I’d go with ZID in this case. I like the more focused approach, although it does entail higher risk, and the lower MER leaves more profit in your pocket. Follow Gordon Pape on Twitter @GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney Building Wealth’s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd. All rights reserved. 3 Internet Wealth Builder – May 11, 2015 TRUDEAU DECLARES TAX WAR The Liberals have decided to tackle Stephen Harper’s Conservative Party on its own turf with an ambitious Robin Hood-style tax program: take from the rich, give to the poor (or in this case the middle class). The plan announced last week would raise Ottawa’s top marginal rate by four percentage points to 33% on taxable incomes over $200,000. Liberal leader Justin Trudeau estimates that will generate about $3 billion in additional income. Much of that would pay for a cut for middle-income taxpayers (those with incomes between approximately $45,000 and $90,000), who would have their rate cut from 22% to 20.5%. Some economists were quick to criticize the Liberal plan, warning that the result would be to raise the top level of combined federal/provincial rates to over 50% in the majority of provinces. The top rate in Quebec and New Brunswick if the plan were enacted would be 58.75%. It’s a widespread view that rates above 50% encourage tax avoidance, as was pointed out in a Globe and Mail article by Bill Curry last week. However, the Liberals seem to feel that a soak the wealthy stance will play well with the electorate in the upcoming federal election. Only time will tell if they are correct. Buried in the party’s announcement was another pledge that will send a chill down the spine of some investors. As part of the master plan to pay for the tax regime changes, the Liberals would roll back the recent increase to $10,000 in the contribution limit for Tax-Free Savings Accounts. They aren’t saying they’ll abolish the plans, just take the limit back to the original $5,000 a year. There was no mention as to whether indexing would be restored in the process. (It was dropped in the budget as a trade-off for the move to $10,000.) Tinkering with tax brackets and rates is one thing. Every government does it. But changing the rules for popular savings plans such as TFSAs and RRSPs is bad policy. Surveys consistently tell us that a high percentage of people don’t understand the details of these savings plans. This is especially true for TFSAs, which are relatively new, having been launched in 2009. It’s unhelpful for any government, Conservative, Liberal, or NDP, to continually revamp the playing field. Moreover, the promised rollback may be a serious political mistake for Mr. Trudeau and his party. A Nanos poll conducted for The Globe and Mail and released last week showed that 64% of respondents approved of the TFSA contribution increase and 55% - more than half of those surveyed – said they were likely or somewhat likely to save more money in their plans over the next two years. “Even if you try to argue that many Canadians will not take advantage of it, I think it would be fair to say that for the average Canadian, just knowing that they could put more money in a Tax-Free Savings Account is probably a political win,” the Globe quoted pollster Nik Nanos as saying. Although some economists have warned that the TFSA contribution increase will compromise government revenue in the future, the short-term effect of a rollback would be negligible. According to the budget annexes, the fiscal cost of the move for Ottawa will be $85 million in the current fiscal year, rising to $360 million in 20192020. The five-year total is $1.135 billion, which is a drop in the bucket in terms of federal revenues. We can debate the pros and cons of the Robin Hood tax plan – and we most certainly will in the coming months. But let’s leave TFSAs and RRSPs alone. Both are popular programs that encourage savings – more of which we desperately need. Don’t mess with them. – G.P. ENERGY BOUNCE BACK LOOKS FRAGILE We welcome back contributing editor Ryan Irvine who revisits some of his energy-related picks in the context of the new reality in the sector. Ryan is the CEO of KeyStone Financial and one of the country’s top experts in small cap stocks. Ryan Irvine writes: This year, and more acutely over the past month, we have seen a sharp uptick in a select number of the energy related stocks from our coverage universe from the lows experienced after the oil price shock which began this past fall. As oil prices have shown strength in recent weeks, investors have bid up what we consider the more quality (profitable) energy shares, including Parex Resources Inc., which has seen its shares gain over 50%, from the January Continued on page 4… Building Wealth’s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd. All rights reserved. 