Quarterly newsletter january 2013

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Quarterly newsletter january 2013

  1. 1. Volume 18 Issue 1 january 2013 cardinal quarterlyMarket Outlookby Timothy E. Burt, cfaL ast year (2012) was a good year for stock investors with all of the world’s major stock markets up for the year. The two best performingstock markets were Germany (up 29.1%) and Japan (up 22.9%). The nextbest performing markets were France (up 15.2%), Australia (up 14.6%)and the U.S. (up 13.4%). The two major laggards were the U.K. (up 5.8%)and Canada (up 4.0%). Even the price of gold lagged most stock marketsbeing up only 5.7%. Both the U.S. and Canada suffered normalcorrections in May and November with declines of 9.9% and 7.7% forthe S&P 500, and declines of 11.5% and 5.5% for the S&P/TSX. Since the Inside This IssueNovember 15, 2012 lows, both stock markets have moved steadily higher. Cardinal Rules.................. 3 For most of the year, investors were worried about another recession,slowing growth in China, a breakup of the European Union, a collapse of Canadian Equity Pool........ 4European banks, war between Israel and Iran, and an uncertain politicaloutcome before the U.S. Presidential election. These fears continued Canada Plus Portfolios...... 4to cause investors to withdraw from equity funds and to invest in bond Fixed Income Aroundfunds or money market funds. The media continued to feed the fears the World......................... 5and uncertainties of investing in stocks. Not even record low bond yieldsdeterred investors from preferring bonds over stocks. We strongly believe Focus on Pipelines............. 6that such an investment strategy will prove to be a big mistake in the nextfew years. The Cardinal Foundation..... 6 We believe that the global economy will gradually improve in 2013. Investment Q&A............... 7While most of Europe is still in a recession, things should get better in thesecond half of the year. After a central government leadership change in Cardinal Research............. 8China, we think that the new leaders will refocus on stimulating growthin the Chinese economy by lowering interest rates and increasing fiscal Cardinal News.................. 8spending. The U.S. economy continues to get stronger and create newjobs primarily from a recovery in housing and growth in auto sales. Nowthat the U.S. election is over and there is finally clarity on income taxes,decisions on consumption and investing should be easier to make. The continued on page 2... 400-1780 Wellington Avenue Winnipeg, Manitoba R3H 1B3 www.cardinal.ca
  2. 2. last minute avoidance of going over the so-called fiscal cliff has pressure on food prices. Renewed strength in the U.S. housingbeen a short term boost to the stock market. We believe there markets has led to increases in lumber costs and other buildingwill be a resolution of the debt ceiling issues, fiscal spending cuts, materials. Health care and educational costs are also rising. Manyand the federal budget by the end of the March quarter. This local governments are raising property taxes and sales taxes. Evenshould set the stage for better stock market performance for the energy costs are starting to rise again. Inflation rates in Canadarest of the year. We expect U.S. GDP growth rates in the range and the U.S. have likely bottomed and should gradually riseof 3.0 – 3.5% for 2013. throughout the year back to levels in the range of 2.5% – 3.0%. If While we don’t think that Canada’s economy will fall back to this happens, then currently low bond yields will not look attractive.a recession this year, we do believe its economic growth will lag We expect the U.S. stock market (S&P 500) to surpass itsthe U.S. with growth rates in the range of 1.5 – 2.0%. Canada’s record high (set on October 9, 2007 at 1565.15) sometime in thehousing market is weakening and its consumers are heavily in first quarter of this year. It only has to rise another 6.3% fromdebt. Fortunately, the job picture remains good and interest its January 10, 2013 level of 1472.12. At year-end, we forecast arates are very low. New auto sales in Canada have been very closing level of close to 1650 for the S&P 500 for a full-year gainstrong. Unfortunately, we think that the federal government will of 15%. We expect the Canadian stock market (S&P/TSX) tointroduce an austerity budget this spring as it attempts to move also rise this year, but likely not to return to its previous recordtoward a balanced budget by 2015 when the next federal election high (set on June 18, 2008 at 15073.13) until sometime next yearmust be held. This step will likely cause provincial budgets to also (2014). It would have to rise another 19.6% from its January 10,be cut as transfer payments are reduced. Several provinces will be 2013 level of 12600. It could still happen this year, but it wouldfaced with major spending cuts and/or tax increases. Regardless, require