Several Canadian banks reported dividend increases in August 2012, including Bank of Montreal (2.9%), Bank of Nova Scotia (3.6%), CIBC (4.4%), and Toronto-Dominion Bank (6.9%). Despite higher profits and dividends, bank share prices remained below 2010 levels. The document questions whether the market is overreacting to concerns from Europe and underestimating the banks' ability to continue growing profits. It argues investors should focus on long-term company fundamentals like dividend growth rather than volatile short-term share prices.

1. September 2012
Dividend Increases
Bank of Montreal 2.9%
Bank of Nova Scotia 3.6%
cardinal
Canadian Apartment Properties 3.3%
CIBC 4.4%
Cisco Systems Inc. 75.0%
H&R Real Estate 4.0%
Royal Bank of Canada 5.3%
update
Toronto-Dominion Bank 6.9%
(During the period: August 1 – 31, 2012)
The Summer That Bank Dividends COMPANY FOCUS
Rose From Their Slumber ARC Resources
It has certainly been an interesting period for many of Cardinal’s companies. Our returns ARC Resources is a high yielding Canadian
were generally up for the most recent three month period, but market prices continue to be producer of oil and gas with a market capitalization
quite sluggish. The summer culminated with the six Canadian banks that we own reporting of $6.7 billion and a dividend yield of 5.2%. As of
earnings from their operations. Five of our six increased their dividend payout. Royal Bank the second quarter 2012, production was 93,992
reported its highest quarterly profit ever. Together the big five earned $7.8 billion dollars barrels of oil equivalent per day (62% natural gas),
profit in the past three months – that’s right, $7.8 billion! At that rate these banks have an 14% higher than the previous year.
annual earnings capacity of about $30 billion dollars. Wouldn’t they be something worth
ARC owns and operates a low cost base position
owning a piece of? Yet share prices are lingering below where they were in the spring of
of natural gas assets, primarily in the Montney
2010, and dividends are now on average 17% higher than they were back then and profits
play in British Columbia, producing gas at a cost
are 53% higher. As Rodney Dangerfield put it, “banks don’t get any respect!”
of $0.80 per million cubic feet versus peers that
Could this situation be an example of the market being wrong again, or at least over-reacting spend over $1.00/mcf. This is augmented by
to the likelihood of bad news from Europe and/or from the Quebec election? Will Europe oil and liquids-rich plays in B.C., Alberta, and
drastically impede the earnings or decimate the capital of these banks? Have not the banks Saskatchewan.
demonstrated that they have ever more clever ways to extract increasing profits from their
ARC’s share price has fallen lately along with
customers? TD and CIBC both announced dividend increases and their share prices both
energy prices and due to fears of a possible
went down. What gives?
dividend cut. However, the company recently
It is said that true investors should think like business owners, which means paying attention completed equity financing which will provide
to the fundamentals, not the current market price. Situations like this point out how irrelevant substantial growth capital, and help ensure a strong
the current market price can be when what we should be most concerned about is the long balance sheet and ample dividend protection.
term health of our companies and their future earnings power. And yet, so many investors
The combination of a high and safe dividend
look at their portfolio statement and think either “Oh, I lost money” or “Good, I’m making
yield, a low cost asset base, diverse array of
money.” When the market can be so fickle as to price the same company (RBC) at $43.90 on
growth options, and financial flexibility allow
November 24, 2011, and $58.74 four months later on March 27, 2012, one starts to realize
ARC to continue to grow both production and
that current market prices should be taken with a grain of salt. The companies in our Canadian
cash flows through the whipsaw of commodity
and U.S. portfolios are quality companies. As long as they keep growing dividends, and we
cycles and make it an attractive holding.
keep getting buying opportunities at cheap prices, client portfolios will be seeing healthy
income for years into the future. Unless otherwise noted, the source of all data in this Update is Bloomberg and Cardinal research. This
Update is prepared for general informational purposes only. Statements about future performance may not
be realized and past performance is not a guarantee of future performance. Cardinal does not guarantee
the accuracy or completeness of the 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 and opinions contained herein are subject to change without notice.
© 2012, Cardinal Capital Management, Inc.
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