This Company’s Use of Cash is Outstanding

So check it. I haven’t written anything lately because as I mentioned in my last post, I simply “fell out of love” with buying companies only for their growing dividends. I felt it was a bit hypocritical of me to be writing only about stocks that grow their dividends, when I was actually finding myself buying great companies that don’t necessarily pay a dividend at all! But any who, I am over this feeling now so onwards and upwards, as they say.

Now on to the topic of this post – I want to highlight a little Canadian company that I own that is one of the best examples I can think of of a company that generates tons of cash and uses it wisely – Richelieu Hardware Ltd. (“RCH”)

Before we dive head first into RCH’s financials, I want to quickly first describe the type of businesses that I am looking for in general. The businesses that I buy and hold all tend to have these common characteristics:

1) they have a long history of generating positive free cash flow

2) they largely finance their growth via internal free cash flow generation and NOT by continuing to tap debt and equity markets

3) what they don’t use for growth, they give back to their shareholders by hiking their dividend and buying back shares.

Ok, with these characteristics in mind, on to RCH.

RCH has a very long history of generating positive free cash flow

Looking at the below summarized financials of RCH, you can see that starting in 2003 and ending in 2013 (I haven’t yet updated my financials database for 2014), RCH has never had a negative free cash flow year. What is also quite exceptional about RCH is the minimal amount of capex they have spent over this period, only $48m compared to operating cash flow generation of $390m. Their “FCF / OPCF” ratio has averaged 88% over this period, meaning that for even $1 of operating cash flow they generate, $0.88 is “free”! Fantastic. This is just the type of business that I am looking for.

Richelieu Hardware - Financials

Ok, so just as important, what has RCH done with it’s free cash from 2003 to 2013? This my friends is even more outstanding…

1) they spent $91m on acquisitions

2) they paid $77m of dividends

3) they paid down $39m of debt

4) they bought back $90m of shares

5) and they retained $46m in cash.

WOW, this is one healthy little business.

What did I do when I discovered this little company?

After I came across these financials in the late fall of 2014, it didn’t take me long to decide what to do: I bought one half of my position in November 2014 at $56.57 per share and I bought the other half in January 2015 at $57 per share. As of end of business, July 3, 2015, RCH is currently trading for $65.10 per share, a healthy little holding period return for me of 14%.

As I have mentioned in previous posts, I am not here to tell the reader what to do (when they should buy, how much they should buy, when they should sell etc.), I am here to simply point the reader in the direction of stocks that appear to be great businesses, and let them decide what to do for themselves. But if it was me and I came across a little company like RCH that:

1) generates boat loads of free cash

2) finances their growth by internal cash generation and NOT by tapping debt and equity markets and

3) rewards shareholders by hiking their dividend and by buying back shares,

I would be initiating a position quite soon and holding for the long-term.

Cheers friends!

Well, I simply changed my mind

Last year around this time I starting writing this blog. I was super excited about what I had to tell the world about dividend growth stocks.

However, after a certain amount of time (9 posts to be exact), I sort of “lost” interest. It was not because I no longer loved the stock market, I still do! In fact, I look at stocks all day long. It’s just, when I first started really investing for the long haul, I was so high on dividend growth companies that I believe I missed the bigger picture.

So what is the bigger picture you might ask? After digging into the financials of companies a little further, I realized that even if the company pays no dividend at all, it can still be a great investment as long as the company generates cash. This is important. As long as a company is consistently generating cash, it doesn’t matter whether it pays and grows a dividend or not.

What a revelation!! – now I could expand my investing horizon to not only include dividend growth stocks, but also great stocks that don’t necessarily pay dividends at all.

So going forward, while this site will continue to be called divgrow (because it is so gosh darn catchy), if I choose to return to blog post writing – I haven’t decided yet – then I will also include stocks that I like that don’t necessarily pay increasing dividends, or dividends at all!

Happy investing.

5 Trends I Look For When Examining Long Term Financial Statements

I’ve been scouring through financial statements these days in search of good businesses that I can showcase on DivGrow. My partner thinks that I am quite lame for doing this (with love of course), but nonetheless, I seem to enjoy it for some reason, so i’ll continue to do so:). If you’ve checked out this site before (or have been unfortunately subjected to my ‘lecturing’ on investing in person), you probably know already that I always start my stock picking process with an initial screen that filters out all companies that aren’t growing their dividend. I figure that in my life, my “easiest” shot at getting wealthy is over the long term, not the short term, through buying and holding good, profitable companies that grow their payouts enough so I can eventually retire on dividend checks. While a lot of people I talk to have correctly pointed out that there are plenty of good businesses out there that don’t pay dividends, I still choose to focus on companies that do because frankly, I like getting paid NOW and also because it is a good way to narrow down the list of stocks I need to follow.

