Nelson Smith

Freelance writer. Contrarian investor. Watcher of baseball. Owner of At least my mom thinks I'm funny and/or handsome.

Oct 302014

It’s your usual Thursday man, Eddie. He blogs here, but you knew that already. He also likes sloppy kisses. 

This is a follow up to last week’s post about how banks are not trying to steal your money.  Instead, I offer some insights into choosing a bank.

The first step to choosing a bank is to rid yourself of the notion that the bank is an obstacle.  A bank, and the people who work within it, should be viewed as partners.  In this way, the relationship between yourself and the bank will be put into its proper context.  You should view a bank as a wide range of services and access to capital and investments to pursue your life and financial goals.  While they will try to direct you into higher margin products, one must use their judgment and common sense and make prudent decisions about their financial choices.

Look for a personal relationship when choosing a bank.  I have a financial advisor with a big five bank.  While this is anathema to most PF bloggers, it has been, in fact, quite beneficial.  Even though bank employed financial advisors do not have a fiduciary duty to me, this really only becomes an issue if there is a wide disparity in financial knowledge and if they dictate my financial strategy.  Easy ways to overcome this disparity are by reading financial books (generally not single-minded and erroneous blogs – and yes, I am aware of the irony) and by closing the information gap.  My financial advisor assumed I was a cookie-cutter mortgage/TFSA/RRSP type until I corrected her as to my more broad financial knowledge and retained the initiative.  With a new focus, our relationship has been quite productive.  Apart from getting her to crunch financial numbers and acting as a sober second thought, she has provided me with access to many of the banks resources and advice.

More Uproar for your eyeballs: Why worrying about bank fees is stupid.

More to the point above, I read a book by Don Campbell, a notable Canadian real estate investor.  He admonishes the approach taken above and even suggests taking your banker out to coffee or lunch, asking them about banking and current trends in industry, and not treating them like a thief.  You would be amazed at the cooperation and benefits of this type of relationship, instead of clawing for a $2 per month reduction in savings account fees.  See the forest through the trees.  If you don’t want to be thought of as a number by your bank, try reciprocating first.

Think of your future needs as well as your present needs.  One should choose a bank with a strategic vision in place.  While most big five banks are very similar, other financial institutions have different policies when it comes to breadth of services, product focus, and accessibility.  For instance, Tangerine, formerly ING Direct, is lauded by PF bloggers for its relatively high interest rates on savings accounts.  However, in my experience, getting a mortgage from them is difficult at best.  With a conservative lending policy, no physical locations, and a narrow range of services, I cannot see them being useful for anything other than an external bank account for liquid funds in which I want a psychological barrier to access.  I will forgo the 1% premium on my savings deposits, thank you.

I chose my bank because it is truly a national institution in which I can do business in any province.  Several of my friends are managers and managing directors there, which provide me access to some services which might not otherwise be available.  While this is certainly a subjective and arbitrary factor, it is nonetheless relevant.  Lastly, I want simplicity in dealing with one primary institution with a physical location.  When dealing with corporate accounts and, one day, private banking, virtual banks do not cut it.

Some other random thoughts:

I once knew somebody who changed banks over a $5 per month chequing account fee.  The amount of time it took him to change over his financial affairs to another institution for $60 a year is easily dwarfed by the productive activities he could have otherwise been doing.  Remember opportunity cost.  I cannot stress this enough

If you have a job in a company in which you may be transferred to different provinces, go with a national bank.  The last thing you need while moving provinces is to change banks.

Oct 292014

I’m apparently not even trying with the titles anymore. “Here is a title that describes the thing I’m talking about. And you’ll like it.”

Village Farms International is a greenhouse grower of tomatoes, cucumbers, and bell peppers. It owns approximately 110 acres of greenhouses in B.C., as well as 130 acres worth in Texas. It also has distribution partnerships with a few other growers. It sells fresh vegetables to many of North America’s largest food retailers, including Wal-Mart, Costco, Loblaw, and so on.

Greenhouse farming is more effective than traditional farming for a few reasons. The company can stagger the beginning of crops so that it can produce all year round. Yields are more in the summer because of the amount of sunlight, but year round production is still important. Greenhouse vegetables also tend to command a higher price, because plants grown in a controlled environment end up in better shape than the comparables. Greenhouses can protect from pests, hail, and so on. And the greenhouse process uses significantly less water than traditional farming.

