Tag: dividend stocks

Lower inflation clears runway for rate cuts

Canadians dreading their spring and summer mortgage renewals got some good news this week, as Canada’s annualized inflation rate dropped to 2.8%.

The Statistics Canada report stated that the slower growth of cell phone service fees, groceries, and internet bills were key reasons why the consumer price index (CPI) number came in significantly lower than the 3.1% economists had reported.

The main takeaways from Tuesday’s StatCan report are:

• Rent and mortgage costs are still the main drivers of inflation. Excluding shelter costs, the CPI is up only 1.3% from a year ago.

• Gas prices rose 4% in February from January, and were a major reason for the 3.1% economist inflation predictions. If prices return to a decline (as has been the trend), it would continue to be disinflationary.

• Notably, cell phone plans were down an astounding 26.5% from last February.

• While grocery prices have risen by 22% over the past three years, it appears we’re finally reaching an equilibrium. February was the first time in two years that grocery CPI was lower than overall CPI headline.

• Restaurant meals, property taxes and electricity were outliers above the 3% CPI mark.

• The preferred metrics of core inflation for the Bank of Canada (BoC) are also subsiding, and are down to 2.2% annualized over the last three months.

If we use interest-rate swaps to judge the likelihood of an interest rate cut, there is roughly an 80% chance (up from 50% before the CPI numbers came in), that the BoC will cut rates in June. (Interest rate swaps are basically a way for the free market to speculate or bet on what interest rates will be at a specific point in time.)

In a related note, as the chances of interest-rate cuts increase, the value of the Canadian Dollar falls. The CAD hit a 3-month low on Tuesday. Overall, that’s good news for mortgage holders, bad news for USD-paying snowbirds.

By comparison, Japan raised its interest rates for the first time in 17 years this week, ending the world’s last negative interest rate policy. The Eurozone also released its inflation data this week, and in a pattern quite similar to Canada’s, it also surprised to the downside, as inflation fell to 2.8% from 3.1%.

This week, both the U.S. Federal Reserve and the Bank of Canada reiterated plans for rate cuts later in the year. Here’s how mortgage rates are responding.

Soft earnings for Power Corp and Alimentation Couche-Tard 

It wasn’t exactly a banner week for Canadian heavyweights Power Corp and Alimentation Couche-Tard.

Shares of Couche-Tard were down 4.2% on Thursday after its earnings release. ATD president and CEO Brian Hannasch stated that the lower-than-expected earnings were primarily due to lowered customer traffic and decreased gross fuel margin in the US. He went on to talk about how the integration of the TotalEnergies acquisition is going smoothly and that the company is excited about adding four new countries and 2,175 stores to Couche-Tard’s network of convenience stores.

Power Corp shares didn’t suffer quite the same fate as Couch-Tard, as they were up 1.4% on Thursday, despite the significant earnings miss. It appears that a 7.1% dividend increase was enough to quell any fears that the company was underperforming its current valuation.

Business textbooks are always teaching the Japanese business concepts of Kaizen, Kanban, Andon and just-in-time production. But despite this, the actual market valuations of Japanese businesses have been falling behind for a long time now (basically my entire life).

What some investors fail to understand about this historical anomaly is just how massively overvalued the vast majority of companies were in Japan in 1989. It’s as if Japan’s entire stock market had Tesla- or Nvidia-level expectations of world domination.

Here’s a few takeaways from Ben Carlson of A Wealth of Common Sense:

• From 1956 to 1986, land prices in Japan increased by 5,000%, even though consumer prices only doubled in that time.
• At the market peak, the grounds on the Imperial Palace were estimated to be worth more than the entire real estate value of California or Canada.
• In 1989, the price-to-earnings (P/E) ratio on the Nikkei was 60x trailing 12-month earnings.
• Japan made up 15% of world stock market capitalization in 1980. By 1989, it represented 42% of global equity markets.
• From 1970 to 1989, Japanese large-cap companies were up more than 22% per year. Small caps were up closer to 30% per year. That’s incredible growth for a 20-year period.
• Stocks went from 29% of Japan’s gross domestic product (GDP) in 1980 to 151% by 1989.
• Japan was trading at a CAPE ratio (cyclically adjusted P/E, which uses 10 years of inflation-adjusted earnings in its calculation) of nearly 100 times, which is more than double what the U.S. was trading at during the height of the dotcom bubble.

So, in regard to the constant naysayers who want to compare the “lost decades” of the Japanese stock market to current market conditions, we can only say there is no data to support this level of pessimism. In other words, there are market bubbles, and then there’s the Japanese bubble.

As usual, celebrated investor and CEO of Berkshire Hathaway, Warren Buffett was a bit ahead of the curve on this one. He’s been buying up Japanese assets for several years. Buffett was quoted by CNBC back in 2023 as saying, “We couldn’t feel better about the investment [in Japan].”

It’s also worth noting that even Japanese stocks win “in the long run.”