Once I determine the universe of stocks that meet my screen, I then sift through financial statements looking for companies within this universe that I want to buy and hold for my own portfolio. Importantly, just because a company is a dividend grower does not mean I necessarily want to own it because as I pointed out in my last post, I am quite young, and therefore I prefer to overweight companies that are growing their dividends the fastest, subject to the constraint that they can continue to finance their growing dividend with free cash flow and NOT debt or new equity, within reason. Luckily there are many of these companies out there, which is good because rule #3 of the 8 timeless investing rules says not to bet all your pounds on one pony.

Long Term Track Record

The markets these days are fixated on the short term. This is evidenced by the fact that virtually all analyst reports on companies you’ll read come with a one year price target, or something to that respect. I pay virtually no attention to these target prices because my plan is to buy and hold the right companies for the long term and I therefore couldn’t care less about where the stock trades next year. Maybe it goes up, maybe it goes down, but if the underlying fundamentals remain solid and earnings and dividends keep growing, over the long term, chances are it will eventually trade higher than today.

Instead I like to focus on a companies long term financial track record and look for promising trends that help me conclude on how well a company has executed their business strategy over time. When looking at a companies financial statements, I like to look back as far as there is information available. I am fortunate to have access to a Bloomberg portal, which typically gives me 20+ years of financial statements for most companies. Lucky me!

This brings me to the point of this post. As mentioned above, once I have my universe of stocks, I then sift through the long term financial statements of companies within this universe and look for promising trends. There are many good checks you should look for, but to keep this post to a reasonable length, I am going to focus on five trends that I always look for when studying a companies long term financial statements.

The easiest way to demonstrate is on an actual company, so for the rest of this post I am going to study the long term financials of dividend grower Hormel Foods, (“Hormel”), a $14 billion food company that owns popular food brands like “Spam” and “Skippy.” Hormel trades on the NYSE under symbol “HRL“.

Trend #1 – Dividend Growth

Not surprisingly, the first thing I look at is dividends paid over time. In particular, I look to see (1) if dividends are growing and (2) if the rate of dividend growth is attractive. Hormel is solid dividend grower that announced its last dividend hike in November 2013 for the 48th consecutive year in a row. Consistent dividend hikes are obviously great, but not only is Hormel’s dividend growing, since 2005 it has been growing at an accelerated rate. For the 15, 10 and 5 years ending in 2013, Hormel grew their dividend at 10%, 12% and 13%, respectively. In fact, in November 2013 they hiked their dividend another 18% from 0.68 to 0.80 per share! I love to see an acceleration of dividend growth, because that tends to imply that management expects the company to continue to grow quickly going forward.

Here is graph that shows Hormel’s dividends paid per share since 1993. Notice that dividend year over year growth (red line) has increased on average since 2005.

Dividend Graph

Trend #2 – Stable Payout Ratio

What good is buying a company to harvest their dividends if dividends are not sustainable? To check on dividend sustenance, I look at the payout ratio. Since 1993, Hormel has managed to quickly grow their dividend and also maintain a low payout ratio of approximately 30% of earnings (33% as of 2013). Dividend growth along with a stable payout ratio can only mean one thing, earnings growth, which is truly what I am after because dividends are only one driver of total shareholder returns. Earnings growth is the other.

I don’t really have a rule of thumb for payout ratios, I just look for consistency. Companies of different sizes and in different industries have varying average payout ratios. For instance, utility companies which tend to have very predictable cash flows, can afford to have a higher payout ratio.

Here is a graph that shows Hormel’s earnings and dividends paid per share since 1993 along with the payout ratio (red line). This graph highlights that Hormel has grown its dividend in lock step with its earnings, which is exactly what I am after.

