Adding To My Bell Canada Position

Bell Canada (BCE) is a Canadian telecommunications company. It is the largest of the “Big Three” comprising Bell, Telus (T), and Rogers (RCI.B).

Already having a sizeable allocation to Bell within my portfolio, I decided recently to add to my position with additional funds as opposed to only the reinvested dividends the company sends me. My current purchase will add roughly 25% more shares to my Bell position.

So why did I do it?
Bell is currently trading at around $42 per share and yields just over 5.5% at the moment in the form of a quarterly dividend. In the current environment, I am quite content to acquire more shares of a very solid performer in Bell with future growth prospects that I believe to be appealing, at a price that is reasonable.

Over time, I expect Bell to continue increasing its dividend at least once per year. With a starting yield of 5.5% and reinvested dividends, even modest annual dividend growth in the 4-7% range will produce a sizeable future cash flow fifteen or twenty years down the road.

In addition, the money I used to increase my position came from dividends that were accumulating in my account already from dividends from other companies. This means that I did not need to add additional funds to my brokerage account to pay for these shares. In effect, this allowed me to “play with the house’s money” while increasing my stake in a quality enterprise.

How did I do it?
Bell had been trading just slightly above the price at which I wanted to pay for it over a period of a few weeks. I wanted a starting yield of 5.5% for my new shares, so I simply set a limit price that would make this possible and waited. I set the expiration on the order a month out, after which time I would re-evaluate if Bell shares never dropped below my target. If the order expired, I would have missed out on acquiring more shares (or I could have just opened a new contract at that time). This was not a real concern of mine, as the stock market tends to gyrate significantly enough to give the patient investor the opportunity to shop at a bargain.

Having now added to my position in Bell, I do not foresee any future additions in this sector for some time. I will allow my dividends to continue reinvesting themselves to passively grow my stake, but new funds will not be provided.

Risks to my assessment?
Verzion (NYSE: VZ), the behemoth telecom from the U.S. has been eyeing the Canadian marketplace. It has expressed interest in purchasing Wind Mobile and Mobilicity here in Canada. Assuming it was able to dip its fingers into Canada (amid protests from Canada’s Big Three), this would be viewed as a serious threat to the current establishment. If Verizon comes to Canada, I would expect each of the Big Three companies to take a hit on the stock market as analysts revise their estimates downward in light of a fourth large competitor in the marketplace.

Even with the knowledge that Verizon may attempt to invade Canada, I still feel comfortable investing in Bell. The thing with the future is that it is always uncertainty. The investor who waits to have all the facts about what is going to happen will live forever on the sidelines. Bell is a solid company now and still would be if Verizon arrives on the North side of the border. If Verizon decides to stay at home, then that will only further strengthen the bet I have made on BCE.

Full Disclosure: Long BCE

Detroit City Bankruptcy

Just under one week has passed since the City of Detroit filed for Chapter 9 Bankruptcy on July 18, 2013, making it the largest municipal bankruptcy in the history of the United States with an estimated $17-$20 billion debt burden. After taking some time to let the dust settle, let us take stock of this landmark event.

Detroit’s Emergency Manager, Kevyn Orr, was given the task in March of this year to manage the city’s finances. Since then he has commented on the fact that Detroit has been operating on an insolvent cash flow basis (more going out than coming in) and has recommended this drastic action of bankruptcy as a last resort.

Before looking at the implications that may arise, it will be prudent to consider some of the facts. This bankruptcy, though large in scale, does not come as a surprise. Detroit has been suffering greatly not just through the financial crisis which shook the foundations of “Motor City’s” automotive industry, but also because its population base of 1.8 million in 1950 has shrunk to somewhere in the 700,000 range. What this means is the base of people that may be taxed in order to raise revenue for the city is greatly diminished and local government is not able to turn the faucet on to easily or quickly solve the problem.