much higher energy prices to achieve it, something weit will mean that fiscal stimulus is over, and reduced government don’t currently forecast. Our best projection for the S&P/TSXand consumer spending will slow economic growth in Canada. is to close the year near 14000 for a gain of about 12%. These Fortunately, corporate profitability remains high and expected returns are above those in 2012, but clearly achievablecorporate balance sheets are strong with large cash balances. given our improving economic forecast and a more stableWe should see continued revenue and profit growth this year as investment climate.companies keep a tight rein on expenses. This should also allow Government of Canada 10-year bond yields haven’t beenfor more dividend increases and stock buy backs. In the current at 5.0% since June 2004 and at 4.0% since December 2007. Afterlow interest rate environment, P/E ratios are low and should go reaching a low of 1.55% in July 2012, they have since recoveredhigher as investor confidence improves. Most quality stocks have to 1.95% as of January 10, 2013. We think these rates will graduallydividend yields over 2.5% and are very attractive compared to rise to 3.0% by the end of the year.10-year government bond yields below 2.0%. Our Canadian For the past 3 years, the Canadian dollar has been trading atequity portfolios have an overall dividend yield of about 3.5%. close to parity with the U.S. dollar. It currently trades at $1.015Compared to bonds, stocks clearly offer higher yields and better U.S. On November 6, 2007, the Canadian dollar reached a highcapital appreciation potential. of $1.0865 U.S. Since December 2009 it has traded in a range of Stronger global economic growth should put upward $0.95 U.S. to $1.05 U.S. We think that it will continue to trade inpressure on agricultural and industrial commodity prices. So far, this narrow band for the next year. The major factors that influenceinflation rates have come down in both Canada (from 2.5% in the trading range of the Canadian dollar are energy prices andJanuary 2012 to 0.8% in November 2012) and the U.S. (from the interest rate spreads on Canadian Treasury Bills versus2.9% in January 2012 to 1.8% in November 2012). However, U.S. Treasury Bills.higher grain prices and transportation costs are putting upward2 cardinal quarterly
  3. 3. Cardinal Rules world in the “mark to market” debate. You have probably heard an investment professional argue that “you don’t have a loss if you don’t sell” and yet others would say, “Of course you do. You couldBuild Wealth have sold at $840,000 before. Now you can only sell for $750,000.”By Henry Hudek, cfa The point that opponents of “mark to market” make is thatT he past year was a fascinating one for investors. The ‘roller- coaster’ seemed to be a little more wild than usual as the‘domino game’ of serial crises in Europe overshadowed a gradual real value doesn’t change as much as the market indicates because the market gets ‘over-emotional’ and exaggerates swings in value. They believe that market values should somehow be “smoothed’but tentative recovery in the U.S. economy, and slowing Chinese to reflect true value, without including the day-to-day excesses ofgrowth whipsawed energy and other commodity prices. In the market’s roller-coaster. This view recognizes that the marketthe end, Cardinal’s Canadian equity composite returns slightly is approximately correct over long periods, but can be very wrongexceeded 10% (gross of fees), a not unreasonable figure, and the over short time frames.fourth year out of five where we exceeded the S&P/TSX return. As the Certs commercial used to say, “You’re both right!” ,Unfortunately, as respectable as that sounds, the TSX returns and in that lies two very important truths. A key role in financialover the last five years have been miserly at less than 1% per year, planning is ensuring that one never has to sell off any of theirand some clients who invested in equities in late 2010 and early wealth when one doesn’t want to, that is, at a loss. Therefore, if2011 may still be down from their entry level. The Cardinal rule you truly intend to own these shares for an extended period, youto BUILD WEALTH over the last 5 years may ring hollow when should ignore the current market quote, but if you have to sell,looking at the current market value on statements today. then you should be concerned about the current market quote. This begs the question: What is Wealth, and how do we On a day-to-day basis, the market does rule. If you have to sellfind out whether it’s going up or down? When we modern folk something (or want to buy something), the price on the marketthink of wealth, we generally think of an amount of money. But that day is what you will have to live with.consider this quote from the Book of Job, describing Job’s wealth Off course, both being right doesn’t help investors who ridebefore his well-documented