1. may 2012
Dividend Increases
cardinal
Exxon Mobil Corp. 21.3%
International Business
Machines 13.3%
Kellogg Co. 2.0%
PNC Financial Services Group 14.3%
update
Suncor Energy Inc. 18.2%
(During the period: April 1 – 30, 2012)
Markets: Always Right?
In our quarterly reports to clients we show their portfolio’s performance, while genuine, were overblown. BMO’s share price should never have
and we show the performance of a Benchmark, in most cases the S&P/ been taken as far down as the market took it.
TSX Total Return index. This is a measure of the return of the roughly 250 So these are fairly clear examples of where we believe the markets have
biggest stocks (measured by market capitalization) traded on the Toronto been blatantly wrong. But in fact, is it not likely that the market is always
Stock Exchange. Often clients and advisors will ask us about differences somewhat wrong or somewhat right? Isn’t there always an element of
between our returns and that of the market. The presumption seems to be emotion, sometimes more, sometimes less, in how the market evaluates
that the market is right and if our rate of return lags that return, we must the companies you own? Consider the attached chart of the companies
be doing something wrong. that most clients own in a fully diversified Canadian equity portfolio at
Here’s a wild idea: Is it possible that the market can be wrong? Before Cardinal, showing dividend growth and share price appreciation in the
you answer quickly – let me add three words – Bre-X, Nortel, RIM. We five years from January 2007 through December 2011. We believe this
think history demonstrates that the market can get emotionally excited is evidence that the market is being erroneous again, at least in terms of
about certain stocks and overvalue them, often for extended periods of undervaluing the stocks you own at Cardinal. As shown, over the last five
time. This is not only possible for a few individual stocks. Remember the years the average dividend increase at these companies has been 74.9%
technology bubble of 1999? Whole markets became tilted to cash-poor, or 11.8% per year compounded. Fundamentally we think this implies a
unprofitable technology stocks, which we believe history has proven to higher value for these companies, since we believe the value of an asset
be a wrongful overvaluation. is related to the cash it generates. Yet, as the chart indicates, the average
We believe that the market can be wrong, not only in overvaluing a stock, share price appreciation over the five years is only -2.7%, which is -0.5%
but also in undervaluing stocks. You may remember that in February per year compounded. Is the market undervaluing these companies? Is
2009, the Bank of Montreal (BMO) had its share price driven down so the fear from Greece, from China, from Spain (you pick the headline)
low that its dividend yield was 11%! The stock was priced by the market causing some emotional reaction to underbid for these companies. Our
at less than $25/share. This is the same Bank of Montreal that a year later analysis causes us to believe that these companies are good value and
was priced by the market at over $60/share. Over the course of that year, worth owning. Sooner or later we believe the market will realize this, even
there was no major internal event that fundamentally changed BMO or if it is only one company at a time.
the Canadian banking industry. What actually changed was largely the So why do we provide a Benchmark in our reports? Over long periods
market’s emotional state. From oppressive fear, near panic, the market of time the markets will generally reflect real growth in value. Warren
became almost optimistic about the future, at least until Europe reared its Buffett’s quote is that in the short run the market is a voting machine,
debt-laden head. During 2008, 2009 and 2010, BMO paid out its quarterly but in the long-run, a weighing machine. We believe this. You should
dividend of $0.70 per share. In those three fiscal years it continued to measure your money manager, but only over extended periods of time. As
make substantial profits to consistently fund its dividend. Yes, in 2008 at March 31, 2012, our independently audited Canadian equity composite1
several issues were pending at the banks, and at BMO in particular, had outperformed the market on a 1-year, 3-year, 5-year, 10-year and
including in part its potential exposure to US real estate and certain 15-year basis. We do not believe that in any one year we must outperform
Structured Investment Vehicles. Detailed analysis showed that the fears, the market. But we are extremely proud of our 10-year and 15-year
A copy of our performance data can be found on our website at www.cardinal.ca.
1
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2. returns. We believe they prove that we are doing something right. If you measure a manager
against a short term number, you may in effect be demanding that he be as wrong as the
COMPANY FOCUS
market. Guessing market emotions is not what we do – and we have difficulty believing that
it can be done correctly and consistently. To us that is speculative activity, not investing. We Saputo
promise our clients that we will invest their money. History shows we’re good at it, because Saputo is an established Canadian company
we can be right when the markets are wrong. and a good example of what we look for: a high
quality company, with a solid balance sheet and
Cardinal Canadian Equity growing dividends. Saputo has almost doubled
5 Year Dividend and Price Performance its dividend over the past five years and we
anticipate that steady, increasing cash flows will
support future dividend growth.
Dividend Growth Share Price Appreciation As a leading producer of milk and cheese in
Company Name Dec 31, 2006 – Dec 31, 2011 Dec 31, 2006 – Dec 31, 2011
Canada, Saputo’s products are part of many
Canadians’ daily diets. Saputo is also a top
ARC Resources Ltd* – 12.6% cheese producer in the United States. So long
Bank of Montreal 7.7% -19.0% as consumers continue to enjoy cheese on their
Bank of Nova Scotia 23.8% -2.4% pizza and milk on their cereal, Saputo’s products
will be in demand.
Canadian Imperial
Bank of Commerce 28.6% -24.9% Being a low cost producer of quality dairy
products is one of Saputo’s key advantages. And
Canadian Natural we see Saputo using this advantage to acquire
Resources Ltd* 140.0% 22.8% smaller, underperforming U.S. cheese processors.
Canadian National Saputo has an excellent track record of improving
Railway Co 100.0% 60.1% the operations of companies that it acquires and
capturing the added value in its earnings. Their
Canadian Pacific
robust cash flows have allowed Saputo to finance
Railway Ltd 60.0% 12.4%
most acquisitions with internal cash, maintain a
Cenovus Energy Inc* – – strong balance sheet and grow the dividend.
Encana Corp* 300.0% -33.7%
Cardinal Capital Management, Inc. does not guarantee the accuracy or completeness of the
Great-West Lifeco Inc 28.1% -39.6% information contained herein, nor does Cardinal assume any liability for any loss that may
result from the reliance by any person upon any such information or opinions. The information
Industrial Alliance and opinions contained herein are subject to change without notice.
Insurance & Financial
Services Inc* 53.1% -27.3%
IGM Financial Inc 35.2% -9.9%
Imperial Oil* 37.5% 5.7%
Magna International Inc* 31.6% -27.6%
National Bank of Canada 38.9% 9.6%
Penn West Petroleum Ltd* – -43.2%
Royal Bank of Canada 35.0% -6.3%
Saputo Inc* 90.0% 111.2%
Shoppers Drug Mart Corp* 108.3% -17.9%
Sun Life Financial Inc 20.0% -61.7%
Suncor Energy Inc* 175.0% -36.0%
Toronto-Dominion Bank/The 41.7% 9.4%
Tim Hortons Inc* 142.9% 46.5%
Average 74.9% -2.7%
Source: Bloomberg, Cardinal Research
Notes:
ARC Resources converted from a trust unit into a common equity changing the dividend payout policy in January 2011
•
• Cenovus Energy split from Encana in November 2009
Penn West Petroleum converted from a trust unit into a common equity changing the dividend payout policy in January 2011
•
* Not held in client portfolios for entire 5 year period.
400 - 1780 Wellington Avenue Phone: (204) 783-0716
Winnipeg, Manitoba R3H 1B3 Fax: (204) 783-0725
Toll Free: (800) 310-4664
www.cardinal.ca