In addition to the population whittling away considerably, there are many other unresolved issues in the city. Detroit has an exorbitant amount of vacant buildings in the ballpark of 70,000-80,000. Basic functions within the city have suffered as well with an estimated 40% of the streetlights being out. Issues such as these are serious fundamental problems that are only likely to be exacerbated as Detroit enters bankruptcy proceedings.

What is at stake?
Everyone with a financial stake in the city of Detroit can be expected to be pursuing their claims. I have heard estimates of pensioners potentially facing cuts of up to 90%, though I would suspect that number to be far too drastic. Nevertheless, with the city’s future so incredibly uncertain, more and more of the residents with the means to do so can reasonably be expected to pack up and move on. At the same time, less people will be encouraged to make the move to call Detroit home.

Bondholders and other investors may find the risk/reward proposition unfitting and take their dollars elsewhere as Detroit suffers the fallout of bankruptcy. Without new money flowing in, the city will continue to decay.

Will we see a bailout?
I will be watching most closely at any actions the federal government takes to bolster Detroit. On the face of it, it may appear to be a straightforward solution to this problem, but it can be a slippery slope. If Detroit gets bailed out by the government with an influx of money, what would stop other struggling cities or states from likewise filing bankruptcy and asking for a handout? Further, what if one lump sum is not enough? Supposing the federal government clears Detroit’s debts, this still would not necessarily address the cash flow situation and the city may once again find itself in need of further handouts until this underlying issue is addressed. It can indeed be a bottomless pit. All the same, if the bailout does get fully approved by the courts and things move forward, I do expect a bailout on some level to take place. Governments cannot seem to help themselves but to print money as a short-term fix to their problems at the cost of their constituents and future generations alike.

One suggestion to aid matters has been for the city to put its art collection up for sale. At an estimated $15 billion, this would all but clear Detroit’s debts while leaving a void in the cultural soul of the city. Additionally, these art works are tourist attractions which generate revenue. A one-time sale, again, would not solve the cities structural issues, but rather buy time.

The bankruptcy of a city is, in my view, a more interesting proposition than that of a corporation (which can be sold off in pieces and cease to exist) or a person (creditors take what they can and the individual is left to rebuild from ground zero). A city must, in the midst of trying to regain its financial footing, continue its day-to-day operations such as hauling waste, providing public transport, and so on.

Domino effects also exist in a municipal bankruptcy. For instance, if pensioners (many of whom likely still reside in Detroit) have their incomes cut, they will have less disposable income to spend within the city and businesses will feel the ripples as their sales decrease, leading to further layoffs which force people to apply for social assistance, deepening the problem.

A call to action...
If anything, this case may serve as yet another example to demonstrate that individuals absolutely must take their financial futures into their own hands. When we have cities going bankrupt and once-rock-solid government pension funds being called into question, everyone should have their eyes wide open to what is happening. The world is reaching a critical mass with its debt load and the troubling part is that there are no signs of slowing. People continue to use their credit cards as ATMs with no thought to the cost. Governments are facing the stark reality that they may not be able to cash the cheques they have written in the past as demographically, aging populations pose a serious threat to social assistance and systemically important pension plans.

Bell Receives CRTC Approval on Takeover of Astral Media

It has been announced today that Bell (TSX: BCE) has received approval on their takeover offer of Astral Media by the CRTC (Canadian Radio-television and Telecommunications Commission). The CRTC is, ultimately, the watchdog for the Canadian media industry. It is responsible for ensuring fairness and competition among the various media participants including, among others, big name players such as Rogers (TSX: RCI.B) and Cogeco (TSX: CCA).

As part of this takeover, Bell would be acquiring some of the television channels and radio networks currently owned by Astral Media. This deal, for a ballpark sum of $3 billion, would move Bell’s share of the French-language television market to 22.6%, while enjoying a 35.8% share of the English-language market, as per the CRTC (http://crtc.gc.ca/eng/com100/2013/r130627.htm). The Commission assures Canadians that this will still allow for a competitive landscape and not impede the interests of consumers (the little ones, like you and me).

