Rogers To Offer Its Own Credit Card

Rogers Communications Inc. (TSX: RCI.B) has announced that it has been granted approval to begin offering its own credit card by the Office of the Superintendent of Financial Institutions. Rogers hopes to begin offering this credit card to consumers within the next year.

From its own website, Rogers has announced that the final step in the application process has been completed and that those who use this credit card will earn themselves rewards points. Since earning points with Rogers will strengthen the link between the company and its customers, this may be viewed as a move to encourage customer retention.

In 2011, I first wrote about Rogers entering financial services and at the time I pointed out the risk that Rogers would stray from its core offering into uncharted waters. Time will tell whether Rogers is able to navigate the financial landscape profitably and avoid attracting only high-risk customers to its credit products.

I have been viewing the reaction of individuals on the various media postings of this announcement. The public perception and most highly “liked” comments are those that view this move by Rogers as “one more opportunity to rip off consumers”. I find this interesting given the fact that this credit offering is something that a person would need to apply for in order to opt in to it. While I cannot see myself getting one of these credit cards, I think that “more choice” is better for consumers – to each their own, is my view.

Should the addition of a credit card to Rogers’ portfolio prove successful, this will be one more stream of earnings to bolster dividend increases down the road for shareholders. I will be watching closely over the next few years to see how many customers Rogers is able to add and how accretive this will be to earnings. Competition from the already strong Canadian banking sector and other retailers will make this a challenging proposition.

The key to everything will be building a base of quality customers on a large enough scale to make this worthwhile. If this succeeds, I will look for similar moves from Bell Canada (TSX: BCE) and Telus (TSX: T) as well.

Full disclosure: Long BCE. No position in RCI.B or T and no intention to initiate one within the next 72 hours.

Separation Anxiety

I am often asked what I like best about dividends. I will detail my position here.
In the investing world, there are basically two ways to make money:
a) The first and most popular way is to buy something when it is cheap and sell it at a higher price later (buy low, sell high). This is the method of trying to achieve capital gains through well timed purchases and sales. It is akin to killing off your cattle to sell their beef, or to cut down your trees to sell their lumber.
b) The second way is to achieve cash flow through purchasing productive assets. This can be done in the same way that a dairy farmer milks his cows perpetually to simply sell the milk, or likewise the owner of an apple orchard who collects and sells the apples from his growing apple trees rather than cutting them down for their lumber. Dividends live here.

So, it becomes a matter of Capital Gains vs. Cash Flow (Dividends) – though over time an investor is likely to experience both.

When you own a company whose future prospects you believe in, it is in your interest to want to continue to hold those shares. Wealth builders through history have been “accumulators”. The way to achieve lasting financial strength is to continue to accumulate productive assets over time. This leads me to my first point.
1) Separation anxiety; aligning your interests with your company.
The problem with trying to achieve capital gains with a company that does not pay a dividend is that some day you will need to sell your position in the company to get any benefit from having owned the shares. I view myself very much as a stakeholder in the companies I own. I believe in their future wellbeing. As such, when I buy a company, I hope to never have to sell it. When I am paid my regular dividend, I believe that my interests and the company’s interests are aligned. We are able to grow together over time.
Selling my shares would mean I would have to end my investing relationship with the company (or lessen it, at least, if I sold only some of my shares). With every purchase I make, I genuinely hope that those shares will be in my final Will some day. Though I will indeed sell my shares if the story changes, that is never my intention at the time of purchase.

Over the very long term, companies typically trade in what might be regarded as a fair range as to their value. In the short run, however, the stock market is incredibly volatile and is traded emotionally. So, my second point:
2) Dividends are more stable than share prices.
Dividends are determined by a company’s fundamentals and future prospects while the stock price may be influenced by any number of factors – many of which may have no specific bearing on the particular company itself. Chasing capital gains can be a tricky business as even if you identify that a stock is overvalued, that does not mean it will go down any time soon. Investors trying to buy low and sell high often suffer from the long periods of time that they need to wait to be “proven right” by the market.
The passive dividend investor who is satisfied with the stocks they own is able to sit back and let the tidal wave of the stock market ebb and flow while they collect their money.

From studying businesses over many years, I have seen companies go on countless acquisition sprees to expand their empires. They often reach far beyond their “circle of competence” (as Warren Buffett would say) and try to operate businesses that are distinct from what they currently do. This can be a destroyer of shareholder wealth and brings me to the final reason I will share today that I love dividends:
3) Restraint on management.
Dividends impose restraint on management. Once a company has initiated a dividend policy and increased their payout for a decade or longer, it becomes a part of the culture. It becomes one of the last things that a company would want to tamper with. Knowing that a dividend must be paid and increased annually, management becomes less prone to going on wild expansion ventures and tends to be more careful with investor dollars.
Even with the slew of recall issues Johnson and Johnson (NYSE: JNJ) has had over the past few years, I doubt whether they even considered touching their dividend payout –even behind closed doors.

