I'm always looking for ways to improve and grow my Freedom Fund through international diversification when possible. Most of my portfolio is currently invested in major U.S. blue chip companies like Johnson & Johnson (JNJ) and PepsiCo, Inc (PEP). The great thing about these companies, however, is that they are multinational companies that operate on a global scale, so even though they are headquartered here in the U.S., they are truly international companies.
But that doesn't mean one shouldn't still own companies that are based in countries other than the United States. Many great companies operate in other countries and have great exposure to markets outside our borders. There are thousands of companies out there that aren't U.S.-based. The great thing is that you don't have to fly over to London to buy U.K.-based stocks. Many great international companies trade on our exchanges here in the U.S. using American depository receipts (ADR). Also, some foreign-based stocks trade on our exchange just like any other stock. These are "interlisted" stocks, which means they trade on multiple exchanges. This is typically true of major Canadian stocks.
Lately, I've been looking at some of these interlisted Canadian stocks as possible additions to my portfolio. There are some inherently attractive qualities to Canadian companies. First, they operate in a very stable country. Canada has one of the most stable governments in the world, and as such also have a very stable currency. They are neighbors to this country with a shared language and often common goals. Another great thing is that many of the Canadian companies that have common stock that's interlisted on our exchanges have operations that are easy to understand and translate well for an American investor.
After some research over the last week or so I've narrowed my interest to three specific Canadian stocks, which I'll discuss below.
The Bank of Nova Scotia (BNS)
Known as Scotiabank, this is a great bank from everything I can see. This is a global bank that operates in over 55 countries and serves over 19 million customers around the world. One of the great things about this bank, a characteristic shared by many of the major Canadian banks, is that they didn't have to cut their dividend during the recent financial crisis. This is partly due to the fact that Canada has a fairly strict set of regulations regarding banking, which may limit the chances of explosive growth but also limits the possibility of financial implosion. In order to get a mortgage in Canada you need to have provable sources of income and money down. On the other hand, there is some data showing that Canada may be in the midst of a housing bubble. This is something to watch.
BNS operates in 4 distinct segments: Canadian banking, international banking, global wealth management and global banking and markets. Fundamentally, this bank looks wonderful. The debt/equity ratio stands at 0.3 and the yield is currently at 3.78% based on the CAD 0.57 quarterly dividend payout. The Canadian dollar and U.S. dollar trade almost at parity right now, so that makes a lot of conversions relatively easy. EPS has grown from $3.05 in 2008 to $5.22 in 2012. That's a CAGR of 14.38%. The dividend has also grown from an annualized $0.73 CAD in 2002 to its current annual payout of $2.28 CAD. The current P/E ratio stands at 11.56 and P/B is 2.0. The payout ratio is currently at 44.6%, so there is plenty of room for the dividend to continue growing. The bank is conservatively managed with global exposure and is actively growing earnings and dividends at a healthy clip. This is tops on my watch list right now.
Toronto-Dominion Bank (TD)
Another well-run Canadian bank. TD also was able to keep paying out investors during the financial crisis and has gotten back to raising the dividend, twice during fiscal 2012. This bank operates in four segments: Canadian personal and commercial banking, U.S. personal and commercial banking, wealth and insurance and wholesale banking. Although not a global bank like BNS, this can have upside as they stick to their strengths in Canada and the U.S. This is the second largest bank in Canada, so there is certain scope and economies of scale that come with that size.
Currently trading at a P/E of 12.47 and P/B of 1.8 with a yield of 3.65%, this isn't quite as cheap as BNS, but there is still some value in the shares. The debt/equity ratio stands at 0.3. EPS have grown from $4.87 in 2008 to $6.76 in 2012, for a CAGR of 8.54%. The dividend has also grown significantly, up from an annualized payout of $1.12 CAD in 2002 to the current annual payout of $3.12 CAD. The payout ratio stands at 47%, so like BNS there is plenty of room for dividend growth. This is another conservatively managed bank, much like all of the big Canadian banks, and I think there is plenty of room for growth ahead. TD has actually recently indicated that they intend to increase their dividend payout ratio from a previous 35-45% to 40-50% and also will likely raise the dividend twice per year for the foreseeable future. That's great news for dividend growth investors!
Telus Corporation (TU)
Telus is a large, and growing telecommunications services company that serves more than 13 million customers in Canada. They operate in two segments: wireline and wireless. TU hasn't had explosive growth over the last 5 years, as is the case with almost any telecommunications company. I look at telecommunications companies like utilities. They provide a service that people increasingly need, although unlike utilities there is a lot of competition that crosses over regions.
TU has grown earnings from $3.79 in 2007 to $4.05 in 2012. Growth has not been impressive. Revenue growth is much the same going from $9.1 billion in 2007 to $10.9 billion in 2012. EPS has grown at a rate of 1.34% over this period, compounded annually. Management has been committed to growing the dividend during this period, however, going from $1.50 CAD in 2007 to $2.38 CAD in 2012. This brings the payout ratio up to 65%, which is in-line for a telecommunications company. The yield currently stands at 3.68%, factoring in exchange rates and based on the current quarterly payout of $0.64 CAD. The things I like about TU are the fact that its network covers 95% of Canada and its subscription numbers have been growing at a decent clip, up from 11.6 million in 2007 to 13.1 million in 2012. From the research I've conducted over the last week it looks like customers are relatively happy with the service from Telus. Without further significant growth in EPS, however, dividend growth will be limited going forward. Telus also manages its debt load much better than competitors. Telus has a debt/equity ratio at 0.6, compared to 1.4 for BCE Inc. (BCE) and 2.9 for Rogers Communications, Inc. (RCI). The P/E ratio stands at 17.28, so the valuation would have to come down significantly for me to purchase shares.
Conclusion
I view all three companies as attractive, high quality companies. I have them listed in order of my interest. There were a few great Canadian companies that were cut from the list for varying reasons. Canadian National Railway (CNI) has a yield (1.77%) that's too low for me currently. Rogers Communications, Inc. (RCI) has debt that is way too high for me to be comfortable with right now. BCE, Inc. (BCE) also has a debt load that is just out of my comfort range. However, BCE has a pretty significant yield (over 5%) and a valuation that isn't too expensive. So, BCE would be right up there with TU if we get a slight correction in the shares. BCE, however, has spotty dividend growth but appears to be on track as far as the last 5 years are concerned.
I currently do not own any Canadian stocks, but am highly interested in the three I listed, as well as BCE to a degree. It should be noted that American investors with Canadian stocks in taxable accounts will pay a 15% withholding to the Canadian government. This foreign tax, in many cases, can be reclaimed when one fills out their tax return.
How about you? Own any Canadian stocks? Interested in any of the above? Any I should consider?
Special note: Thanks to Dividend Ninja for some assistance during my research.
Full Disclosure: Long JNJ, PEP
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