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Jun 26, 2014

BTSX Gains 10% But Loses To The Index

by David Stanley


David StanleyIt was a reasonable year for our BTSX portfolio, gaining over 10%, but we lost to a surging index.  Still, a double-digit gain is nothing to be sneered at in this ‘New Normal’ environment. Table 1 shows what caused our downfall over the previous year.

Beating the TSX

That’s right – after cutting their dividend either totally or partially, our top three selections proceeded to lose an average of 17.5%. That tends to make for a depressing investment year. Fortunately, our other companies picked up some of the slack. Still, we lost heavily to the resurgent index. We shouldn’t be all that surprised, since gold stocks have a history of cutting, eliminating or increasing their dividends depending on the financial milieu in which they find themselves. This is very different from true blue-chip stocks. For example, during the recent 2008-9 downturn none of our portfolio stocks cut their dividends. I should point out that ignoring our top three selections would have resulted in a total return of 21.2%, slightly higher than the index.

TransAlta, in my opinion, is a different kettle of fish.  They cut their dividend in February 2014 by 38% as opposed to eliminating it, and also sold some assets. Still, the price only dropped 12% during our investing year.  The company mainly operates coal-fired power plants and these suffer from high maintenance costs, thus producing a significant drop in earnings that were partially offset by reducing the dividend. I think the dividend cut was warranted and a wise move from the company's point of view. While the firm is still wrangling with the Alberta Utilities Commission over allegedly abusing Alberta's deregulated electricity market, the CEO has reiterated that an attractive, sustainable dividend continues to be an important aspect of their overall global planning.  They also have plans to build a new gas-fired power plant before the end of the decade. TransAlta is an old, estabished company that was founded in 1911. This low beta stock (-0.068) has a reasonable yield of 5.4%. Thus, I have purchased new shares for my own account in the past 18 months, adding to those I purchased in 1995. I do think that TransAlta is a more risky buy than I usually undertake, but I like my chances that it will succeed in turning itself around.

How did these dividend cuts effect our overall historical returns? Not very much actually. Table 2 shows that over our 28-year history we are still doing quite well on an annualized basis, beating the index by over 25%. I should add that although it is not reflected in the data, six of the remaining seven Beating the TSXstocks in the portfolio actually increased their dividend by an average of 5.7%. As I have said before, selecting high dividend, blue-chip stocks pretty well insures that you are also going to get good dividend growth.

These data only reflect the yearly average total return.  The strong point of the BTSX system is the influence of compounded reinvested dividends. Those results (Figure 1) are much more convincing.

Beating the TSX

What are the constituents of next year’s BTSX portfolio?  Table 3 shows that we are back to a more normal looking group in that no gold stocks made the grade this year. The average yield is 4.2%, which greatly exceeds the 2.3% yield on Government of Canada benchmark 10-year bonds. Seven of our 10 stocks have both DRIP and SPP plans. These help investors take advantage of the compounding effect of high dividends.

While we failed in our mission to beat the S&P/TSX 60 Index total return value this year, an increase of over 10% is certainly comforting in these uncertain times. One factor that contributed to the differential was, I think, a rotation into growth stocks by institutional investors.  As I thought might happen, when Beating the TSXmarket conditions are perceived to improve there is usually a tendency to swap boring income stocks for the greater allure of active management of growth and small-cap stocks with their promise of higher price appreciation. We all know that this effect is cyclical and it will only take a downdraft in the market (overdue in my opinion) for the pendulum to swing back to passive management of dividend stocks.  Let’s see what happens in the coming year.

As always, I hope this column will generate discussion and I will attempt to answer your questions within the guidelines set by the Canadian MoneySaver.

David Stanley, Ph. D., P. O. Box 12, Ontario, N0B 2K0