In 2012, a gigantic hailstorm destroyed the company’s greenhouses in Texas. It has since rebuilt using $47 million in insurance proceeds. Here’s why this is important.

  • The total value of the company’s real estate, according to the most recent balance sheet: $99 million
  • Cost to rebuild 80 acres, which is 33% of total growing area: $47 million
  • Putting the same valuation on the other 66% of growing area would value them at $94 million
  • Total value of greenhouses: $141 million

Based on just the value of the greenhouses alone and not even the land underneath them, it looks like the value of the real estate is understated by at least $42 million. That doesn’t include 4 distribution centers (located in B.C., Washington state, Texas, and New York), nor the 2 corporate offices.

Business outlook

Thanks to operations from Texas coming back online, revenue jumped to $41.3 million in the second quarter. Gross profit was just $4.47 million, mostly due to weaker tomato prices, which declined 10% year-over-year. The company lost $0.01 per share in the quarter.

One of the issues that has plagued Village Farms International over the years is Mexican farmers dumping cheap tomatoes into the U.S. market. It drives the price down and is generally bad news for everyone involved. So it, along with some competitors, took their beef to the U.S. government, who got the Mexicans to agree to a number of concessions. Mexican farmers have to sell to registered middlemen, they are severely limited to the amount they can export if the price falls below a certain floor, and they have to certify that greenhouse tomatoes are just that. Over the long-term this is good news, but as we know the government can change its mind on stuff like this.

Essentially, it looks to be a break even company when tomato prices are weak, and should be solidly profitable when prices recover. If prices during the last quarter would have stayed steady compared to last year, the company would have earned $0.03-$0.04 per share. That’s not terrible considering the share price is currently at $1.12.


The biggest concern is the company’s debt of $57 million, compared to total equity of a little over $60 million. It just refinanced the debt in 2013, with an amortization of 14 years and a term of 5. Steady progress has been made, but it’s still a pretty big pile of debt. Cash currently sits at about $6 million. It’s proven over the last few quarters that it can continue to earn enough to cover the mortgage payment, but that’s still a risk.

And in an odd move, the company acquired a power plant for $5.2 million. I assume this is so it isn’t stuck paying B.C. Hydro a bunch of money for power each month, but it was billed “as focus on improving the sustainability profile of Village Farms’ greenhouse operations in Delta, B.C.” It does have an agreement with B.C. Hydro to supply it with energy, but details besides that are pretty slim. The company took out debt of $3 million to finance it.

I’d like to see it pay down the debt, not increase it. 

The bull argument

Essentially, buying Village Farms International comes down to the following arguments.

1. The company has a proprietary growing system that it calls GATES. The system allows it to be more productive and get greater yields than its competitors. The possibility exists to license GATES, but that looks to be unlikely.

2. Now that operations are back up to full speed, an increase in tomato prices would pretty much go straight to the bottom line. As previously mentioned, tomato prices have been weak.

3. A noted value investor was just added to the board.

4. The CEO owns approximately 25% of the shares outstanding. One of the co-founders also has a big position, but he has indicated that he will start to sell some of it soon.

5. Not only are there large barriers to entry (meaning, some hick farmer can’t just up and start a tomato greenhouse of any scale), but the value of the greenhouses is understated on the balance sheet.

6. As the balance sheet currently stands, shares have a book value of $1.56. At Friday’s closing price of $1.12, that’s a discount of 39.2% to book. The company’s intangible assets are negligible.

Bottom line

Based on the company as it is, I think the potential exists for it to earn $0.15 to $0.20 per share on an annual basis. If that happens, I’d put shares somewhere in the range of $1.75 to $2.00 each, which is approximately a 40% return from today’s levels. I’m publishing this on Wednesday because I’m going to try and see if I can pick up a few shares between now and then. I’m concerned about the debt levels, but even during bad times the company has faithfully paid. There will always be demand for tomatoes, and it’s obvious that greenhouse tomatoes are better. I think Village Farms International is a buy here.