If you put $1 a day into Japanese stocks starting in 1980 (~$10,500 in total), you’d have over $17,000 today (thanks to recent all-time highs).

This is true despite Japan experiencing one of the worst equity market returns in history during this time period. pic.twitter.com/2t8SG9xJfV

— Nick Maggiulli (@dollarsanddata) February 26, 2024

As Nick Maggiulli, author of Just Keep Buying (Harriman House, 2022), says in the above tweet, if you had started investing in the Nikkei 225 in 1980 (in the run-up to the Japanese bubble), you’d still have a real annual return of 3.5% today (inclusive of dividends).

Carlson also points out that if you invested in a Japanese stock index back in the early 1970s, your returns would still be about 9% a year, despite the biggest bubble of all time bursting in the middle. It’s just that all future returns were pulled forward due to manic speculation—and investors have been waiting for companies to “grow into their valuations” ever since. After waiting a long time for the earnings growth spurt to kick in, it appears the valuation shoes finally fit.

Of course, no such Japanese index fund existed at the time. Today, Canadian investors can efficiently get Japanese exposure through exchange-traded funds (ETFs), such as the iShares Japan Fundamental Index ETF (CJP) or the BMO Japan Index ETF (ZJPN).

Nvidia doesn’t have much room left for multiple expansion when it comes to an increased share price for the stock. After accounting for its incredible earnings day, Nvidia is still trading at a P/E ratio of 66x. Even fellow tech heavyweights Microsoft and Apple are only at 36x and 28x respectively. Consequently, if Nvidia continues its incredible bull run, one would have to believe that the demand for chips will continue to skyrocket and that Nvidia will be able to hold off competitors like AMD and Intel. —K.P.

RRSPs are not a scam or a rip-off

With the deadline to contribute to registered retirement savings plan (RRSP) officially passed as of February 29, we wanted to quickly address the becoming prominent idea that RRSPs are some sort of scam.

We’ve noticed an increasing number of inquiries from friends and family over the last few years that go something along the lines of, “RRSPs are just a rip-off because you have to pay tax on them anyway.”

Since you’re reading a column called “Making sense of the markets,” you’re probably aware that RRSPs are not in fact an asset. The fact that some Canadians don’t understand is shocking. It’s important to understand precisely what RRSPs are.

RRSPs are a type of investment account—one that’s registered. It’s a place where you can hold investments, and it has powers that protect investments from taxation. If you think you’re purchasing RRSPs as an asset, then you might have gone to a bad wealth management company. A good financial advisor helps you understand what asset you were investing in. A bad financial advisor will be vague by using phrases such as “invest in RRSPs.” Investment information is often murky so money can be put into whatever high-fee investments (such as mutual funds) they wanted to sell that day. (Need an advisor? Check out MoneySense’s Find A Qualified Advisor tool.)

Of course, an RRSP doesn’t avoid taxes entirely. It defers tax on the contributed amount from when you relatively earn a lot of money (while working) to when you earn less money (when retired). If you get a tax refund when you contribute or owe less taxes when you contributed to a RRSP, that’s essentially the government saying, “Since you contributed to your RRSP, your taxable income this year is not as high as it would’ve been. So you don’t owe us that money now. Oh, and if you have children, we’ll likely increase your Child Care Benefit cheque, as well.” 

If you get a refund, then invest it and let all of that money compound in low-fee investments for the next several decades, you’re very likely to be happy with the results. But those people who say “RRSPs are scams” are usually salespeople pedalling life insurance for higher commissions. 

Yes, for some Canadians investing within a tax-free savings account (TFSA), it means they could come out ahead of investing within an RRSP. Yet, for the vast majority of Canadians, they could end up in a pretty similar place. Don’t forget, if you invest inside a TFSA, you don’t get that tax refund to stuff right back into your investment account—you’re contributing after-tax income. When deciding on a TFSA or an RRSP, you would need to know exactly how much income you and your spouse will have when you retire. 

Walmart continued to show why it deserves its best-in-class status for mass retailers. Quarterly revenue was up 6% and e-commerce sales were up a massive 23%. No doubt shareholders were excited about the 9% dividend raise the company announced.

The big news from “the big blue retailer,” a.k.a. Walmart, was that it’s buying TV manufacturer Vizio for $2.3 billion. The move makes sense given how many Vizio TVs Walmart sells. The company pointed out that the acquisition would be a major boost for its advertising business, as it could now better track customer data. Look forward to massive Black Friday Vizio sales for years to come.

“Our market is on its way back to normal demand conditions. We’re not quite there yet, but the pressures we saw in 2023 are receding.”

—Richard McPhail, Walmart CFO

Home Depot announced that its sales were down about 3% from 2022’s fourth quarter, but that was significantly less of a pullback than it had been expecting, given the current high interest rate environment.

Canadian earnings: who needs profits anyway?