So, for investors like me who suffer from “separation anxiety”, the best plan of action is to own quality, dividend growth stocks for the long term and collect an ever-increasing cash flow.

Full Disclosure: Long JNJ

Warren Buffett's Letter to Shareholders, 2012

Warren Buffett releases a Letter to Shareholders to those with a stake in Berkshire Hathaway (NYSE: BRK.B) each year. Though this year’s letter was released several months ago, I have been reading through it again recently and I will provide some commentary on sections that have caught my eye.

Outperformance...
Buffett notes at the outset of the letter that Berkshire Hathaway has outperformed the S&P 500 Index in every five-year period since 1965 when he assumed control of the company (Page 3). At the same time, Berkshire Hathaway tends to underperform in a rising market. As such, Buffett indicates that if the markets continue their unprecedented rise that they have been enjoying since the bottoms of 2009, the S&P 500 may actually achieve a five-year outperformance against him.

One thing I enjoy most about Buffett is that he sets a target (such as outperforming the S&P 500 Index) and sticks to it. Year over year, his tune remains much the same and we never need worry about being surprised by him shifting his alleged goals to make himself appear in a better light. This yardstick that he uses is a clear indicator of his job as a manager. In his view, if he cannot beat a simple benchmark index, then the average investor would be no better served by trusting him with their money than simply buying the index.

Due to Berkshire’s financial strength, I would prefer to have a position in it rather than the broader S&P 500 Index. To me, it is how an investor performs in a lagging or declining market that counts most. The comfort of knowing that my wealth will not be wiped out with one catastrophic event is worth more to me than trying to outpace everyone else during a “good” market or rising tide.

Major Acquisitions...
This year, Berkshire assumed a fifty percent stake in a holding company that now owns all of Heinz, which is best known for its ketchup (Page 4). While Berkshire certainly “paid up” for this acquisition, Heinz is a stable business and this meshes perfectly with Buffett’s overall strategy of being willing to pay a fair price for a solid, well-positioned brand.

America’s Future...
Time was spent in this year’s letter with the hopeful note of Buffett offering his view that American business will continue to do well long into the future. Uncertainty will always be there to rear its head at investors, but that is what makes the market. Different parties taking different sides is what moves the ticker, but Buffett is willing to continue to bet on business fundamentals and the American dream of future prosperity. I tend to agree with him.

Railroads...
Buffett discusses the economy of railroads at length, and this section is well worth reading in its entirety. One statistic that truly stands out is that Burlington Northern Santa Fe (owned by Berkshire) actually moves a ton of freight around 500 miles on one gallon of fuel while “trucks taking on the same job guzzle about four times as much fuel” (Page 10). That is certainly efficient both in terms of dollars on Berkshire’s end and also a big plus on the environmental side of things.

Further, once tracks are down, it is very unlikely for new entrants to enter the market and compete. So, once a railroad has their line set, they do not need to fear constant competition eroding their ability to sustain profitability (they have a moat, as Buffett would say).

The railroad business offers one extra advantage to Berkshire Hathaway as well; a place to invest its free cash flow. Berkshire has many businesses that kick off loads of excess cash. Owning a capital-intensive railroad offers the perfect outlet for some of that cash flow.

Changing of the guard...
Berkshire’s stock portfolio, which notably has large stakes in The Coca-Cola Company (NYSE: KO) and the American Express Company (NYSE: AXP), has always been managed by Buffett. Given that Buffett is getting older, Berkshire has taken steps to assure the company will continue into the future on a well-guided path. As such, Todd Combs and Ted Weschler now have been given the reins to make investments of their own, on behalf of Berkshire (Page 15). This is a relatively newer development for Berkshire and one to watch closely in order to discern the money management style of these two investors.

Dividends...
This year’s letter included a section explicitly on dividends and a discussion as to why Berkshire does not pay one. Buffett discusses each of the intelligent uses of capital that a company may employ, including share repurchases, reinvesting in businesses already owned, purchasing businesses outside of their current industries, as well as paying out a dividend.

Buffett ultimately concludes that shareholders of Berkshire are currently best served by the company retaining all earnings to build future growth as they have in the past (Pages 19-21). That said, he leaves the door open to the possibility of future dividends should those within Berkshire believe it to be in the best interest of shareholders at some point in time. Though I am generally largely in favor of dividends being paid, I am willing to grant Buffett the benefit of the doubt given his extensive and successful track record. Without such a dividend, however, I have not yet initiated any position Berkshire – though it is a possibility down the road.

You can find all of these Letters to Shareholders at www.BerkshireHathaway.com. Please read them.

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

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.