Thursday, August 24, 2006

'True Yield' Stands Out at 8 Firms: UBS

Wayne Cheveldayoff, 24 August 2006

A buying opportunity may have emerged for dividend-paying stocks, says UBS Securities Canada Inc. strategist George Vasic.

Rising bond yields have recently restrained their performance but even with this dampening effect, stocks with rising dividends have easily outperformed the market over the past 10 years and have a much better reward-to-risk ratio than the market as a whole, he says.

In a report in early August, Vasic focused on the companies among the 60 largest TSX stocks that consistently grow their dividends.

"Big-cap dividend growers have continued to be an excellent long-run investment; they kept up with the resource-led TSX rally of the last four years, clearly outperformed during the tech bust (as would be expected), and overall kept up with the tech-led market when viewed from 1995 to 2000 (although not with the most frenzied 24 months from 1998 to 2000).

"Specifically, we identified nine (mostly financial) stocks with an impeccable record of dividend growth, as well as another six consumer/industrial stocks with lower yield but solid long-term dividend growth.

"We find that the mostly financial stocks have led the pack, posting annualized gains of 17.8 per cent versus 10 per cent for the TSX 60 since 1995, even before allowing for their higher yield."

This group includes Bank of Montreal, Bank of Nova Scotia, CIBC, Enbridge, Manulife Financial, National Bank of Canada, Royal Bank, Sun Life Financial and Toronto-Dominion Bank.

Vasic also found that the 13.4 per cent average annual rise in the stocks of a group of consumer/industrial dividend growers also significantly outpaced the TSX 60. The consumer/industrial group includes CNR, Imperial Oil, Loblaw, Magna International, Thomson and George Weston.

A group of three higher-yielding stocks, including BCE, Transalta and TransCanada Pipeline, produced average annual gains of 9.8 per cent from 1995 to the present, basically even with the TSX 60.

Vasic points out that the relatively good performance of the three groups came with volatilities that were comparable to the market, meaning that a higher risk of fluctuations wasn't associated with the higher return produced by the dividend growers.

Furthermore, in the recent period of rising bond yields, the dividend-growers simply experienced a dampening of their growth trajectory rather than actual share-price declines as some investors feared.

Overall, according to the UBS report, dividend growers don't always decline when bond yields rise (although they have in some periods in the past), they do reasonably well during lacklustre markets and they do very well when the market rallies.

"The bottom line has been long-run outperformance with similar levels of volatility - thus a much better reward-to-risk ratio than the market as a whole."

In the near future, for the top-performing mostly financial group, "dividend growth is apt to slow, since part of the recent strength (notably among the banks) has been to raise payout ratios. Nevertheless, a five to seven per cent dividend growth rate (in line with earnings) looks reasonable, and coupled with the (approximate) three per cent yields, makes for a very attractive eight to 10 per cent long-run return potential."

In this group, average annual dividend growth rates in the period 2000 to 2006 have ranged from 10.4 per cent for Enbridge to 23.5 per cent for Manulife Financial, with Bank of Montreal recording 14.8 per cent, Bank of Nova Scotia 20.5 per cent, CIBC 13.7 per cent, National Bank of Canada 17.6 per cent, Royal Bank of Canada 16.7 per cent, Sun Life Financial 14.8 per cent and Toronto-Dominion Bank 11.4 per cent. Dividend yields in this group range from 1.9 per cent to 3.6 per cent.

In the consumer/industrial group, CNR recorded an average annual dividend growth rate for the same period of 18.6 per cent, Imperial Oil 3.5 per cent, Loblaw 15.7 per cent, Magna International 3.5 per cent, Thomson 4.1 per cent and George Weston 12.8 per cent. Dividend yields in this group range from 0.8 per cent to 2.2 per cent.

In the higher-yielding group, BCE's dividend grew by an average annual rate of only one per cent from 2000 to 2006, TransCanada 8.1 per cent and Transalta showed no growth at all. BCE has a dividend yield of 5.5 per cent, TransCanada 3.7 per cent and Transalta 4.2 per cent.
The Globe and Mail, Allan Robinson, 23 August 2006

It's easy to think about riding out a bear market before the share prices slump, but if stocks do get clobbered as a result of an economic slowdown, investors will feel better with some dividend-paying common shares in their portfolio, strategists say.

Those dividends can provide some share-price support and over the long run, companies with steady growth in dividends have proven to be among the best performers.

"Dividends historically represent -- and people don't often realize it -- roughly one-half of the total return on equities," said Michael Smedley, chief portfolio officer of Canadian General Investments Ltd., a closed-end equity fund with an investment portfolio of $833.7-million.

Over all, the fund's policy is to provide an annual yield of about 5 per cent from interest income, special dividends and capital growth, Mr. Smedley said. The yield on the shares in the fund's portfolio is currently 1.53 per cent, but it is significantly higher based on the book value of the investments, he said.

A $10,000 investment in CGI's common shares would have grown to $47,000 over the 10-year period ended June 30, 2006, which represents a compound average growth rate of 16.8 per cent, according to the company.

"In my view, quality never goes out of style," said Adrian Mastracci, an investment counsellor at KCM Wealth Management Inc. in Vancouver. There is a favourable tax treatment on common dividends and in bad times, dividend-paying securities on companies like the banks, insurance companies and utilities hold up better than just growth companies, he said.

After screening the S&P/TSX 60 along with 60 additional mid-caps, UBS Securities Canada Inc. came up with what it describes as a "true yield" for eight companies. The factors it assessed (in addition to their yield) were the dividend growth rate, the payout ratio and dilution caused by issuing common shares.

Starting with the dividend yield, UBS subtracted the three-year cumulative average growth rate of the shares outstanding, which is a dilutive factor. A more comprehensive measure takes into account the dilution, which reduces the true yield, while buybacks increase the yield, said George Vasic, UBS's strategist.

The eight companies and their current yields were Bank of Nova Scotia (3.2 per cent), Canadian Imperial Bank of Commerce (3.4 per cent), Canadian National Railway Co. (1.4 per cent), Great-West Lifeco Inc. (3.3 per cent), Manulife Financial Corp. (1.9 per cent), National Bank of Canada (3.2 per cent), Royal Bank of Canada (2.9 per cent) and Sun Life Financial Inc. (2.7 per cent).

Those companies provided a "true yield" of more than 3 per cent, no share dilution, more than five consecutive dividend increases with growth of more than 10 per cent and a payout ratio of less than 50 per cent, UBS said.