Earnings Graph

Trend #3 – Growing Revenue & Stable Margins

Sales growth is paramount. Without sales growth it is very hard to grow earnings and cash flow over the long term which will in turn, limit dividend growth. I therefore always look at how the company has managed to grow their revenue over time and also, if margins have remained stable or even better, improved. Often when a company gets too big or loses something important like a large account for example, revenue growth slows down. If revenue growth becomes stale, in order to maintain earnings and dividend growth, the company would need to cut costs, sell assets, restructure etc., which is often quite difficult. Therefore consistent, growing revenues, coupled with stable and improving margins is the recipe for long term earnings and dividend growth.

Here is a chart of Hormel’s revenues over time, along with two lines (1) EBITDA margin (red line) and (2) free cash flow margin (blue line). EBITDA margin only includes operating costs and doesn’t take into account capex, interest, taxes and working capital impacts on cash flow, so I expect to see this metric be more stable than free cash flow. However to get a full sense of cash generation as a percent of revenue, I look for a consistently positive, stable and growing free cash flow margin which indicates that the company is able to generate an increasing amount of cash as revenue grows over time. The company can then use this cash to fund things like dividend payments, share buybacks and also reinvest in the business to fund future growth. As per the graph below, Hormel looks good on both measures.

Margins Graph

Trend #4 – Stable or Falling Share Count

This one is simple and meant to check that management does not have a history of diluting shareholders. Further, you can get a sense of management’s commitment to returning capital to shareholders if the company has a history of buying back shares.

As you can see from the below graph, Hormel has bought back their shares over time. This is fantastic to see because it means (1) management likes to reward shareholders and (2) if debt balances haven’t grown (which they haven’t), then the business must have grown via internal cash flow generation.

Share Count Graph

Trend #5 – Balance Sheet Strength

Last but not least, I always, ALWAYS study a companies balance sheet to understand their capital structure. Leverage when used effectively, can enhance a companies shareholder returns. However, just like people, if a business gets into to much debt, that can spell serious trouble. Like payout ratios, I don’t have a general rule of thumb for how much debt is appropriate as different types of businesses and industries have different ‘typical’ capital structures. For instance, a utility can handle higher leverage because of the stability of its cash flows. In contrast, a more cyclical company like an auto parts manufacturer should have lower debt levels so they can manage debt service payments in booms and busts. For me, I prefer as little debt as possible in the companies I buy so they can maintain maximum discretion over their free cash flow, but I also know that debt can sometimes be a good thing and accretive to shareholders if used effectively, so reasonable debt levels don’t scare me away.

To check on long term debt trends, I like to look at two ratios: net debt/equity and EBIT/interest expense. Net debt/equity is a ratio of the companies uncovered debt obligations relative to owners equity. It is best to check this ratio for stability over time and also compare it to companies within the same industry. EBIT/interest measures a companies ability to fund ongoing interest payments from operating earnings. Here, the higher the ratio, the better and like net debt/equity, it is also best to watch this ratio over time for stability and benchmark it against industry peers.

In the below graph, notice that Hormel has de-levered over time as net debt/equity has decreased. Not surprisingly, EBIT/interest has increased as debt levels and interest payments have come down. As a result, Hormel has a very healthy balance sheet with net debt of -$180m as of the end of 2013 and interest coverage of greater than 60 times.

Balance Sheet Graph

A Few Final Thoughts

As you can tell from the five above graphs, Hormel looks like a profitable, healthy, stable dividend grower. Further, Hormel has been accelerating their dividend growth in recent years! This is exactly the type of business that I look to buy and hold. Hormel is company with a track record of rewarding shareholders, a stable of strong brands, solid underlying fundamentals, and one that I can easily imagine being around long after I die. After all, people got to eat right?

I must point out however, that my research doesn’t end after I look at these five trends. I also check out things like current management, their product lines, how they stack up against their peers etc., as there might be something that has changed within the last few years that isn’t apparent just by looking at financials, that may push off a company.

Further, it is important to highlight that there are plenty of companies that have similar track records as Hormel. Knowing this, I look to add as many companies with solid financial track records to my portfolio as I can in order to maximize diversification. This way I will always live to fight another day.

Well friends, that’s all for now. Until next time, follow the growing dividends!

Disclosure: I don’t own HRL, I will look to initiate a position in the future.

Small Yield & Higher Growth or High Yield & Lower Growth?

Over the last few days, people who I have discussed recent posts with all seem to highlight a common theme regarding the stocks I choose to showcase: the stocks I tend to focus on all have low initial yields. This really is only half true. While the stocks I tend to prefer often do have low initial yields relative to other dividend stocks, there is typically a very good explanation for this – these stocks also tend to grow their dividends the fastest.