afflictions commenced: that emotional roller-coaster when they watch market prices “His substance also was seven thousand sheep, and three plummet. Too often I have heard, “I can’t take it anymore. Ithousand camels, and five hundred yoke of oxen, and five hundred need to get out.” If you feel that you are in this situation you canshe asses, and a very great household; so that this man was the respond in one of two ways. The first, easiest and most obvious isgreatest of all the men of the east. (Job 1: 3-4) “ to reduce your equity exposure. Perhaps we should recall that real wealth is measured in The second is far less obvious and far more difficult. Turn offwhat we own, and that money is simply the way to measure the TV. If you do not want to ride the emotional roller-coaster,wealth when it comes in so many different forms. So if we receive then just get off it. It is a sign of our modern times that we cana statement showing that the current market value of what we determine the market value of any one of our stocks to the second.own has declined, has our wealth diminished? We can hear an “expert’ opinion daily, if not hourly. We usually feel If we dividend investors were living in Job’s era, people might that as investors, it is our responsibility to be watching and takingspeak of us as owning 500 shares of Canadian National Rail and care of our investments. Now that information is so readily available,700 of Royal Bank and 400 of Tim Horton’s: Truly great wealth! shouldn’t we be monitoring it? Isn’t that how we build wealth?Instead we say, “my portfolio is down from $840,000 to $750,000.” Well, if it were only information that we were accessing,We still own exactly the very shares we used to own, our camels perhaps the answer would be yes. But it is not usually informationare giving us more milk and our oxen are pulling heavier carts. that we are accessing. Instead, we get reams of opinion. RememberIn fact, many dividend investors like Cardinal clients own more that the media is in the business of demanding attention, notshares than ever because their dividend income stream is constantly informing. While we feel it is our duty as investors to stay informed,being reinvested. Most companies in our portfolios continue to the media is not the optimal route to achieving that.increase their dividends, so if one measures wealth by the income It is absolutely an investor’s job to know what they own, but thatreceived, our shares have materially grown our wealth. One share job cannot be done through the media. It is done through a rigorousof Canadian National Rail equals more wealth than it used to and ongoing review of all aspects of a company’s business andbecause it generates more dividend income. So if we own as financial situation, and that is the role our clients delegate to us.much or more than we owned before, has our wealth diminished Real values of stable, solid, profitable companies don’t fluctuateor increased? Should we “mark to market” values, or look through nearly as much as the market value does. Why would you listenthat to the real value? to mass media when real values come from earnings power and That issue is one that has plagued the investment industry dividend payouts? Own productive camels and sheep, know theirsince inception and still troubles regulators and the pension real worth, and then you can know whether you are building wealth.Volume 18 • Issue 1 • January 2013 3
  4. 4. Introducing the Pool into clients’ overall portfolio management fee. This gives our clients, as well as us, more flexibility for accounts that arethe Cardinal below our usual account minimums.Canadian The Pool will be managed with the same investment approach as our Canadian Equity composite and is only availableEquity Pool to clients who have separately managed accounts with Cardinal. The minimum account size to invest in the Pool is $25,000 exceptBy Emily Burt, mba Ontario where, due to securities regulation, it is $150,000 ifT his January, Cardinal launched our very first internally managed pooled fund. The Cardinal Canadian Equity Poolwill be a new way for our clients to invest with us. This Pool you are not an “accredited investor” The Pool has a small . internal operating expense that will be capped at .25%. For more information, or if you have any questions about the Pool, pleasewill not only help to diversify smaller accounts in an efficient get in touch with us.manner, but it will also allow us to roll any accounts invested inThe Case for Canada great players. We believe there are increasing benefits to going into some of the stable companies across the border like GeneralPlus Portfolios Mills, (John) Deere, Microsoft, H.J. Heinz and Wells Fargo. There are myriad U.S. companies with a long history of payingBY Henry Hudek, cfa regular dividends, not to mention regularly raising the dividend.T hroughout the recent financial crisis and subsequent Corporate balance sheets are