4 Internet Wealth Builder – May 11, 2015 Fragile Bounce – continued from page 3… lows. Shares in Macro Enterprises Inc. have more than doubled since dropping to 52-week lows in January of this year. Some of the gains are deserved as the price declines are typically overdone as panic sets in. However, we do see some risk in the segment as capital spending has ground to a halt near-term. Crude is now well above its lows but still remains 35% lower than the levels we saw at this time last year and by most reports, the world remains awash in the stuff at the moment. Given this widely held view, it is unclear as to whether a continued uptick in oil is sustainable. At the very least, the rally appears somewhat fragile. What we do know is that capital spending will be significantly lower in the energy segment for at least 12 months. As such, we are not looking to add to our exposure in this group and will take the opportunity to cut some names following the recent uptick. We stress that nearly all of these companies will be facing significantly lower year-over-year results for the next 12-18 months at a minimum. As a result, we are cutting ratings on Macro and Parex – details and specific recommendations on each are provided in my updates. For example, in the case of Parex, we continue to see the stock as the best of the Canadian-listed international oil producers. However, given the recent gains in the share price, we view the stock as fair to moderately richly valued at present. Of course, if oil continues to move higher, these stocks will perform well. We just do not feel it is necessary to be overexposed to this volatile segment at present. For unique exposure to the segment we continue to recommend High Arctic Energy Services, which pays a healthy dividend and is well positioned to post strong cash flow in 2015 when most in the segment will face significant declines. RYAN IRVINE’S UPDATES Macro Enterprises Inc. (TSX-V: MCR, OTC: MCESF) Originally recommended on June 2/13 (#21320) at C$3.63, US$3.62. Closed Friday at C$2.50, US$2.45 (May 4). Background: Headquartered in Fort St. John B.C., Macro’s core business is providing pipeline and facilities construction and maintenance services to major companies in the oil and gas industry in Northeastern B.C. and Northwestern Alberta. Outlook: As a result of the significant decline that commodity prices experienced during the second half of 2014 and through the start of 2015, activity levels in the oil and gas industry have been materially impacted across Western Canada. Although the pricing uncertainty is affecting activity and many projects have been delayed, Macro reported that large oil and gas companies are continuing to request bids on significant projects, both LNG (liquefied natural gas) related and not. With a solid balance sheet, the company is positioned to weather these uncertain times. Management is anticipating revenues in the first half of fiscal 2015 to be significantly less than those recorded in the same period last year, which were a record at the time. Rather, it is looking for revenue that is more closely aligned with what was recognized in the second half of the prior year. The company is targeting margins more in line with historical averages and as such expects to see financial improvements to its operations throughout the upcoming year. Growth wildcard: As part of its strategy, the company is seeking construction contracts in connection with the LNG projects being planned on the west coast of British Columbia. This is an industry that is anticipated to bring substantial economic activity to B.C. over the next 30 years. Macro has completed bid processes and has entered into discussions with the LNG project owners regarding future pipeline and facilities construction. Macro has also been approached by several major clients to assist with budget and constructability estimates for major pipeline and facility projects that are not LNG related. These projects are scheduled for approvals by mid to late 2015. Conclusion: Macro’s shares have more than doubled since its oil price driven lows hit earlier in the year, when it bottomed out at $1.17 on Jan. 30. While we believe the company is well positioned to benefit from infrastructure and LNG work if and when new projects come online, the current environment will produce year-over-year declines in revenues throughout 2015. While management has stated that it expects margins to be closer to historical averages in 2015, there is a danger that the low price environment increases competition and makes the company even more of a risk taker, particularly over the next year. Macro has a strong balance sheet and its CEO known as a first-rate operator in a tough business, so the Continued on page 5… Building Wealth’s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd. All rights reserved. 