If there is one thing we can learn by looking through the history of large industry consolidations and/or mergers, however, we find that they do not often result in a sweetened deal for the little guy. Of course, the CRTC approval does include some conditions which will restrict any monopolizing agendas by Bell and, fortunately, require them to also invest in Canadian-specific content and youth initiatives.

Once the dust settles on this deal and Bell has integrated Astral, I expect this to be a value-adding proposition. Gaining such a considerable share of the market will allow Bell to have greater control over their content and essentially broaden their media asset portfolio.

What does all of this mean to the astute dividend investor? A more secure income stream as Bell will have more assets to rely on to smooth revenues and assist in growth. It will also lessen Bell’s exposure to wireless where it already competes heavily with Rogers and Telus (TSX: T). My hope as an investor is that this will be accretive to Bell’s earnings from the get-go and spur further dividend growth down the line.

I am encouraged by Bell’s ability to put large sums of cash to work in this environment where companies have been sitting on the sidelines waiting for more political and economic certainty. In an age where companies often perform takeovers in unrelated industries for the sake of growth itself, I believe this deal actually makes a lot of sense.

Full Disclosure: Long BCE.

Warren Buffett’s Letter to Shareholders, 2011

Warren Buffett is widely regarded as one of the greatest investors in history. He is known as a value investor and demands a margin of safety (in the tradition of his mentor, Benjamin Graham) when he invests. He tends to acquire assets, largely from the universe of publicly traded companies, which are undervalued or out of favour when he does so.  With an eye to value and not simply to price, he tends to bet on his analysis heavily, making large acquisitions once he has made up his mind – and ignoring the critics. This method has worked unfathomably well over the course of his investing career.

Buffett heads a large holding company called, Berkshire Hathaway (BRK.B), and makes purchases for this company. Buffett released his Letter to Shareholders for 2011 on February 25, 2012. Each of the letters he has released since 1977 can be found (at no cost) at: http://www.berkshirehathaway.com/letters/letters.html. These Letters to Shareholders are treasure troves for investment advice and excellent sources for gaining insight into what a truly great investor thinks of the economy as it stands and where he sees things going.

While I recommend reading all of the letters in full, I will highlight just a few of the sections I felt are worth repeating from this newest letter for 2011.

Regarding how he views stock ownership in companies, Buffett says, “We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects” (Page 4). How very different this is than the constant drivel that spouts from the financial media, recommending buy-and-sell “investing” on a weekly, if not daily, basis. Rather than taking stocks as simply pieces of paper or a blip in your discount brokerage account to be moved about based on price fluctuations, Buffett views his positions as real ownership stakes in brick-and-mortar corporations – to be held for the long term once a decision has been reached to own at all.

Buffett goes on to say on Page 5 that, “They will then reawaken to what has been true since 1776: America’s best days lie ahead.” Depending on one’s definition of “America”, this may or may not be the case. I do believe that America (and Canada) will have great days in their future, but only for those who come prepared. The world is changing and the reality is that pension plans and other “take-care-of-me” entities are coming apart at the hinges. There are countless examples of this, and it is worrisome for anyone depending solely on those benefits. The key for anyone looking for the “best days ahead” will be to take responsibility of their investing and retirement plans whether on their own or with a quality financial planner to prepare for the future. Best days or not, there will be more crises to come and being properly invested is paramount to success.

Buffett spent a fair amount of time on the topic of share repurchases this year. This comes for two reasons. First, Berkshire Hathaway announced for the first time this past year that it may conduct share repurchases if the company could be bought once certain valuation criteria were met. Second, the company also took a significant stake in IBM which also repurchases its own shares. Of interest to me were two Buffett quotations, “When Berkshire buys stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well” (Page 6), and “What should a long-term shareholder, such as Berkshire, cheer for during that period?... We should wish for IBM’s stock price to languish throughout the five years” (Page 7). To paraphrase his reasoning, Buffett points out that if someone is going to be a net buyer of stocks going forward, they would in fact be hurt by an increasing share price which would charge them more money for less shares. It is akin to an individual who is happy when gas prices go up simply because their gas tank is already full. The problem being, of course, that they will then pay this higher price when they return to fill up again in the future (Page 7).