Sometimes you have to wonder if the analysts who predict quarterly earnings know what they’re talking about. Take Nutrien, Suncor and Loblaw, which all reported their earnings. Loblaw’s quarter was predictably boring, and the stock moved up slightly, score one for the analysts. However, Nutrien came in way below earnings expectations, yet the stock went up 7%. Suncor on the other hand had a great earnings report, but shares were down slightly on the day.

Analysts usually point to anticipated forward guidance being the key in instances like this. So, because the future doesn’t look great for oil prices (recessions, supply increases, etc.) and Nutrien believes potash demand will increase going forward, the stock market is looking ahead and not simply reacting to last quarter’s news.

Nutrien shareholders definitely miss the days of sanctions crippling the supply of Russian potash to the market, despite the bump on Thursday. The fourth quarter price was USD$235 per tonne, compared to USD$526 per tonne a year earlier.

In more positive news, Nutrien’s CEO Ken Seitz said, “We do see potential for firming of potash prices,” and went on to add that Red Sea logistics issues were likely to continue to add to cost pressures for the foreseeable future.

Suncor announced that it had set a new oilsands production record at 757,400 barrels per day, however, profit margins were down on lower oil prices. The oil giant also announced it would be bringing in a familiar corporate face as its next board chair, as Russ Girling (former CEO of TC Energy Corp) would be taking over fromMichael Wilson.

Shopify struggles

Canada’s second-largest company (or third, depending on the day) had a relatively strong earnings day on Tuesday, but the company’s share price took a beating based mostly on decreased earnings expectations going forward.

Shares of Canada’s tech darling were down over 13% on Tuesday, but even with the massive pullback, the share price is still up 14% year to date (YTD).

Shopify’s CFO Jeff Hoffmeister reported the good news that more products were sold on the Shopify platform than ever before. The fourth quarter included the all-important holiday shopping activity, and Hoffmeister announced that Shopify has moved $75.1 billion-worth of merchandise. That was a 23% increase on last year’s numbers. Net earnings came in at $657 million, compared to a loss of $623 million during the fourth quarter in 2022.

President Harley Finkelstein said Shopify handled the orders for 61 million customers worldwide on the Black Friday weekend. 

“Our platform handled a staggering 967,000 requests per second, which is the same as 58 million requests per minute, nearly 80% higher than our peak traffic just two years ago.”

—Harley Finkelstein

So, where’s the struggle? Growth is not the same as profitability. With Shopify stating its free cash flow is going to be substantially lower than previously indicated, investors were quick to pounce on the bad news.

Finkelstein tried his best to put a positive spin on future growth opportunities.

 “There are opportunities for us to go beyond Europe. Of course, we’ve talked about Latin America and the Asia-Pacific in the past, but we definitely see a lot of opportunity there[…] I mean, we’ve captured less than 1% of market share in global retail sales, even as our product and geographies have expanded.”

There’s no question Shopify’s been an incredibly innovative company, and it is all the more noteworthy for keeping its home base in Canada, despite many tech companies moving shop. It’s very likely the company will be consistently profitable, but trying to forecast the “when” and the “how much” of that long-term profitability is a very difficult endeavour. In this age of higher-for-longer interest rates, investors appear to be demanding durable profits sooner rather than later, and consequently, shareholders will have to buckle up for a bit of a volatile rollercoaster.

Can Shopify keep up the growth momentum while controlling costs? Investors are betting on it. But Tuesday’s dip would indicate that it’s not at all certain about those bets.

Disney is back on track

Even with all the iconic brands under its corporate umbrella, Disney has struggled the last few years, as its share price is down 11% since February 2019.

Things might be looking up now that CEO-extraordinaire Bob Iger is back in the captain’s seat after “retiring” back in 2020.

Disney shares were up over 7% in extended trading on Wednesday after the earnings call. And the call highlighted the following reasons for increased profit guidance in 2024:

• Disney will meet or surpass its goal of cutting costs by $7.5 billion this year.
• The House of Mouse company will also invest $1.5 billion into a partnership with game software developer Epic Games.
• Disney’s “experiences” division (think theme parks and cruises) saw a 7% increase in revenues versus last year. 

Yet, the biggest Disney revelation this week came from its sports streaming division.

With Amazon trying live football broadcasts this year, it appears the more traditional names in media have decided to fight back. 

Disney (through its ESPN subsidiary), Fox and Warner Bros. Discovery announced joining forces to create a new sports streaming service. The planned platform has yet to be named, but it would feature current sports programming from ESPN, ESPN2, ESPNU, SECN, ACCN, ESPNEWS, TNT, TBS, TruTV, FS1, FS2, BTN, UFC, as well as the main ABC and Fox broadcasts. 

Iger stated, “The launch of this new streaming sports service is a significant moment for Disney and ESPN, a major win for sports fans and an important step forward for the media business.”

When you think about the possibilities of bundling a new live sports service with current Disney+, Hulu, and Max (the HBO streamer), you will have re-created a substantial amount of the old American cable bundle, plus streaming of classic movies and TV shows. Now, all we need to know is the price, and if and when it would be made available to Canadians.