flush with cash and many have recession the Canadian economy has held up better than some exposure to the faster growing Asian and Latin Americanmost of the more developed countries on the planet. This has markets. Share prices are still depressed by the touchy memorygenerally been beneficial for investors in Canadian stocks, but of the crisis and by angst over Europe and U.S. political gridlock.Canada’s equity markets don’t have everything. We have very There are some real opportunities in the U.S., and with thefew consumer goods, industrial manufacturing or technology relatively stable Canadian dollar near parity, it is a great time forfirms of the size and caliber in which Cardinal prefers to invest. Canadian investors.As the U.S. accelerates out of its recession and Europe seems to Our Canada Plus portfolio currently holds stock in about 34be bouncing along the bottom, we believe we have an opportunity quality companies, and is diversified across 7 sectors. Dividendto expand out of the Canadian universe for our clients and add yields in the U.S. are generally a bit lower, but we are seeing fasterquality companies in sectors not available in Canada. For clients growth in dividends there than in Canada. A rising Canadianable to afford the risks and volatility of the international scene dollar vis-a-vis the U.S. dollar would negatively impact the valuewe offer a U.S. mandate as well as a mixed mandate we call of U.S. holdings for Canadian clients. Soaring energy prices, orCanada Plus. The minimum account size on Canada Plus has the decline of the U.S. greenback as the ‘reserve’ currency ofbeen recently lowered to $350,000 and is positioned at about choice, are the major factors that would cause the loonie to sig-60% Canadian and 40% U.S. nificantly outpace the greenback. Although we are very optimistic Over the next few years we believe it will be highly about energy, it is unlikely that prices can skyrocket. We believe it isappropriate for clients to give consideration to broadening their relatively safe for Canadian investors to rely on U.S. denominatedinvestment universe outside of Canada. There is more to the assets. We suggest you discuss with your advisor to consider ifworld than Financials and Energy, of which Canada offers many there are tax consequences to moving a portion of your assets to Canada Plus.4 cardinal quarterly
  5. 5. Fixed Income Around because short-term bonds are less price sensitive than long-term bonds. In other words, when rates increase, the price of athe World short-term bond will fall less than the price of the long-term bond would. Cardinal has also been increasing the holdings ofBy Brett Purdy, cfa corporate bonds in existing bond portfolios in order to take advantage of some higher yields. Corporate bonds from companiesM any events over the past year kept investors looking to fixed income in safe haven countries such as the U.S. andCanada. European debt troubles continued into their third year such as the Canadian banks are high quality and have a credit rating of AA in many cases.as the focus moved to larger countries such as Spain and Italy While there are currently better opportunities in equitieswhere recessions and high deficits caused bond yields to rise. to obtain higher yields than can be found in bonds, there isThe markets worried about weaker global growth as China still a place for fixed income in portfolios for clients whose riskexperienced a slowdown in economic growth. China is the tolerance is low and wish to reduce volatility. In a balancedsecond largest economy in the world, and slower GDP growth portfolio bonds can lower the risk of an overall portfolio,would have negative consequences for its trading partners, providing safety and preservation of capital.such as the U.S., Europe and Australia, which would then spill Given that negative real yields (or even very low positiveover into other countries. And of course, there was the U.S. ones) are unsustainable in the long run, interest rates will havepresidential election in November and the “fiscal cliff” worries to rise. The timing of this is uncertain and is taking longer thanheading into year-end that gave more uncertainty to the markets. anticipated as a result of the Euro crisis and sluggish economicHowever, there are reasons for optimism. Europe seems to growth in most developed countries. We are wary of strayingbe slowly working out its issues, China is showing signs of from short term bonds into longer term bonds because whenimprovement, and the U.S. government averted the “fiscal cliff” . bond yields do increase as inflation rebounds and economicInterest rates have stayed at ultra-low levels as the Federal growth improves, bond prices will decline. Long term bondsReserve and the Bank of Canada left their key rates unchanged are more sensitive to increases in yields and will fall more thanat 0.25% and 1.0% respectively in 2012. Combined with low short term