Now don’t get me wrong, like any rational investor, I prefer high dividend payouts as much as the next guy. However, what I tend to prefer MORE are good businesses that consistently grow their dividends faster than their peers, subject to the constraint that these good businesses maintain their ability to fund their growing dividend with free cash flow and NOT debt or new equity, within reason. I will explain more on this below, but first let’s recap – in my last four posts I wrote about four different stocks that all have a current yield of less than 2.0%:

Dover – 1.7% current yield

CN Rail – 1.3% current yield

Tim Hortons – 1.9% current yield

Valspar – 1.4% current yield.

Long Term Investment Horizon

The reason why I have the ability to remain privy to stocks with lower initial yields but fast growing dividends is because I am quite young at just 26 year old (almost 27). Further, I have a good job that allows me to pay myself first, so I can build a position in these stocks over time. This point is very important because buying into positions over time allows me to dollar cost average, a conservative acquisition strategy that should serve me well considering current market multiples.

Considering I have such a long term investment horizon, I am much less concerned about current income and more interested in maximizing the potential long term growth of my dividends. A quick example will help further illustrate why I tend to prefer stocks that have fast growing dividends at the expense of current yield.

Example: CN Rail versus AT&T

CN Rail (“CNR”) has a current yield of 1.3%, which by all accounts can be considered pittance and as such, not very meaningful to an income investor. However, while CNR’s current yield is small, this company manages to grow its dividend at an amazing clip. In fact, over the last 10 years CNR has hiked its dividend at an astounding pace of 18% per year compounded annually, while maintaining a dividend payout ratio of less than 30% as of the end of 2013. If you had bought this stock 10 years ago and held onto it, your initial yield or ‘yield on cost’ would have increased by over 500%! Furthermore, with a payout ratio of less than 30% as of the end of 2013, CNR can retain plenty of cash it can then invest back into growing the business, increasing the chances of being able to maintain a high dividend growth rate going forward.

In contrast, lets now consider AT&T (symbol “T” on the NYSE), one of Americas largest companies and a core holding in many dividend investor’s portfolios. AT&T has an attractive current yield of 5.2%, which to most investors makes AT&T at first glance, the clear winner over CNR. Furthermore, with AT&T you get consistency as they have now hiked their dividend for 30 consecutive years. However, when looking at dividend growth over the same 10 year period ending 2013, AT&T has increased its dividend at a compounded annual pace of only 5% versus CNR’s 18%. While 5% is still a very respectable growth rate considering the size of AT&T, it is not even in the same ball park as CNR. As a result, if you had bought AT&T 10 years ago, your initial yield, or ‘yield on cost’ would have increased by only 160%, compared to CNR’s 500%.

To highlight this point further, if we extrapolate forward (note to readers: this is a fool’s game) another 10 years using today’s current yields for both stocks, on your cost basis, CNR would yield 1.3% * 5 = 6.5% and AT&T would yield 5.2% * 1.6 = 8.3%, two yields that are now much closer by comparison. This is an idealized scenario, but if past performance is any indicator of the future (note to readers: see previous note) and these two companies continue to grow their dividends at their current rates, it would only take another 3 years, or 13 years in total before your yield on cost for CNR is greater than AT&T. Therefore, if you plan to hold for more than 30 years like me, it makes sense to prefer the lower yielding, higher growth CNR over AT&T. In practice, I like to maintain exposure to both types of stocks for diversification benefits – rule #3 of my 8 timeless investing rules – but I do like to overweight higher growth dividend stocks.

The Results Don’t Lie

To help demonstrate further why I like to hold stocks with fast growing dividends, here is a chart that I sourced from Yahoo Finance that compares CNR (green), AT&T (blue) and the S&P 500 (red) since CNR went public in 1996. Over this time frame CNR has handily outperformed both the S&P500 and AT&T, which is largely a function of the fact that CNR has grown their earnings and dividends at a much faster pace.

CNRAILvsATT

Not For Everyone

As I mentioned above, I am still very young and am therefore fortunate enough to have plenty of time on my side. I know that in my lifetime I will likely see major market corrections, recessions, depressions, famines, wars etc. Luckily with time on my side and lots of diversification, I will hopefully be able to recover and still earn a reasonable return over the long run. Heck, with a bit of luck and skill, I may be able to do extremely well if I can “flush out the good ones” and hold on to them.

