It seems that December is always super busy. Every year there is so much to get done before people disappear on holidays: Christmas shopping, holiday parties, and some sort of travel. This year is no exception, it seems that December has been flying by and 2015 is almost gone.
Needless to say, I had to sacrifice some time working on my blog in order to get ready for all the good times to come. I also changed my strategy a bit this month, by investing less money. I’ve got a number of important goals in 2016, which will require more of my capital. I’ll explain in more detail in another post.
This month has been an interesting one for the dividend growth investor. It seems that everyone is talking about the much anticipated benchmark rate hike by the Federal Reserve. If it happens, as many analysts are predicting, it will represent a 0.25% raise to the Fed funds rate (overnight rate) for the first time since 2006. This is promising to create some volatility in markets, as a rate hike would normally be expected increase the cost of borrowing for consumers and companies. As I’m writing this post, markets in Asia, Europe and North American were up slightly in anticipation of the rate hike. It will be interesting to get a sense from the Fed meetings as to how they plan on managing rate increases in the near to medium term.
In December, markets have also reacted to sharply lower petroleum prices. With the multi-year lows in petroleum prices, the Canadian energy stocks really dragged the TSX down (-5.05%) and the CAD has fallen sharply against the greenback. There are plenty of interesting articles about the appealing opportunities for equity investors created by lower energy prices, but a certain degree of caution is required as companies that are highly leveraged may be in for a great deal of trouble if petroleum prices stay low for a long period of time and their borrowing costs rise at the same time. No one wants to catch a falling knife. I know from experience with BB.CA in my early investing days. I’ve read with interest a lot about the recent dividend cut by KMI. It was a bit of a surprise for me as recent signals pointed to some promising dividend growth prospects for this company.
I didn’t have time to prepare a watchlist for December. When I checked my sector and geographic weight targets, I noted that I should look to initiate a holding in healthcare and build up my consumer staples. Under different circumstances, I probably would have had NSRGY, PG on my staples short list. I would have looked into JNJ, NVS and RHHBY for the healthcare sector. While I’m sure there were great opportunities for initiating positions in these equities, I was not prepared to convert CAD to USD at a huge loss. I recognize the CAD will likely be lower for a while, but I’m just not going to convert to USD when the CAD is trading weaker than the 2008-2009 financial crisis.
Here’s what I did instead…
Screen Results – CNR
My first screen criteria was attractive valuation. This criterion compares the most recent P/E ratio to the 5 yr. average and index average. CNR had an attractive P/E ratio of 17.4 as compared to its 5 yr. average of 16.6 and the S&P/TSX ratio of 16.4. While this demonstrated that CNR was trading higher than the index and its 5-year average, the difference was small. Analysts note a fair value of $78, so I felt the stock was trading at a slight discount.
The second screen category was payout ratio less than 55%. CNR had an attractive 28% payout ratio, which leaves it plenty of room for growth.
The third screen criteria, dividend yield greater than 2.5%, was not met. CNR currently has a yield of 1.66%. However, the company has recently communicated that it will continue its share buyback program next year. This combined with a strong financial position, diversified revenue segments, and impressive dividend and EPS growth make CNR stand out.
I recently initiated a small initial position in CNR for 5 shares at $72.54 per share. This new holding will add $5.95 CAD in forward dividend income to the Niche Fund. My aim this month was to diversify my holdings, and initiate a new position in one of my foundation stocks. This purchase represents my second industrial stock holding.
For more info about CNR please see their investor relations page.
What are your thoughts on CNR? Do you currently hold any railway stocks?