bonds. We continue to emphasize shorter term bondsand stable inflation expectations, bond yields remained low for (under seven years) in our portfolios to minimize interest rate risk.another year. The Government of Canada 10-year bond yield We have been looking for opportunities to increase the yielddeclined another 14 basis points to end the year at 1.80% while in our bond portfolios. Provincial bonds that mature in five yearsthe 30-year bond fell 13 basis points to 2.36%. Three-month or less currently yield below 2%. High quality corporate bondsTreasury bills finished the year 10 basis points higher at 0.92%. rated A or better can provide around 50 to 55 basis points of extraThis resulted in a flatter yield curve as short-term rates rose and yield. We believe that this adequately compensates an investor forlong-term rates fell. We are at the peak of a bull market in bonds taking on the extra credit risk inherent in corporate bonds. Bythat has lasted since 1981. Real bond yields are near zero today focusing on high quality issuers such as the Canadian banks, weor even negative in many cases, making this an unsustainable can increase the yield in our portfolios without assuming dangerousenvironment for bond yields. The timing of the official end of levels of credit risk found in bonds with lower ratings.this bull market remains uncertain, but at some point rates must By investing conservatively in short term, high qualityincrease to properly reflect the risk inherent in bonds. corporate bonds and maintaining a position in provincial bonds, In anticipation of higher rates, Cardinal is maintaining we are improving the overall yield of a portfolio, while ensuringshorter-term bond portfolios that contain bonds with maturities preservation of your capital for the long term.of five years or less. This will help mitigate interest rate riskVolume 18 • Issue 1 • January 2013 5
  6. 6. Focus on Pipelines Dislocation with the world prices has happened before in Canada and the market responded accordingly by building oneBy Jeffrey Rance, b. comm. (honours) of the largest pipeline systems in the world. Today is no different, as pipeline companies are developing tens of billions of dollars’E nergy stocks underperformed the broader index in 2012. We believe the main proponent of this is that the market hasconcerns regarding pipeline capacity and the price oil producers worth of new pipeline projects. Over the near term, projects such as the Seaway pipelinereceive. Production growth in U.S. oil fields has exceeded the reversal, the expansion of the BP Whiting refinery, the Gulf Coastpace at which the pipeline system can handle the increased portion of Keystone XL, and the continuation of the unprecedentedvolumes causing the price Canadian companies receive for their growth of oil on the railroads will help to reduce price differentials.oil to become dislocated from world prices. Longer term, between Keystone XL, the conversion of the TransCanada Mainline to oil, and possibly a West Coast option, Over the near term this is an issue as some companies we believe that concerns over pipeline capacity are overblownreceive a lower price for their oil and it also makes great headlines for long term investors in Canadian energy.when there are temporary declines in local crude prices. It doesnot, however, affect all the companies in the portfolio. Companies Ultimately, we believe that the near term volatility createsthat have North American refining operations like Suncor, a buying opportunity as this will not be a long term issue. TheCenovus, and Imperial Oil have benefited from the reduced cyclicality of the pipeline business has historically lent itself tocrude oil costs while keeping gasoline and diesel priced in short term price dislocations, but has subsequently resulted inreference to international levels. This has resulted in refining an overbuilding of assets, which is a positive for energy producers.cash flows that are more than double historical averages. Despite the pipeline capacity issues, the average price CanadianUnderperformance of these companies does not reflect the companies received for their crude in 2012 was the third highestfundamentals. on record. This has resulted in depressed valuations for Canadian energy stocks to a point we view as attractive given that cash flows and dividends continue to grow.2012 Year in Review • The purchase of new sports equipment for B’nai Brith Camp’s summer camp programsBy Emily Burt, mba • Funding to furnish two resident rooms for the Betel HomeA t Cardinal, giving back to our community is a part of our culture. The Cardinal Foundation allows us to assistcharitable organizations that may not otherwise be able to Foundation to help keep their seniors living in a comfortable, safe environment • A final pledge to the University of Manitoba – Charlescontinue providing goods and services to those who need it Bigelow Study Room, giving