5 Internet Wealth Builder – May 11, 2015 Ryan Irvine’s Updates – continued from page 4… company will survive this downturn. The firm has idle equipment ready for larger scale work and at present is essentially a “lottery ticket” on higher energy prices and the long-term development of West Coast LNG. For those that like this type of investing, the company offers value at this stage, but we prefer more consistent and predictable cash flow that is less dependent on a very volatile commodity. In the case of Macro, given the current environment, we have a great deal of difficultly realistically modeling cash flow over the next 12-18 months. Ultimately, the company’s fortunes will be tied to higher energy prices. If oil and gas continue to move up and sustain pricing, the lottery ticket will have a far greater chance of paying off and the rewards could be strong, but it’s all very unpredictable in the current environment. Bearing all these factors in mind, we advise using the recent share price rise as a chance to divest our position in Macro and focus on less volatile companies to profit from a rise in energy prices. Action now: Sell. Parex Resources Inc. (TSX: PXT, OTC: PARXF) Originally recommended on July 28/13 (#21328) at C$5.38, US$5.23. Closed Friday at C$9.65, US$8.23 (May 6). We introduced to Parex Resources Inc. to IWB members in July 2013 at $5.38. In May last year, with the stock trading in $11.50 range, we recommended readers sell half of their original positions in this Colombia light oil producer for a gain of 114%. Background: Headquartered in Calgary, Parex is engaged in oil and natural gas exploration, development and production in South America and the Caribbean region. Outlook: Parex has continued an impressive and positive multi-year track record of year-over-year growth in reserves and cash flow. The company continued to build on this in 2014. While we expect reserves to once again grow in 2015, cash flow will not in the current oil price environment. When we first recommended Parex, the company traded at a significant discount to its peers on a cash flow and net asset value basis. Today, Parex has developed into a company with one of the best combinations of management, assets, and balance sheet strength in the Canadian national and international exploration and production segment, with an impressive track record of value creation through acquisitions and the drill bit. We expect Parex to maintain balance sheet strength relative to its peers in a reduced oil price environment, positioning itself to restart growth with opportunistic acquisitions or development of significant existing organic projects when oil prices recover. Having said this, the company no longer trades at a discount to its peers given the relative strength of its shares in a dismal market. From a valuation basis, Parex’s 2015 expected EV/DACF (enterprise value to discounted annual cash flow) is currently 6.2 versus international peers at 4.4. The company trades at around 7.5 times the current year’s cash flow estimate versus 2.8 times when we originally recommended the stock. A good deal of the multiple expansions has come as a result of the drop in crude prices and would be resolved to a degree with oil returning to the US$80-$90 range. Growth potential: Potential catalysts include results from exploration and appraisal/development drilling that have now restarted following a short hiatus at the beginning of this year. Conclusion: Following the stock’s outperformance recently, we now view Parex as trading at a significant premium to a majority of its closest peers on net asset value metrics. Therefore, we are downgrading our rating to Sell near term and placing the company on our monitor list. We continue to see Parex as one of the best international junior oil producers, but its shares are not fundamentally inexpensive at this time. Action now: Sell. High Arctic Energy Services Inc. (TSX: HWO, OTC: HGHAF) Originally recommended on Sept. 2/13 (#21332) at C$2.85, US$2.55. Closed Friday at C$4.25, US$3.53. Background: High Arctic is an international oil and gas services company with operations in both Papua New Guinea (PNG) and Western Canada. High Arctic’s substantial operation in Papua New Guinea is comprised of contract drilling, specialized well completion services and a rentals business, which includes rig matting, camps, and drilling support equipment. Results: High Arctic reported strong performance for the fourth quarter and full year of 2014 with growth in earnings and EBITDA and continued accumulation of cash on the balance sheet. The company reports that while the sharp decline in oil prices in the fourth quarter of 2014 has significantly reduced oil field activities in most regions of the world, High Arctic’s operation in PNG has not felt the effects of these declines as operators in PNG continue to focus on LNG development. Continued on page 6… Building Wealth’s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd. All rights reserved. 