That being said, here is a word of caution: while I prefer to buy and hold higher growth dividend stocks in my portfolio while maintaining adequate exposure to the time tested stocks (read: Coca-Cola and Johnson and Johnson), this strategy is not ‘one size fits all.’ For many investors this approach does not make sense whatsoever.  Let’s take my mom for instance. She is in her late 50s, single and retired. While she is very lucky to be able to retire so early, she also still has a very long life expectancy of more than 30 years and must therefore generate enough income to be able to maintain her lifestyle for a long, long time. What she needs as an investor is current income and as a result, cannot afford to over-weight lower yielding stocks. For her equity allocation, a better strategy is to maintain a more balanced portfolio of stocks leaning towards over-weighting larger, slower growing, time tested dividend growers like AT&T, Coca-Cola and Johnson and Johnson.

Now don’t read me wrong here! While by now you likely understand the benefit of holding fast dividend growers, I am absolutely NOT saying that anyone should go out and swap their AT&T for CNR! A better approach is to maintain exposure to both and remain a strict follower of the 8 timeless rules of investing. But for the younger investors in-da-house, over-weighting the faster growers may be a strategy to consider because it is likely that companies whom grow their dividends the fastest are also growing their earnings and cash flow the fastest and to paraphrase the lovely Martha Stewart, that is a “good thing.”

Until next time friends, follow the growing dividends!

Disclaimer: I own CN Rail, I don’t own AT&T.

Paint Your Account Green With Dividends From This Good Business

I firmly believe that when it comes to operating a successful, profitable enterprise, the product you sell does not really matter. I say ‘really’ here because of course, it is much easier to consistently generate returns with a product that has all the usual qualities that make good products good.

As we learn in business school, good products that are capable of generating long term, stable returns typically exhibit (1) consistent and growing demand, (2) low substitutes, (3) high barriers of entry and (4) a significant cost advantage. A product that always comes to mind that exhibits these qualities is rail shipping. CN Rail for example, is fortunate to own and control a large railroad network of 20,000+ miles of track that they use to ship bulk goods across North America. Rail shipping is a product that boasts consistent and growing demand, particularly as the US continues towards energy independence, a significant cost advantage as it is much cheaper to ship bulk goods by rail than by truck, and high barriers to entry as new players would first need to lay thousands of miles of track before they could compete which would cost billions of dollars.

There are however, many profitable, good businesses that successfully produce and sell products that don’t seem to exhibit any of these typical qualities. Take a paint company for instance. For an enterprise to be successful over the long term while selling an incredibly competitive product like paint, other ‘softer’ or ‘qualitative’ virtues must be present within the enterprises ‘DNA’ that allow it to do so. These softer virtues, which eventually turn into competitive advantages, include things like the ability to build long term, deep relationships with customers and members of the supply chain and just as importantly, a good quality management team that can effectively allocate capital, control costs and capitalize on trends. For today’s post, I want to highlight a company that has been able to consistently outperform the market and has generated exceptional shareholder returns over time – while manufacturing and selling paint.

Brief Overview

The Valspar Corporation (“Valspar”) is a US$7 billion paint and coatings company that trades on the NYSE under the symbol “VAL“. Valspar has grown over its 200 year history from a single shop in Boston, Massachusettes to a company that offers a broad portfolio of paints and coatings products in over 25 countries around the world.

The company operates in two product segments:

Paints: as per Valspars 2013 annual report, their paint segment includes a wide variety of products such as paints, primers, topcoats, and aerosol spray paints that are sold primarily through retailers, distribution networks and company owned stores. The consumer paints product line comprises the largest part of this segment which offers a variety of paints for professionals and “do-it yourselfers,” which are sold through home centers, hardware wholesalers, distributors and independent dealers.

Coatings: also according to their 2013 annual report, their coatings segment includes a broad range of decorative and protective coatings for metal, wood and plastic. Products within the coatings segment include primers, top coats, varnishes, sprays, stains, fillers and other coatings used by customers in a wide range of manufacturing industries, including agricultural and construction equipment, appliances, building products, furniture, metal fabrication, metal packaging and transportation.