University of Manitoba sciencemost. This philosophy allows us to make a truly positive students a place to learn, read and collaborate on group projectsimpact on our community. The Cardinal Foundation recently completed its 3rd Annual By focusing on smaller, tangible donations instead Sock Drive in support of Siloam Mission. With the help of Cardinal’sof large capital campaign projects the Board and Grants staff and an overwhelming outpouring of support from ourcommittee have made The Foundation’s fourth year of giving community, clients and business partners, the “Knock Yourmore successful than ever. Among the donations were: Socks Off” drive collected nearly 7000 pairs of socks to help keep• The purchase of new metal bed frames and mattresses Winnipeg’s homeless warmer this winter. Thank-you to everyone for Osborne House to ensure that bed bugs could no for their outstanding generosity this year. longer create dangerous sleeping spaces for those in need of emergency shelter6 cardinal quarterly
  7. 7. Investment Q&A I like Cardinal’s investment approach because of the dividend income, but how safe are my dividends?How many companies have raised dividends this year? Cardinal demands that the companies we own pay a dividend,In the past year, we had over 15 Canadian companies raise their because we believe that owners should share in the profits thatdividends. Of those companies, 4 companies – Royal Bank, companies make. Of course, individual companies in the portfolioTD Bank, Bank of Nova Scotia and National Bank – raised their can face challenges from time to time. Last year, Sun Life’sdividend twice throughout the year. There was also impressive dividend yield crept up over 7% because its share price had fallendividend growth in companies across all of our industries. so low. There were reports that Sun Life would have to cut itsCompanies such as Canadian National Railway, Tim Hortons, dividend. A dividend cut can be a crucial red flag because it isCanadian Natural Resources and Suncor Energy all had notable so often a sign of a broken business model when it occurs. Indouble-digit dividend increases. the case of Sun Life (as with all our companies) we continually Dividends and dividend growth are important criteria for assessed its balance sheet and capital reserves and felt confidentcompanies that we invest in. It provides us with a comfort that that the dividend was sustainable. We also maintained thewe are getting paid for holding shares in that company, and we utmost confidence that Sunlife retained a strong and viable long-continually receive more income as they increase their dividends. term business. This analysis gave us the conviction to continueThe payment and growth of the dividend also gives us confidence holding Sunlife through a period of turbulence in its share price.that management believes that their business outlook is optimistic. More recently the share price of Penn West Petroleum has Not only did our Canadian companies deliver on dividend fallen so much that its dividend yield is now in the realm of 10%.growth, but we also saw most of our U.S. companies raise their We continue to monitor cash flows and the balance sheet atdividends last year. The number of companies and the breadth Penn West and visit the company regularly to determine whetheracross sectors were similar to our Canadian companies. This management continues to have the desire to maintain theis evidence that our companies, both in Canada and the U.S., dividend. While continued weakness in natural gas prices couldoperate in attractive industries which allow them to grow revenues, eventually pressure the dividend at Penn West, we do not believeearnings and their dividends. there is an imminent threat of a cut. More important, we retain absolute confidence that Penn West will be a viable and healthy Similar to last year, an overwhelming amount of reported long-term business, despite short-term turbulence. Last year,news can affect stock market prices and cause uncertainty in Sunlife was the best performing company in the portfolio withthe short term. Despite this, our Canadian and U.S. companies a 48% calendar year return including the dividend. Most of thisshowed strength in their business and conviction in their ability return was the simple result of a bounce back from an extremelyto increase their dividends. It is the growth in the dividend that low valuation. Penn West could appreciate 48% in 2013 and stillwill help drive share prices higher in the long term. This will be trading below its historical average price to cash flow valuation.provide confidence to investors to own these companies. Thus, we can easily envision the company as a top performer inTerry Wong, cma, cfa the portfolio this year and believe our clients will be well served by our decision to continue holding. Henry Hudek, cfaVolume 18 • Issue 1 • January 2013 7