Oct 272014

Being that oil is more depressed than your typical Fallout Boy concertgoer, I’ve been spending a little time sniffing around the sector over the last couple weeks. Penn West continues to be my favorite name, but I’m waiting until the inevitable dividend cut happens. It’s interesting how the company is selling off assets to pay down its debt, yet refuses to cut its dividend and divert the $250 million per year it pays back to shareholders towards paying down debt.

But I digress. This isn’t about Penn West. It’s about Crescent Point.

According to the only part of the internet that can be trusted, Wikipedia, Crescent Point was created in 2001. It’s grown by leaps and bounds since, thanks to a series of acquisitions. Operations are primarily located in the southern part of Saskatchewan, but it also has decent enough production in Alberta, Manitoba, North Dakota, and Utah. The company is constantly on the prowl for good light and medium oil assets with a decent amount of success so far.

I don’t want to understate the number of acquisitions the company has made. Highlights include:

  • 2003: It merged with Tappit (heh) Resources
  • 2005: Acquires land in Saskatchewan
  • 2006: Makes an additional 10 acquisitions
  • 2007: Pays $628 million for Mission Oil and Gas
  • 2008: Buys a 21% equity position in a new oil company started by its own management because sure, why not
  • 2010: Makes 4 more acquisitions, including one from Penn West
  • 2011: Expands presence in Alberta and North Dakota by making a couple more acquisitions
  • 2012: Pays $3 billion for a series of acquisitions

And so on, but I’m bored.

Thanks to the company’s practice of making a major acquisition on practically a yearly basis, Crescent Point doesn’t exactly trade like a regular oil stock. It still largely tracks the price of oil, but investors have given it a gigantic premium compared to some of its competitors. So even though the company’s free cash flow in 2013 was a mere $227 million, the market cap is more than $16 billion.

(Although, in its defense, FCF has increased to $347 million in just the first 6 months of 2014)

Compare that to, say, Suncor, and it’s not really a contest. Suncor has a market cap of $56 billion and 2013’s FCF was $3.3 billion. Just about every oil company is more attractive based on the cash they generate from operations. Crescent Point gets a premium valuation because it’s growing so fast.

I wouldn’t invest in it because of the acquisition risk though. What happens if opportunities dry up or it acquires a dog? Suddenly the high growth premium goes away, the dividend gets cut, and the stock craters.

Most high growth companies don’t pay out dividends. They keep that money aside for investing in the business and for acquisitions. And yet, Crescent Point pays what can only be described as a huge dividend, coming in at 23 cents per share per month, which works out to a pretty large 7.23% yield. Based on the company’s 442 million outstanding shares (according to Google Finance, anyway), that’s a dividend in excess of $1.2 billion each year.

Remember, this is the company that had a free cash flow of just $227 million in 2013, and is on pace for about $700 million of FCF in 2014, even though the decline in oil prices will hurt that somewhat. So how does it manage to keep paying the dividend?

First of all, management offers shareholders a pretty big incentive to take their dividends in the form of shares, not cash. You get a 5% discount (plus a commission free transaction) for taking dividends in the form of shares, which works out to a yield of almost 7.6%. Considering how well the stock has done, it’s been a good decision thus far.

Because of most investors taking the dividend in shares, Crescent Point paid out just $422 million in cash in 2013. That’s still a shortfall of more than $200 million compared to its free cash flow, but it’s a whole lot better than paying out $1.2 billion.

You’d think that Crescent Point is drowning in debt, but it really isn’t. It owes $2.5 billion in long-term debt, which isn’t horrible for a company with a market cap north of $16 billion. So how exactly does it pay for all these dividends and acquisitions?

You probably already figured it out. It issues stock like it’s going out of style. Let’s take a closer look at the share count.

  • End of 2010: 266 million
  • End of 2011: 288 million
  • End of 2012: 375 million
  • End of 2013: 395 million
  • End of Q2, 2014: 420 million

And to pay for its most recent acquisition, the company just issued an additional 17.3 million shares for proceeds of $750 million. Even though it only paid $328 million for the purchase.

