Podcast Summary
Canadian market vs S&P 500 performance: Canadian market underperformed S&P 500 in H1 2024, but strong dividends added 2 percentage points to TSX's return, outperforming equal weight S&P 500
Canadian markets have underperformed the S&P 500 in the first half of 2024, with the TSX up about 4.5% compared to the S&P 500's 14.5% gain. However, it's important to note that dividends added nearly two full percentage points to the TSX's total return, while the S&P 500 saw only about 0.6 percentage points from dividends. Despite this, Canada's market has still managed to outperform the equal weight S&P 500, with the TSX up about 6% compared to the S&P 500's 5.1%. The "Magnificent Six" companies in the S&P 500, which are the top performers, have averaged gains of 46.5% this year, but it's important to note that Tesla, which is typically included in this group, was excluded from the discussion due to its negative year-to-date performance. Overall, the Canadian market has shown somewhat apathetic performance compared to the S&P 500, but its strong dividend returns have helped mitigate this underperformance.
Canadian Market Discount: The Canadian market is experiencing a lack of optimism and concentration of returns, leading to undervalued companies with substantial discounts to their 10-year relative valuations, such as Quebecor, Rogers Communications, Coacheco, Magna, and others.
While the American market has seen strong growth with a narrow focus, the Canadian market, though up 8% in the past few decades and on pace for a good year, feels apathetic due to a lack of optimism and concentration of returns. The S&P 500's outperformance comes with its own risks, and this dynamic is not as prevalent in the TSX. Instead, Canadian companies like Quebecor, Rogers Communications, Coacheco, Magna, and others are trading with substantial discounts to their 10-year relative valuations, with an average discount to the last decade's earnings multiple being in the 30 percentage points. This discrepancy between the two markets may provide opportunities for investors looking for undervalued companies.
REITs and Bank Dividends: REITs with high yields rely on debt and offer attractive dividends, while Canadian banks provide stable, high dividends as 'widows and orphans' stocks
There are numerous high-yielding Real Estate Investment Trusts (REITs) available in the market, offering yields of 7%, 8%, and even 9%. These REITs, run by competent management, have to distribute a significant portion of their cash flow as dividends, leading them to rely heavily on debt to raise capital. Despite this, their yields remain attractive, and some even have insiders and CEOs purchasing units on the open market. Additionally, investing in the five Canadian banks that are cross-listed in the US provides stable, high dividends, with three of the ten largest Canadian companies being banks. These banks, known as "widows and orphans" stocks, have a strong track record of increasing dividends before and during COVID, making them a reliable investment option.
Canadian bank dividends: Despite regulatory hurdles and taxes, Canadian banks have increased dividends significantly, offering an average yield of 5.2%, a 50% increase from three years ago. However, market conditions may change as housing market overheats and interest rates rise, potentially making government bonds more appealing and reducing the appeal of dividend investing.
Despite banks being taxed by the government and facing regulatory hurdles, they have significantly increased their dividends since being allowed to do so, resulting in an average yield of 5.2%, which is a 50% increase from three years ago. This trend, however, may not last as the Canadian housing market is experiencing overheating, leading banks to take large loan loss provisions. The current market conditions seem to favor high dividend yields, but as interest rates rise, the appeal of government bonds may make dividend investing less attractive. However, this situation is not permanent, and investors should keep an eye on market trends and economic indicators to make informed decisions. The PE ratio has decreased from 12.5 to 10.5, the price to book ratio has dropped from 1.8 to 1.4, and the average dividend yield has more than doubled from 3.7% to 5.2%, making the current market an intriguing opportunity for dividend investors.
Tech industry dividends: Some tech giants like Apple, Alphabet (Google), and Microsoft have started paying dividends, demonstrating financial discipline and potentially offering stable income and long-term growth for investors
The focus on dividends in the tech industry is a shift worth noting. For years, tech companies have been prioritizing share buybacks over dividends. However, with the industry generating significant cash flows, some tech giants like Apple, Alphabet (Google), and Microsoft have started paying dividends. This trend is a positive sign of management teams demonstrating financial discipline, even with the double taxation of dividends. While it's understandable that many investors are drawn to popular stocks like Nvidia, history shows that market-beating returns can be achieved by investing in sectors and companies that are less popular or undervalued. Therefore, considering dividend-paying tech stocks could be a smart investment strategy for those seeking stable income and long-term growth.
Canadian Market Opportunities: Despite apathy, Canadian market offers cheap valuations for banks with dividend hike history and underperforming REITs holding high-quality companies at bargain prices. Enbridge is an exception to avoid.
Despite the apathy towards the Canadian market, there are numerous opportunities for investors. The Canadian banks are trading at cheap valuations and offer a history of dividend hikes. The REIT sector is also underperforming, yet it holds high-quality companies at bargain prices. Enbridge is the only major Canadian company to avoid, but aside from that, the market presents promising prospects. For investors, it can be disheartening to find excellent companies with strong cash flow and management but see them trade like "dead fish." However, the wait can be worth it, as these companies continue to generate cash flow and invest for shareholder benefit. Overall, the Canadian market's current state presents an opportunity for those willing to look beyond the apathy.
MTY Food Group Discount: MTY Food Group, a Canadian food industry company trading at a 50% discount to historical valuations, generates high-margin royalties through franchise fees, making it an attractive investment opportunity.
MTY Food Group, a Canadian company trading at a significant discount to its historical value, is a potential investment opportunity. With over 90 banner franchises in North America, MTY generates high-margin royalty revenues through franchise fees. Historically, investors have been willing to pay up to 12 times Ibodah for the cash-light, asset-light nature of the business. However, today, the stock is trading at around six and a half times Ibodah. The company, which has a ticker symbol of MTY, operates in the food industry and has a strong presence in mall food courts. Despite its history of growth through acquisition, MTY Food Group offers investors a chance to invest in a high-margin, cash-rich business at a discounted price.
MTY Food Group, Kits I Wear: MTY Food Group, a Canadian company, owns several popular food chains and contributes to their growth. Kits I Wear, a small online glasses company, offers affordable and accessible glasses through online prescriptions and impressive growth numbers.
MTY Food Group, a Canadian company, owns several well-known food chains in North America, including Cold Stone Creamery, Papa Murphy's, Blimpy subs, Baja Fresh, and Famous Dave's barbecue. This means that supporting these brands contributes to this company. For those interested in growth investments, Kits I Wear, a small online glasses company, is another intriguing option. With the convenience of getting prescriptions online and uploading them for custom glasses, the company has seen impressive growth. The founder, who previously grew an online contact lenses business, is leading Kits I Wear. This business model makes buying glasses more accessible and affordable. The growth numbers for Kits I Wear have been noteworthy, making it an interesting investment opportunity for those who can trade on Canadian exchanges or the OTC market.
Canadian Stock: An investor's profitable sale years ago in a Canadian stock inspires confidence in its future growth, now priced at $8.50 CAD and potentially reaching $20-$25.
An investor who previously made a profitable sale years ago is now repeating his successful strategy in the online sector. The stock in question, which was recommended on the podcast at $3.50 CAD and is now priced at $8.50, is expected to continue growing and potentially reach $20-$25. This investor's success serves as an opportunity for others to consider investing in this company. The Motley Fool team wishes everyone a happy Canada Day and will be taking a break from their usual second segment for the holiday week. As always, listeners should keep in mind that the people on the program may own stocks mentioned and The Motley Fool may have formal recommendations for or against them.