  8. 8. Cardinal Research expected to grow 5% per annum so fleet capacity is expected to also rise at a similar rate. Urbanization, the second mega trend, drives demand for products such as elevators and HVAC equipmentUnited Technologies Investor Day used in residential, commercial, and industrial/infrastructureBy Jim McInnis, cfa markets. In China, over the next 20 years, 15-20 million people annually are expected to migrate to urban centers from the ruralU nited Technologies Corporation (UTC) is an established, multi-industrial company participating in the aerospace andindustrial end markets, with sales and operating profits split roughly areas, thereby generating a need for new buildings. Also keep in mind that elevators per capita in China are only half the levels of that in the U.S., so there is room to double this business evenequally between the two. On December 13, 2012, we attended without the urban migration tailwind.UTC’s Investor and Analyst Meeting in New York City where theCEO delivered a business update, reiterated macro factors driving There are some near term catalysts to the stock that alsodemand, and outlined their 2013 financial guidance. This was make UTC an attractive investment: In the Climate, Controls,followed by an opportunity for analysts/investors to informally and Security segment, we expect synergies from the integrationengage with various executives from each of the firm’s business units. of the Fire & Security businesses with the Carrier operations to be greater than the $100 million investors are expecting. Also, the UTC outlined their expectation for sales to grow in all five CEO hinted that the initial Goodrich synergy target of $400m isbusiness units and for segment profits to be higher in four of the likely to be revised higher, meaning better than expected profitsdivisions. UTC anticipates that earnings per share to grow low for shareholders.double digits to mid-teens in 2013, due mainly to a full year’searnings contribution from Goodrich which was acquired in 2012. UTC has many of the characteristics we aim for in an investment: a sterling reputation (high quality), strong management Two mega trends are driving demand for UTC’s products. team, solid balance sheet (financial strength), and high barriers toThe first is growth in commercial aerospace and the second is entry which leads to sustainable earnings generation and pricingurbanization. The commercial aerospace market is in the early power. UTC has rewarded shareholders with 76 consecutiveinnings of a multi-year production boom as airlines replace aging years of annual dividend increases (shareholder friendly). UTCfleets and support demand growth in emerging markets. Over pays a 2.4% dividend yield and trades at 13.8x 2013 consensus30,000 aircraft are expected to be delivered over the next 20 years. earnings of $6.07/share.Revenue-passenger-miles, the industry measure for demand, is DIVIDEND INCREASESCardinal News Canada % IncreaseCongratulations are in order to Robert Lam. Robert joined the Cardinal team in April 2011 Allied Properties Real Estate 3.0%and has recently been awarded the Chartered Financial Analyst designation. Cardinal now National Bank of Canada 5.0%has 10 CFAs on staff! Riocan REIT 2.2%Cardinal welcomes Andrea Chaput to a position with the Research Team. Andrea is currentlya University of Manitoba Asper School of Business Student in the co-op program. Vermillion Energy Inc. 5.3% U.S.A. % Increase Becton Dickinson and Co. 10.0% Honeywell 10.1%Notice to Readers: Unless otherwise noted herein, the sources of all performance data in the Cardinal Quarterly is Bloomberg and Cardinal research. TheCardinal Quarterly is prepared for general informational purposes only, without reference to the investment objectives, financial profile, or risk tolerance Johnson Controls Inc. 5.6%of any specific person or entity who may receive it. Investors should seek professional financial advice regarding the appropriateness of investing in anyinvestment strategy or security and no financial decisions should be made on the basis of the information provided in this newsletter. Statements regardingfuture performance may not be realized and past performance is not a guarantee of future performance. This newsletter and its contents do not constitute a Stryker Corp. 24.7%recommendation or solicitation to buy or sell securities of any kind. Investors should note that income, if any, from any investment strategy or security mayfluctuate and that portfolio values may rise or fall. Cardinal Capital Management, Inc. does not guarantee the accuracy or completeness of the information VF Corp. 20.8%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 and opinions contained herein are subject to change without notice. Source: Bloomberg© 2013, Cardinal Capital Management, Inc. ALL RIGHTS RESERVED. NO USE OR REPRODUCTION WITHOUT PERMISSION. Reported in domestic currency8 cardinal quarterly

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