6 Internet Wealth Builder – May 11, 2015 Ryan Irvine’s Updates – continued from page 5… Outlook: Looking forward into 2015, the outlook appears to be solid with the company’s recently acquired drill rigs (Rig 115 and 116) scheduled to commence operation in the second and third quarters, both under two-year contract agreements. However, as High Arctic’s new drill rig acquisitions won’t fully begin to contribute to earnings until the latter half of the year, we may see a moderate decline in earnings and EBITDA in the first half of 2015 due to expected weakness in the Western Canadian operations and lower utilization in the rental business in PNG. For the full year of 2015, we expect earnings and EBITDA to be flat to moderately ahead of the 2014 performance with growth in 2016. Relative to the peer group of energy service companies, High Arctic is extremely well positioned in the current market with a stable earnings profile, very solid balance sheet with $0.66 per share in net cash (and growing), and an attractive valuation. Although we are generally advising investors to keep a minimal to moderate level of exposure in oil and gas producers and services companies, we continue to see significant upside in High Arctic over the next one to three years and view the stock as generally superior to its peer group and a solid growth and income investment in the energy sector. Action now: Buy. Hammond Power Solutions Inc. (TSX: HPS.A, OTC: HMDPF) Originally recommended on Jan. 28/13 (#21304) at C$8.60, US$8.58. Closed Friday at C$6.75, US$5.58. Finally, we take a quick look at Hammond Power Solutions Inc., originally recommended in January 2013 when the stock traded at $8.32. The stock has been a laggard in our portfolio, closing this past week at $6.75. Background: Hammond Power is a North American leader in the design and manufacture of dry-type custom electrical engineered magnetics, electrical dry-type, and cast resin transformers. Leading edge engineering capabilities, high quality products, and responsive service to customers’ needs have all served to establish HPS as a technical and innovative leader in the electrical and electronic industries. Growth potential: Over the past five years, Hammond Power has invested in a number of growth initiatives including international acquisitions, capacity expansion strategies, new product development, and increased capital spending for strategic projects – all in anticipation of a sustained recovery and growth in its primary markets. Conclusion: To date, this hoped-for sustained recovery has yet to gain real traction. The negative impact of an erratic and unpredictable economy as well as the variability of foreign currency exchange rates, manufacturing throughput, raw material commodity costs, and market pricing pressures has affected the company. To a large degree, the company’s capacity has been too large for the amount of business the market is generating. As a result of the lack of throughput, its factories have not operated nearly as efficiently as the company had anticipated and margins have suffered. We do expect that as the market recovers, Hammond Power will gain the throughput necessary to push margins, but the near-term outlook remains muddied. The business is a good one and not going anywhere. We maintain our Hold rating on the stock, potentially upgrading Hammond when we see a sustainable uptick in business. The company has entered a new market, which may enhance profitability by year’s end. We will monitor closely. Action now: Hold. GORDON PAPE’S UPDATES JPMorgan Chase & Co. (NYSE: JPM) Originally recommended by Tom Slee on Feb. 3/13 (#21305) at $47.85. Closed Friday at $65.49. (All figures in U.S. dollars.) The share price of this big U.S. bank strengthened following the release of stronger than expected firstquarter results. The company reported net income of $5.9 billion ($1.45 per share), up from $5.3 billion ($1.28 per share) in the first quarter of 2014. Revenue was up almost $1 billion year-over-year (about 5%) to $24.82 billion. The revenue gain was predominantly driven by strong performance in the Corporate & Investment Bank, both in markets and investment banking. In addition, there was an increase in fee revenue in Asset Management and Mortgage Banking, partially offset by lower gains in Private Equity. Net interest income was $11 billion, relatively flat compared with the prior year. The company announced a 10% dividend increase, Continued on page 7… Building Wealth’s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd. All rights reserved. 