Performance in Review
Let’s start with the numbers as of Nov. 2, 2023 (before the bell).
Dynamic sector allocation calculated by DSR PRO as of Nov. 2nd 2023.
What’s Going on With Telcos?
I have often been asked this question over the past few months. Most specifically around BCE and Telus, but I thought of providing a broader review including Rogers, Verizon, and AT&T. After all, they have a few things in common, such as:
However, the situation isn’t as bad as investors may make it seem. Here’s the Telcos’ total returns (including dividends) over the past 12 months.
Telecom stocks 2023 total return.It’s definitely not great, but being down 5%-10% may be just normal behavior. However, the biggest problem is the price anchoring bias. When investors ask me about telcos, they don’t see Rogers at +1.83% and Verizon at +3.88%. They see it at -16.96% and -15.32%, respectively. Well, how do they get those numbers?
Along the same train of thought, while BCE (-5.85%), AT&T (-7.48%), and Telus (-10.69%) haven’t performed incredibly in the past 12 months, many investors may only see them at -17.10%, -22.92%, and -17.24%, respectively. While their returns have been negatively amplified by price anchoring, I’m not going to tell you that everything is dreadful.So, did telcos perform well in the past 12 months? No. Well, why do they lag the market? Poor growth and higher interest charges. Despite these answers, the problem is deeper than this. They haven’t done well in a long time.
Telecom stocks five-year total return.Ironically, BCE and Telus are the only ones with decent returns over the past five years. Even then, they lag the TSX by a wide margin. For the record, the iShares XIU.TO tracking the TSX 60 is up 53.73% (total return) in the past five years, and the SPDR S&P 500 SPY is up 72.67%.There is definitely something wrong with telcos. Now, let’s do a quick overview to understand what’s is going on and which metrics we should follow going forward.
Verizon is Slowly Dying?
Verizon is part of our US retirement portfolio, and it’s probably the position I dislike the most. So, what’s the problem? The company is seriously lacking growth vectors. Revenue has grown by less than 2% annually over the past five years. While the EPS growth is better (7.65% CAGR), most of it happened four to five years ago. Therefore, the five-year growth will slow down going forward if the company doesn’t change its course.The company is stuck between a rock and a hard place. On one side, it must continue to invest in its network. On the other side, paying down debt would be a smart idea. Paying down debt would strengthen Verizon’s balance sheet, but limit growth vectors. The company has an urgent need to find growth.Verdict: the situation isn’t catastrophic, as the company can count on predictable cash flow coming from its customers. I believe Verizon will continue its course, and while I don’t expect much capital appreciation, I do expect a solid dividend. It’s important to monitor the company’s stock quarterly.
AT&T is like Verizon, But Worse
AT&T is in the exact same situation as Verizon, but it must carry the burden of several bad management decisions. Its adventure in the media business destroyed a lot of value. Here we are, about a year and a half after AT&T tried to repair its mistake after spinning off Warner Bros Discovery (WBD), and management is going back to what it knows best: wireless and wireline services.The most optimistic would say AT&T is generating more cash flow and has started to pay off its debt. Similar to Verizon, AT&T generates tons of cash flow quarterly. Again, AT&T must get that debt down while continuing to invest in its network. The company has the advantage of having a stronger wireline business than Verizon to “attach” its customers.Verdict: Dividend cutters have no place here. AT&T failed investors once, and it has offered poor results ever since. I’ll reconsider my position if and when the company shows a strong dividend triangle again. Until I see revenue, EPS, and dividend growth, AT&T will remain dead to me.
Rogers Going Big or Going Bust?
It’s no secret that I have had little interest in Rogers for many years. In my view, Rogers is like BCE without the dividend growth. The company has produced one dividend increase over the past five years, and it won’t likely reward shareholders with additional increases in the future considering its recent acquisition of Shaw.The acquisition gives more size and scale to expand Rogers’ empire and to improve margins. The early days of Shaw’s integration have already demonstrated some solid synergy. However, Rogers faces steep competition coming from BCE and Telus, and this won’t end anytime soon. With a larger exposure to media than its competitors, I can’t see how Rogers will grow faster. The media business is struggling, and there is not clear direction toward strong profits.Verdict: Rogers isn’t really on my radar due to its lack of dividend growth. If the integration of Shaw doesn’t go as well as management expects, this story will quickly turn sour.