Cash Generation

Just by looking at their cash flow statement, it is quite obvious that Valspar is VERY good at manufacturing and selling paints and coatings. It is also obvious that Valspar is VERY good at buying other companies that manufacture and sell paints and coatings. As a result, Valspar is a cash machine and has the returns to back it up. From 2008 to 2013, according to Valspar, they have generated total shareholder returns of over 280%, compared to 103% generated by the S&P 500 over the same period. In fact, during the recession of 2008 and 2009, the company barely felt a blip in their operating cash flow even as revenues fell by 17%.

Further, once Valspar has the cash, they make good use of it and reward shareholders via paying a consistently rising dividend and repurchasing shares. Since 2007, and including the recession years, the company has repurchased net $900 million of its own shares and paid $450 million in dividends.

Here is a chart of operating cash flow, free cash flow and net earnings since 1992. Of note, it is positive to see operating cash flow track net earnings over time to help prove consistent earnings quality.

cash generation

Dividend

As mentioned above, Valspar pays a quarterly dividend to shareholders which has been rising consistently over time (why else would Valspar be featured on this blog?) In fact, as of November 2013, Valspar has increased its dividend for 36 consecutive years. Just as impressive is Valspar’s rate and consistency of dividend growth. Over the last 5, 10, 15 and 20 years, the dividend has grown by 10.4%, 11.9%, 10.3%, and 11.2%, respectively. There are few, if any, companies in the world that have posted such consistently high dividend growth over such a long period.

This is as much proof as I need to conclude that management is good at growing their dividend. But for all you naysayers out there, also note that earnings have been growing in lockstep with the dividend and as of the end of 2013, Valspar had a dividend payout ratio of mere 28%. Impressive to say the least. Here is a chart of dividends paid per share since 1992:

dividendgrowth

Like other good dividend growers that I have highlighted on this blog, Valspar is trading at a premium multiple to earnings. However, as I’ve mentioned in other posts, the point of this blog is not to highlight cheap or expensive companies, it is to highlight good businesses that have rewarded shareholders over time. Just like Tim Hortons, with Valspar I believe ‘you get what you pay for‘. Sure, Valspar is expensive, but if like me you abide by the 8 timeless investing rules and buy good businesses to hold for the long term, with such an impressive track record of success, buying and holding Valspar might be one of the best investments you ever choose to make.

Disclaimer: I do not own shares in Valspar. I will look to initiate a position in the future.

Get Addicted To This Company’s Coffee… And Their Dividends

Coffee is one of the world’s most popular drinks. It is also one of the world’s most popular vices! Once you’re a coffee drinker, most often, you’re a coffee drinker for life. This of course is great for coffee companies everywhere and even better if you are the dominant coffee company in your respective market.

While searching for good businesses, as mentioned in rule #1 of the 8 timeless rules of investing, you can often find them right in your backyard. In Canada, and increasingly the US, Tim Hortons is one of those good businesses. Tim Hortons (“Timmies”), a C$9 billion company that trades on both the TSX and the NYSE under the symbol “THI“, is a consistent cash generator with stable margins, a growing dividend and quite possibly the strongest brand recognition of any Canadian company.

Started in 1964 in Hamilton, Ontario, Tim Hortons has grown from a single store selling coffee and donuts to one of the largest publicly traded quick service restaurants in North America with over 4,500 outlets, of which 3,600 are in Canada and 900 are in the US. Further, Timmies has a dominant position in Canada, claiming to serve 8 out of every 10 cups of coffee to Canadians on a daily basis.

Dividend

Public since 2006 and paying a dividend ever since, the company hasn’t looked back, increasing dividends each year at an impressive rate of 33% compounded annually to the end of 2013. If you bought the stock in 2006 and held it until the end of 2013 your initial yield would have increased seven fold. While admittedly, the dividend has had a relatively short life to prove itself, with a payout ratio still less than 40%, Timmies has plenty of room for increases going forward, albeit likely at a slower pace. Here is a chart of dividends per share paid since 2006:

dividendchart

Share Buybacks

Tim Hortons has also been rewarding shareholders by buying back shares with excess cash they generate. Since 2006, the company has generated free cash flow of approximately C$250 million per year on average (C$360 million in 2013), and has bought back C$1.4 billion of net shares over the same time period. Here is a chart showing the companies common shares outstanding since 2006:

commonshares

With a healthy balance sheet, consistent, strong cash generation and a dominant position in Canada, Tim Hortons is a long term story that is extremely compelling and one that I feel has legs for years to come. With constant demand for their product through good times and bad, this recession proof business is a company that should continue to grow over time, at least outpacing the average rate of inflation as they pass rising costs onto consumers. This is one of those good businesses that I can easily imagine being around long after I die. I therefore want to own it and participate in the rising dividends and share buybacks over time.

