This Market Factors begins with the heretical notion that dividend investing strategies are on borrowed time. We move on to the sustainability of the ongoing bank stock rally and discuss a wretched ranking of Canadian music artists in the diversion. Quick hits are there as always.
Income
Over for dividend investors?
U.S. professional investor Todd Wenning wrote a book about dividend investing, which makes his recent heretical column, Dividend Investing is Dead, all the more surprising. Applying his argument to Canadian markets is not straightforward but we’ll give it a shot.
Mr. Wenning begins by reporting that U.S. consumer staples stocks that often anchored dividend portfolios in the past are being disrupted. He notes that dividend growth rates for companies like Coca-Cola, Colgate-Palmolive and Clorox have declined. Increased competition from microbrands and private labels (like Costco’s Kirkland), GLP-1 use and health consciousness are among the major culprits. Mr. Wenning believes that a dividend cut from a major staples stock will happen in the coming years.
The second major hurdle to dividend investing are modern boards of directors more inclined to approve share buybacks than dividends. Buybacks are less of a long-term financial commitment and provide more corporate flexibility. The S&P 500 buyback yield has been higher than the dividend yield for the past decade.
The rise of technology is the third trend making life more difficult for dividend investors. Mr. Wenning recounted the remarkable statistic that the average age of an S&P 500 constituent has declined from 57 years in the 1950s to 15 years now. Dividend-payers like Campbell’s, Macy’s, Xerox and Harley-Davidson have left the index to be replaced by tech stocks unlikely to pay dividends.
The ease with which new companies can implement technology to compete against sector incumbents often makes it necessary for established companies to invest in efficiency rather than pay dividends. The threat posed by new nimble companies can be very real, as domestic cable companies have learned. Mr. Wenning adds that newer companies often use buybacks to offset the dilution resulting from management stock options.
Canadian income investors are likely less at risk.
For one, they are not much threatened by the struggles of U.S. consumer staples stocks. The domestic staples sector is dominated by grocery stocks that pay dividends, but not huge ones.
If we’re going to apply a potential death of dividend investing theme to the TSX the first, most obvious place to look is the telecom sector. Once annoyingly dominant players in the domestic economy, the major telecom stocks are struggling to maintain their position as the centers of media distribution. BCE has already slashed its dividend and Telus Corp. is struggling to maintain a 10 per cent plus yield.
It seems unlikely that the domestic banks, utilities and pipelines will see their businesses significantly disrupted in the coming years, so dividend investing definitely has a future in Canada. The tensions, however, are rising and worth following for domestic investors.
Financials
Bank rally not sustainable
Jefferies analyst John Aiken thinks the major Canadian banks are overvalued. The current forward PE ratio of 15.3 times is about 50 per cent above the long-term average just above 10 times. The previous cycle peak in February 2006 was 13.5 times.
On a price-to-book-value basis, the current 2.2 times is well above the historical 1.6 times. Profitability in terms of return on equity (ROE) is improving, but at 14.6 per cent is below the 15.4 per cent average.
Mr. Aiken concedes that near-term profit growth will be strong but does not believe it is sustainable. Even if profit expectations are unchanged, a reversion to the mean of forward PE ratios would see bank stocks fall between 20 and 30 per cent. Planned share buybacks that would drive earnings per share higher by six per cent in 2027 would not be enough to drive PE ratios back to historical norms.
Mr. Aikens’ assumption that bank PE ratios will eventually return to previous levels is in contrast with the views of Scotiabank analyst Mike Rizvanovic, who believes that increasingly profitable capital markets businesses and improving ROEs justify higher for long PE ratios in the sector.
Joni Mitchell performing at The Riverboat Coffee House in Toronto, April 19, 1968.Dennis Robinson/The Globe and Mail
Diversions
A terrible ranking of Canadian music artists
Lists about music are designed to create controversy and discussion. I should be able to just ignore Rolling Stone’s ranking of top 50 Canadian artists but it’s so heinous I can’t.
Where to start. I’ll accept Joni Mitchell at number one even if the falsetto voice on all her hit songs sets my teeth on edge. I’m convinced her crowning at the top of the list is a reflection of Rolling Stone’s tendency to act like nothing important in music has happened since 1970. The Band at number six and the McGarrigle sisters at 16 are more proof of that trend.
Bryan Adams, arguably the most successful Canadian artist of all time along with Celine Dion (number 10 on the list) is ranked 30. This is behind Alvvays, the previously indigenous Buffy Sainte-Marie (28), Shawn Mendes (27), the New Pornographers (15) and Tegan and Sara (13). The Bare Naked Ladies are listed at 45, barely making the list. Drake and The Weeknd are both in the top ten and to me this smacks of recency bias. Or I could just be old.
I’m 100 per cent ok with Neil Young at number two and I don’t want to talk about Rush at number three because my views on Rush make people angry. On the whole, this list should come with a warning and blood pressure medication.
The essentials
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Globe Investor highlights
Ted Dixon looks at two top TSX gainers this year that insiders like a lot
A trading surge should help boost U.S. bank earnings as they begin reporting next week
How Canada’s ETF industry is preparing for competition from new U.S. share classes
Quick hits
Royal Bank strategist Lori Calvasini noted that the top 10 stocks by market cap in the S&P 500 are trading at 25.7 times forward earnings, closer to the lows of around 23 times they have reached on a few occasions than the most recent peak of 35 times. A Bloomberg story on Nvidia reported that the stock is now cheaper than Hershey’s the chocolate bar seller. Has a bubble ever ended when stocks are cheap?
I’ve been an F1 racing fan since I was a little kid and had passes to run around anywhere I wanted to go because my dad’s employer sponsored the races. It’s nice to see how well the sport is run now under Liberty Media’s stewardship, and analysts are taking notice of the publicly traded FWONK-Q. Morgan Stanley analyst Sean Diffley met with management at the Silverstone race earlier this month and came away with more conviction that upside was available to the business. The stock is trading around the US$100 level and Mr. Diffley has a US$120 target as his base case and a US$135 target as the bull case.
BofA Securities Research Investment Committee (RIC) surveyed analysts for their highest quality stock ideas and came away with three. Analyst Rinny Singh likes Vistra Energy Corp. (VST-N) as a beneficiary of increased power demand beyond nuclear as Vistra also has natural gas power capacity. Curtis Nagle recommends Moody’s Corp. (MCO-N) to profit from rising debt issuance and a recovery from oversold conditions. Telecom analyst Tal Liani likes Intuit Inc. (INTU-Q). The stock has been blasted by AI fears but the TurboTax business is growing rapidly.
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