BCE is a Slow Elephant
I often describe BCE as a “deluxe bond,” a stock with limited capital appreciation, but with a good dividend yield and decent dividend growth. It’s still true today, but the market is eager to see a better cash flow picture.The story is the same for all telcos at the moment: strong cash flow from operations + high capital expenditure = smaller free cash flows and less room for dividend growth. The recent quarters have shown a small improvement in that regard (e.g., smaller CAPEX leads to stronger free cash flow), but we will need a clear trend going forward before we can celebrate.While BCE generates some revenue from media, about 13%-15% of its total revenues, the bulk of its cash flow comes from wireline and wireless services.Verdict: BCE remains as a deluxe bond in my eyes. If I was looking for income, I wouldn’t have a problem holding BCE right now. As long as the company can show improvement with its cash flow metrics, I can sleep well at night.
Telus’ Growth Vectors are Hurting the Business?
On top of dealing with higher interest charges along with weak growth like other telcos, Telus is facing an additional problem: its growth vectors are actually shrinking. Telus Healthcare, Agriculture, and International aren’t contributing to Telus’ success right now, and quite the opposite is true. As many companies expect a recession, they are building their war chest instead of spending on technology. Therefore, Telus International had to revise its guidance and report weaker earnings during the entire year of 2023.They are not losing market share, but they are in a down investment cycle which has had a great impact on their results and reflects on Telus. However, the company did report a good quarter where free cash flow was up 7%, mostly driven by a reduction of CAPEX. The company also announced its second dividend increase of the year, bringing its yearly dividend increase to 7% in 2023.Verdict: Telus keeps me smiling as management keeps showing confidence in its business with a second dividend increase this year. Since their cash flow metrics are improving a little each quarter, we may see the company doing a lot better in the second half of 2024.
What to Look For Going Forward
As you can see, the entire sector has been facing the same challenges. The dividend triangles are similar as well (e.g., they show EPS growth weakness, and some dividend trends aren’t as strong as they used to be). In this situation, I prefer to go with the one with the strongest dividend growth trend (Telus), but that’s just me. However, going forward, they must all show strong metrics. To help you monitor them, I’ve made a quick list.
Portfolio Update
Slowly but surely, my portfolio is taking shape, with 9 companies spread across 7 sectors. My goal is to build a portfolio that can generate 4%-5% in yield across 15 positions. I will continue to add new positions monthly until I reach that goal. My current yield is 4.85%.
Added 5 Shares of Canadian Natural Resources (CNQ)
Canadian Natural Resources recently announced another 11% dividend increase. The company is rapidly paying back its debt and buying back shares on top of increasing its dividend. It’s a rare “income play” that shows interesting growth right now.Here’s my portfolio as of Nov. 6, 2023 (before noon):
Company Name
Ticker
Sector
Market Value
Brookfield Infrastructure
BIPC
Utilities
$845.60
Canadian National Resources
CNQ
Energy
$1,013.54
Canadian Tire
CDNAF
Consumer Disc.
$433.98
Exchange Income
EIFZF
Industrials
$501.93
Great-West Lifeco
GWO.TO
Financials
$676.43
National Bank
NTIOF
Financials
$530.76
Nutrien
NTR
Materials
$965.77
Telus
TU
Communications
$921.12
TD Bank
TD
Financials
$1,135.33
Cash (Margin)
$20.21
Total
$7,044.67
Amount borrowed
-$7,000.00
Let’s look at my Canadian portfolio. Numbers are as of Nov. 2, 2023 (before the bell):
Canadian Portfolio
Company Name
Ticker
Sector
Market Value
Alimentation Couche-Tard
ANCTF
Cons. Staples
$28,002.00
Brookfield Renewable
BEPC
Utilities
$8,833.92
CAE
CAE
Industrials
$5,856.00
CCL Industries
CCDBF
Materials
$7,722.40
Fortis
FTS
Utilities
$9,788.04
Granite REIT
GRT.UN.TO
Real Estate
$8,454.40
Magna International
MGA
Cons. Discre.