While Timmies is certainly not cheap, currently trading at a premium multiple to earnings, like most other things in life, with stocks you often ‘get what you pay for.‘ Therefore, it is no surprise to me that a growing company with a dominant market position like Tim Hortons trades at a premium. Further, since I look to hold stocks for the long term, current trading multiples are of lesser importance to my investment decision, assuming I believe that the company will be able to realize the growth priced into the stock.

Like CN Rail, I have owned Tim Hortons for a while and have forgotten about it. I plan on checking back on it in 40 years to see how much my dividend payments have hopefully increased. Lastly, I especially don’t mind holding Timmies for the long term since I already spend so much money there! After all, their standard blend is in my opinion the best coffee in the Canada… wait, actually… the best coffee in the world!

Disclaimer: I own shares in Tim Hortons.

‘All Aboard’ This Canadian Company For Consistent Dividend Hikes

Trains are awesome. They are an energy efficient and cost effective means to move people and things. They are used all over the world in major cities to move the masses from home to work during rush hour and in the countryside to ship things in bulk across great distances.

There are few publicly traded railroad company’s these days, largely due to the very high barriers of entry to the industry, given that any new potential player would first need to lay thousands of miles of track across vast distances, which would cost billions of dollars.

Today, I want to highlight a particular rail operator, Canadian National Railway (“CNR”), which is one of the two major rail operators in Canada. Of course, like other company’s on this site, CNR generates tons of cash and is committed to rewarding its shareholders over the long term with a consistent, increasing dividend.

Brief Overview

CNR is a C$60 billion, Canadian company that is engaged in the rail and related transportation business. CNR trades on the TSX under the symbol “CNR“.

Publicly traded since 1995, according to their website, CNR owns and operates a network of 20,000+ miles of track that spans Canada and America, connecting the Atlantic ocean, the Pacific ocean and the gulf of Mexico. The company is the originating carrier for 85% of the traffic moving along its network, shipping many different types of cargo, from basic materials like grains and oil, to finished products for large corporate retailers. Here is recent map of their network, sourced from their website:

CN RailGrowth

The company is focused on many different growth objectives, which are largely based around the shipping of basic materials. According to their website, the company sees growth areas associated with:

1) increasing demand for shipping energy products by rail as of a result of the ongoing energy renaissance in the US

2) leveraging its Pacific coast access and gaining share in shipping products overseas to Asian markets and

3) the US housing market recovery which should drive demand for building products like lumber and panels.

Dividend

Due to the constant and growing demand for the company’s product, CNR has been able to handsomely reward shareholders ever since going public in 1995 with increases to their dividend and share repurchases. While CNR’s current yield is only 1.34%, this company is growing it like MAD. In fact, for the 5, 10 and 15 years ended in 2013, the company has managed to grow its dividend at a compounded annual pace of 13%, 18% and 16%, respectively. If you had held this company’s stock for this 15 year period, you would have increased your initial dividend yield ten fold. Furthermore, over this time frame the company maintained a dividend pay ratio of around 30% and lower. Here is chart of the company’s dividends per share paid since going public in 1995:

CNR - Dividend Graph

This company generates boats of cash and makes good use of it. In 2013, the company generated C$3.5 billion of operating cash flow and of that, paid $700 million in dividends and bought back $1.4 billion in shares.

Further, in terms of leverage, the company continues to strengthen its balance sheet over time with net debt to equity falling from approximately 90% in the early 2000s to around 60% in 2013 and interest coverage improving to around 11x over the same period.

CNR - debt

In all, as I’ve mentioned before, the point of this blog is not to pick entry and exit points, it is to highlight good businesses that will likely remain good businesses over time. CNR in my opinion, is one of these businesses, and one that I have “stuck under my mattress” and forgotten about.

I firmly believe that demand for CNR’s product will continue to grow as the population grows and I also believe that management is committed to rewarding shareholders with rising dividends and share repurchases over the long term. I am a buy and hold here and plan to check back on this investment when I retire in 40 years, hoping that my dividends have increases by multiples. After all, this company has a product with never ending demand, generates tons of cash, pays and grows it’s dividend and maintains a healthy balance sheet. Long term investors take note!

Full Disclosure: I own shares in CN Rail.

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