Remember, share prices are driven by opinion and sentiment in the short term. A company can still be fundamentally improving even if its share price stays the same or even declines. In my experience, the above paragraph represents what I feel to be arguably the most poorly understood concept in the investing world, and yet perhaps the most important. Wrap your mind around this and you will “get” investing. Focus your energies on value and take advantage of fluctuations in price. Over the longer term, fundamental quality rises to the top.

Full Disclosure: No position in BRK.B and no intention to initiate one within the next 72 hours.

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Does Gold Make a Suitable Investment?

Through the course of 2011, one of the major themes of investing was whether precious metals should be included in a portfolio and if so, to what extent. Gold was pushing to great heights around the $1900 per ounce level before dropping off the top to current levels in the $1500-1600 range. The investment news media was all over gold as it seemed to have endless momentum on the way up and has cooled off its coverage since the metal has hit a bump in the road.

The problem I have with people viewing gold as an investment is that through history it really has not had much in the way or real gains. What investors need to understand is that gold does not have sales or revenues or anything to really drive its price aside from people agreeing upon a price that it is “worth”. Gold is not a company, it does not have customers, and it provides absolutely no income or dividends in and of itself (though gold can be traded in ways to produce income if someone is willing to speculate on its price movement).

Gold is often used by investors or speculators as a trade on fear. When bad news comes out about worldwide currencies or there is an unstable geopolitical environment, gold tends to rise. When people are content and the coast seems to be clear, gold tends to go down. I feel comfortable with precious metals as part of a balanced portfolio on the basis that they are used as a hedge against inflation and not with an eye to market beating returns. Buying gold in the hopes of above-average returns is a speculative play and not an investment.

When investing, the question must always be asked, “What’s in it for me?” With gold, the only real answer I can find is that it has proven to be a hedge against inflation over time. It tends to roughly keep its value/price/relationship to dollars through the years. Keeping a very small portion – no higher than 10% - of a portfolio in gold is reasonable, in my view, as a way of protecting one’s purchasing power.

Remember, the value of an investment is the cash flow that it produces. If an investment does not provide cash in your pocket on a regular basis, at some point you will have to part with it in order to realize or unlock the value. I don’t like the idea of destroying my base of assets to get my money out. I’d rather let my investments grow over time while at the same time realizing regular returns in the form of dividend, interest, or royalty payments (preferably tax free when sheltered properly, but that’s another topic entirely).

Jeremy Siegel Interview on CNBC, Key Takeaways

Jeremy Siegel appeared on CNBC this morning and provided his views on where to invest during this time of economic upheaval in Europe and a still unclear environment in the U.S.. He is the famed professor of the Wharton Business School  and former economic advisor for McCain during the 2000 presidential race. He is perhaps best known for his studies of dividend paying stocks which are regarded as gospel as far as dividend research goes. The following are key takeaways from his interview:

Siegel points out that it is crazy to get upset when your dividend payers go up and down when you’re buying them for income when at the same time you’re okay with your bond values going up and down when you’re buying them for income as well. If it’s a long term bet, forget about the market fluctuations.

Siegel is author of “Stocks For The Long Run” and champions a strategy of buying and holding dividend paying securities. However, he said he is not much of a stock picker and prefers to use dividend paying ETFs for his personal portfolio.

Siegel discusses how Gold only has roughly 1% price appreciation less inflation. In other words, it’s not an investment tool. If anything, it is just a hedge against inflation and nothing more.

He suggests that Europe is cheap at 8 to 9 times earnings. The U.S. is also cheap at the moment at slightly higher.

Siegel sees the potential for 15% stock appreciation through the end of 2012 from current levels. He remains bullish on stocks over the long term and dividends as one of the key components of total returns over time.

My take on all of this: Siegel is often typically bullish on equities as it is and though I do not feel stocks are currently at bargain levels, I do enjoy hearing him reiterate his views on dividends for the long haul. Stick with dividends, they work.