$4,715.90
National Bank
NTIOF
Financials
$10,707.29
Royal Bank
RY
Financial
$7,461.35
Cash
$353.33
Total
$91,894.63
My account shows a variation of +$4,338.85 (+4.96%) since the last income report on Oct. 3. Here’s a quick review of companies that declared their earnings (the rest will be in my December update).
Brookfield Renewable is ready
Brookfield reported an acceptable quarter as funds from operations grew by 7%, but the FFO per share remained flat. The results reflect strong operating activities as the company benefited from its highly diversified operating platform, inflation-indexed contracts, and development in-line with plans.I appreciated that management addressed the poor stock performance on the market. The company reaffirmed its conviction in generating a strong return on its capital invested. It is also confident in making additional acquisitions as the renewables industry is struggling. Speaking of which, it ended the quarter with more than $4 billion in available liquidity.
Magna International Surprises the Market
Magna International pleased investors this quarter, with revenue up 15% and EPS up 36%. Revenues were driven by higher sales of light vehicles and positive currency rates. After a difficult start in 2023, Magna focused on optimization and cost reductions to expand its margin quickly.Their ongoing focus on operational excellence and cost initiatives helped drive strong earnings on higher sales. Management also revised its guidance for 2023, showing stronger revenue expectations and better margins. The stock now trades at a forward PE of 10.
Fortis is a King
Fortis had good news to announce to its shareholders, as it reported an EPS jump of 18%. This increase reflects the new cost of capital parameters approved for the FortisBC utilities in September 2023 retroactive to Jan. 1, 2023. Earnings growth was also supported by a strong performance in Arizona, due to warmer weather and new customer rates.Finally, a higher US dollar boosted results translated into Canadian dollars. The company is on track with its $4.3 billion CAPEX plan for 2023, with $3 billion invested through September. Fortis announced a dividend increase of 4.4% in September of 2023, making it its 50th consecutive dividend increase.Here’s my US portfolio now. Numbers are as of Nov. 2, 2023 (before the bell):
US Portfolio (in US Dollars)
Company Name
Ticker
Sector
Market Value
Apple
AAPL
Inf. Technology
$13,317.75
BlackRock
BLK
Financials
$9,022.86
Brookfield Corp.
BN
Financials
$11,017.16
Disney
DIS
Communications
$3,748.05
Home Depot
HD
Cons. Discret.
$8,835.90
Microsoft
MSFT
Inf. Technology
$19,157.60
Starbucks
SBUX
Cons. Discret.
$8,500.85
Texas Instruments
TXN
Inf. Technology
$7,365.50
Visa
V
Inf. Technology
$12,162.50
Cash
$351.36
Total
$94,479.53
My account shows a variation of +$4,492.07 (+5%) since the last income report on Oct. 3. Most of my holdings reported their earnings. Let’s have a look.
Apple Warns Investors of What’s Coming Ahead
Apple reported a mixed quarter, as EPS jumped by 13%, but revenue was down by 1%. Net sales by category are as follows:
We continue to see weakness coming from China. Revenue in China totaled $15.084 billion compared to the average analyst estimate of $17 billion and versus $15.42 billion a year earlier. International revenue was also affected by a strong US dollar. Going forward, we should see stagnant revenue in this uncertain economy.
BlackRock Remains a Solid Investment
BlackRock reported a solid quarter, with EPS up 14% and revenue up 5%. EPS growth reflected a lower effective tax rate, partially offset by lower non-operating income in the current quarter. The 5% increase in revenue was primarily driven by organic growth and the impact of market movements over the past twelve months on average AUM and higher technology services revenue.However, long-term quarterly net inflows were only $3 billion, slowing from the $80 billion of inflows in Q2 and reflecting $49 billion of net outflows from lower-fee institutional index equity strategies. Clients are happier in cash right now, and they may prefer to wait.
