A boun­ti­ful har­vest of div­i­dend hikes

The Globe and Mail (BC Edition) - - GLOBE INVESTOR - JOHN HEINZL jheinzl@globe­and­mail.com

M y Yield Hog Div­i­dend Growth Port­fo­lio is barely six weeks old, but it’s al­ready churn­ing out a steady stream of div­i­dend in­creases.

In late Septem­ber, util­ity op­er­a­tor Emera Inc. (EMA) hiked its div­i­dend by 8.1 per cent – in line with its tar­get of 8-per-cent an­nual growth through 2020.

In Oc­to­ber, For­tis Inc. (FTS) and A&W Rev­enue Roy­al­ties In­come Fund (AW.UN) an­nounced in­creases of 6.25 per cent and 2.3 per cent, re­spec­tively. For­tis also ex­tended its 6-per-cent an­nual div­i­dend growth tar­get by a year to 2022, cit­ing a fiveyear cap­i­tal spend­ing plan that is ex­pected to drive earn­ings higher.

The pa­rade of div­i­dend hikes has con­tin­ued in Novem­ber, with CT Real Es­tate In­vest­ment Trust (CRT.UN) an­nounc­ing an in­crease of 4 per cent and Telus Corp. (T) boost­ing its pay­out by 2.5 per cent. That’s five in­creases in six weeks for my port­fo­lio, and over the next few months I’m ex­pect­ing many more com­pa­nies to fol­low suit. (Globe Un­lim­ited sub­scribers can view the full model port­fo­lio at tgam.ca/div­i­dend­port­fo­lio.)

I like div­i­dend hikes be­cause they put more money in my pocket and – just as im­por­tant – they’re a sign of a healthy, grow­ing busi­ness. To­day, I’ll look at Telus Corp. and CT REIT in more de­tail and ex­pand on the rea­sons I in­cluded them in my model port­fo­lio. Telus (T)

6 Price: $48.35

6 Yield: 4.2 per cent

I’m not just a Telus in­vestor; I’m also a cus­tomer. My fam­ily has three cell­phones with its Koodo sub­sidiary and we’ve been very happy with the ser­vice. So have a lot of other peo­ple, judg­ing by Telus’s in­dus­trylead­ing wire­less “churn” rate of just 0.86 per cent in the third quar­ter.

Strong cus­tomer sat­is­fac­tion is one rea­son Telus was able to add 152,000 cell­phone, In­ter­net and Telus TV ac­counts in the lat­est pe­riod – in­clud­ing 115,000 high-value post­paid wire­less sub­scribers that eas­ily beat an­a­lyst es­ti­mates of 97,000. On top of that, av­er­age rev­enue for every wire­less user rose a healthy 3 per cent year over year.

Telus has the wind at its back, an­a­lysts say. “In our view, de­mo­graph­ics are cur­rently favourable for wire­less providers, as im­mi­gra­tion, peo­ple get­ting mo­bile de­vices at a younger age and more cus­tomers now tend­ing to have more than one de­vice are all fac­tors help­ing the in­dus­try,” Des­jardins Se­cu­ri­ties an­a­lyst Ma­her Yaghi said in a note in which he re­it­er­ated his “buy” rat­ing on Telus and lifted his 12-month price tar­get to $51 from $49.50.

Here’s an­other rea­son to like Telus: With its fi­bre-to-the-home roll­out ex­pected to be about 50-per­cent com­plete by early 2018, cap­i­tal spend­ing is poised to de­cline next year. That, cou­pled with lower cash taxes, is ex­pected to add about $220-mil­lion to free cash flow (FCF) next year and lower the ra­tio of div­i­dends to FCF to 90 per cent, down from Mr. Yaghi’s pre­vi­ous es­ti­mate of 98 per cent, he said.

All of this should help Telus to con­tinue to meet its ob­jec­tive of rais­ing its div­i­dend twice a year at an an­nual rate of 7 per cent to 10 per cent through 2019. Un­less some­thing un­fore­seen hap­pens, I ex­pect that Telus will raise its div­i­dend again in May, which will make this happy cus­tomer an even hap­pier share­holder.

CT REIT (CRT.UN)

6 Price: $14.30

6 Yield: 5.1 per cent

CT REIT has raised its dis­tri­bu­tion four times since it was spun off from Cana­dian Tire Corp. Ltd. in 2013, and I’m bet­ting there are plenty of an­nual in­creases to come.

Thanks to its as­so­ci­a­tion with Cana­dian Tire, CT REIT en­joys re­li­able cash flows from its port­fo­lio of more than 300 prop­er­ties, which have an oc­cu­pancy level of about 99.6 per cent. What’s more, the REIT’s cash flow is grow­ing steadily, thanks to “vend-ins” of ex­ist­ing stores, new prop­erty de­vel­op­ments, store ex­pan­sions and con­trac­tual rent in­creases av­er­ag­ing about 1.5 per cent an­nu­ally. In its third-quar­ter earn­ings re­lease, CT REIT an­nounced four new in­vest­ments to­talling $27mil­lion that add to its ex­ist­ing project pipe­line of more than $100-mil­lion. The REIT’s pru­dent pay­out ra­tio of 76 per cent of ad­justed funds from oper­a­tions pro­vides an­other layer of com­fort.

One of­ten-cited risk with CT REIT is the heavy re­liance on one ten­ant, but the re­tail chain’s en­trenched mar­ket po­si­tion, in­vest­ment-grade credit rat­ing and grow­ing same­store sales pro­vide a high level of se­cu­rity. “The REIT’s con­cen­trated ten­ant pro­file in fact shields it from the chal­lenges faced by other dis­cre­tionary goods re­tail­ers with vary­ing de­grees of cred­it­wor­thi­ness,” CIBC World Mar­kets an­a­lyst Su­mayya Hus­sain said in a note last sum­mer.

CT REIT hasn’t es­caped the re­tail down­turn com­pletely: One rea­son its units have been un­der pres­sure is that it leases a dis­tri­bu­tion cen­tre in Cal­gary to Sears Canada, which is liq­ui­dat­ing its as­sets. The build­ing ac­counts for about 1.5 per cent of CT REIT’s rent, but given its prime location, “a re­place­ment ten­ant can be eas­ily pro­cured, al­though the tim­ing lag could tem­po­rar­ily dis­rupt cash flows,” Ms. Hus­sain said in a note this month. She has a “neu­tral” rat­ing on the units and a 12- to 18month price tar­get of $15.50 – in line with the me­dian tar­get of an­a­lysts sur­veyed by Thom­son Reuters.

Dis­clo­sure: The au­thor also owns shares of EMA, AW.UN, FTS, T and CRT.UN per­son­ally.

T

CRT-UN

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