7 Internet Wealth Builder – May 11, 2015 Gordon Pape’s Updates – continued from page 6… effective with the next payment, to $0.44 per quarter ($1.76 annually). At the current price, the shares yield 2.5%. Action now: The stock remains a Buy for long-term growth and modest cash flow. Wells Fargo & Co. (NYSE: WFC) Originally recommended on Jan. 27/13 (#21304) at $35.14. Closed Friday at $56.05. (All figures in U.S. dollars.) First-quarter results from another major U.S. bank were less impressive. Wells Fargo reported earnings of $5.8 billion ($1.04 per share), down slightly from $5.9 billion ($1.05 per share) in the same period of 2014. Revenue was up by a modest 3%, to $21.3 billion. A drop in net interest income was the main drag, although it was due mainly to timing. Credit losses improved by 4% over the fourth quarter of 2014, coming in at $708 million. “Nonperforming assets declined by $618 million, or 16% annualized) from the prior quarter, and early stage delinquencies dropped,” said chief risk officer Mike Loughlin. “We released $100 million from the allowance for credit losses in the first quarter, reflecting continued credit quality improvement. Future allowance levels may increase or decrease based on a variety of factors, including loan growth, portfolio performance and general economic conditions.” Despite the flat bottom line, the bank announced a 7% dividend increase, to $0.375 per quarter ($1.50 per year). The next dividend is payable on June 1 to shareholders of record as of May 8. The stock yields 2.7% at the current price. Action now: Buy. Shaw Communications (TSX: SJR.B, NYSE: SJR) Originally recommended on Feb. 3/08 (#2805) at C$20.53, US$20.64. Closed Friday at C$27.44, US$22.71. The shifting landscape in Canada’s telecommunications sector due to new CRTC rulings is hitting corporate bottom lines hard. Calgary-based Shaw Communications was among the casualties, reporting a big drop in profits when it released results for the second quarter of the 2015 fiscal year on April 14. Net income for the period was $168 million ($0.34 per share) compared to $222 million ($0.46 per share) for the same period last year. Net income for the first six months was $395 million ($0.81 per share), down from $467 million ($0.98 per share) the year before. Second quarter revenue was $1.34 billion, up 5% yearover-year. First half revenue was $2.73 billion, an improvement of 3%. A significant portion of the profit decline was due to the decision by the CRTC that enabled customers to cancel long-term plans. CEO Brad Shaw said that, while the company supports the CRTC’s “commitment to maximize choice for Canadians” the new regulatory environment “will not be without its challenges”. The share price fell by more than $1 after the results came out and the stock is down 14% from its all-time high of $31.93 reached on Dec. 29. The only good news is that the lower share price has increased the yield to 4.3%. The stock pays a monthly dividend of $0.0987 ($1.1844 per year). Action now: Hold. We still haven’t seen all the fallout from the CRTC’s rule changes. BCE Inc. (TSX, NYSE: BCE) Originally recommended on Dec. 14/08 (#2844) at C$21.30, US$17.06. Closed Friday at C$53.80, US$44.28. The uncertainty created by the CRTC has also hit BCE shares, which are down 10.6% from their all-time high of $60.20, reached in early February. However, in this case the sell-off appears to be overdone. Investors appear to be nervous about the future financial impact of various CRTC decisions on wireless services, cable TV, and broadcasting. The company beat expectations with its first-quarter results that featured an impressive increase of more than 35,000 new wireless customers. Wireless is the big growth area for communications companies these days; BCE generates only 9% of business from wireline home phones. The growth in wireless powered the company to a 2.8% year-over-year increase in revenue, to $5.24 billion. Adjusted net earnings were up 12.6% to $705 million. Adjusted earnings per share were $0.84, up 3.7%. Free cash flow was $231 million ($0.27 a share), down from $262 million ($0.34 a share) last year. That’s not good news as the company ties its dividend directly to free cash flow, aiming to pay out 65% to 75% of that amount to shareholders. Action now: BCE remains a Buy although mainly for income at this time. Growth is likely to be minimal until investors can assess the full impact on the company of the various CRTC rulings. – G.P. Building Wealth’s The Internet Wealth Builder is published weekly by Gordon Pape Enterprises Ltd. All rights reserved.
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