Microsoft is the Beast
Microsoft reported another killer quarter, with EPS up 27% and revenue up 13%, soundly beating analysts’ expectations. In September, MSFT also announced a 10% dividend increase (that makes a perfect dividend triangle for the quarter).Revenue in Productivity and Business Processes increased by 13%, driven by Office commercial products (+15%) and Dynamics (+22%). Intelligent Cloud jumped by 19%, driven by Azure (+29%). Revenue in More Personal Computing was up 3%, driven by Xbox (+13%) and Windows (+5%), but partially offset by Devices (-22%). The company is set for another year of growth.
Starbucks is Opening More Stores
Starbucks reported a strong quarter, with revenue up 11% and EPS up 31%, beating analysts’ expectations. Comparable store sales rose 8%, as the average ticket was up 4% and transactions were up 3% during the quarter.Surprisingly, inflation didn’t slow down Americans and Canadians from buying their latte at Starbucks, as comparable sales were up 8% in North America. International comparable sales rose 5%. China comparable store sales increased by 5%.Active membership in Starbucks Rewards in the US rose 14% to 32.6 million. There is more growth to come as the company opened 816 stores this quarter. SBUX also announced a 7.5% dividend increase in September.
Texas Instruments Disappoints
This wasn’t the quarter we wanted from Texas Instruments. The company saw its revenue decline by 14%, and EPS was down by 38%. The company’s results were affected by weaker demand from the automotive and industrial segments. We can feel a recession is brewing.Looking ahead, Texas Instruments expects fourth-quarter sales to be between $3.93 billion and $4.27 billion, below the $4.49 billion estimate that analysts were anticipating. The company said that during the third-quarter, weakness in the industrial space “broadened.” At least the company offered a 5% dividend increase. I’ll put this one on my radar, as the dividend triangle is weakening.
Copy/Paste for Visa
From Nov. 3, I could literally copy/paste our comments about Visa’s earnings from one quarter to another. It was another impressive quarter, with revenue up 11% and EPS up 21%. The icing on the cake was a 16% dividend increase. Payments’ volume increased 9% year-over-year, with cross-border volume up 16% and processed transactions increasing 10%.That compares with Q3 payments volume growth of 9%, cross-border volume growth of 17%, and process transactions growth of 10%. The growth isn’t over, as management expects good numbers for 2024: EPS growth in the low teens and revenue growth in the high single-digits to low double-digits.
My Entire Portfolio Updated for Q3 2023
Each quarter, we run an exclusive report for Dividend Stocks Rock members who subscribe to our very special additional service called DSR PRO. The PRO report includes a summary of each company’s earnings report for the period.We have been doing this for an entire year now, and I wanted to share my own DSR PRO report for this portfolio. You can download the full PDF showing all the information about all my holdings. Results have been updated as of Oct. 3, 2023. You can download my portfolio Q3 2023 report here
Dividend Income: CAD34.14 (-81% vs. October 2022)
Pension Dividend Income since inception by month.
What Happened to October?
I’m down 81% on that month. If we go back in time, you may remember that Algonquin and Gentex were part of my portfolio last year. While AQN reminds me of my mistake, I still smile when I think of GNTX.I sold the first one after a painful dividend cut, and I sold the latter since it forgot its dividend growth policy. On one side, I lost about 50%. On the other, I made about 50% profit. But both stocks weren’t in line with my investment strategy (e.g., dividend growth investing). Focusing on the process is more important than focusing on a single stock’s returns.Here are the details of my dividend payments. Dividend growth (over the past 12 months):
Please note that I used a USD/CAD conversion rate of 1.3744
Cumulative dividends paid since inception.Since I started this portfolio in September 2017, I have received a total of CAD22,994.54 in dividends. Keep in mind that this is a “pure dividend growth portfolio,” as no capital can be added to this account other than retained and/or reinvested dividends. Therefore, all dividend growth is coming from the stocks and not from any additional capital being added to the account.
Final Thoughts
After looking at what is going on over the past two months on the market, one thing I can tell you is that we are far from being done with volatility. The only thing you can do now is to make sure you are comfortable with your portfolio and to focus on the long-term.Get rid of that price anchoring bias, and get back to looking at metrics such as the dividend triangle. Numbers are stronger than stories.More By This Author:Buy List Stock For November 2023: NikeMarket-Beating High Yield U.S. StocksOptimize Your Portfolio Review