Here’s where this situation compounds. The monthly dividend has stayed the same since 2010, even though the share count is up 64%. Since the company doesn’t get close to making enough to cover it, shares are continuously issued to pay shareholders. So even if you opt to take your Crescent Point dividend in cash, you’re still really getting paid in shares.

Like a Ponzi Scheme, this all works until investors start to lose confidence in the shares. Without the ability to sell more shares, Crescent Point can’t make any new acquisitions, and can’t exactly maintain the dividend either. It would be a disaster. Shares would probably fall an additional 40-60%, and then maybe attract guys like me.

Things are rolling now. Plenty of shareholders are happy to take dividends in the form of shares. The company doesn’t have a problem getting institutional money to buy these private placements. And at some point, the company will eventually mature and stop issuing so many shares. But still, the risk exists, and it’s real. If you’re looking for a big dividend in the energy patch, look somewhere else. Plenty of names are in the 4-5% range these days.

Oct 262014

Many consumers are irresponsible with credit cards. This is how so many end up with tens of thousands of dollars in credit card debt. What most consumers fail to realize is that you are charged interest every month on your entire balance, not just the current purchases. The longer you have a lingering balance, the more you are paying to the lender in interest payments. Sometimes this can leave you paying for an item multiple times when comparing the numbers.

Use for Small, Necessary Purchases Only

Use the credit card for only small purchases such as groceries and gas for the car every month. When the bill arrives, pay the balance in full. This shows credit responsibility and may lower interest rates or result in further extensions of credit.

It is ideal to only use the credit card for sums that you can immediately pay back and do not have to break up the payments over a period of several months. Paying each month on the same purchase only costs you more money.

Pay Early and Pay More than the Minimum Amount Due

If you do not have automatic payments setup it is a good idea to pay early. This reflects positively on your credit report and keeps you in good standing with the creditor. It is also a good idea to pay more than the minimum amount due. This reduces the amount of interest you are paying on the principal. The principal is the actual amount spent.

Paying more than the minimum balance due helps you to pay it down further and pay more toward the principal to reduce interest payments.

Avoid Maxing Limits Out

Always avoid maxing out your limits on credit cards. This does nothing but cause more problems because the interest continues to build over time. Every month your balance will continue to grow. Making a minimum payment is not going to get you any closer to paying off the balance. Maxing out limits can also put you over double your available credit limit or more given the amount of interest tacked onto the balance.

Using credit cards wisely is important. Not only does it show creditors that you are responsible by making on-time payments and paying more than what is due, but it also opens more opportunities for lower interest rates and zero balance accounts. Consider using these methods and closing cards with high balances so they can be paid off easier.

Oct 232014

It’s Thursday, which means it’s Eddie. He He promised this week’s edition is “particularly mean”. I’ll let you be the judge of that.

If my count is correct, this is personal finance groupthink assassination number 6.

If I had a nickel for every time I read an article or post from a personal finance blogger, even ones that have a large readership but whose authors are not particularly well read, about the sinister nature of banks, I could not buy anything of value since I stopped reading virtually all PF blogs a long time ago.  However, the propensity for PF bloggers to vilify banks is astounding as it is myopic.

A bank is a business.  More specifically, it is a financial intermediary.  Banks connect net lenders (those who have money via deposits and investable assets etc) with net debtors (those who want loans, mortgages etc) and receive the spread.  They greatly reduce risk on the part of both parties by performing due diligence on each stakeholder to a transaction and facilitating its completion.  Without banks and other enterprises which perform similar functions, deals would have to be negotiated privately between parties.  The difficulty and costs of such an arrangement would be exorbitant.  Imagine going to your rich neighbor and negotiating a $400,000 loan.

The conventional wisdom in the PF world is that a bank is a malevolent spectre that haunts the populace and tries to rob the unsuspecting layman of their hard earned money.  High MERs, ATM charges, and chequing account fees are the tricks in the devil’s bag to deprive the innocent of their wealth.  Luckily, enlightened PF bloggers are on a crusade to deliver us from evil of institutional banking.

Hyperbole and sanctimony aside, banks are terribly misjudged by the masses.  Banks merely try to guide their customers to higher margin products, which is not so extraordinary compared to other businesses.  There are many other enterprises that try to upsell you on their goods or services.  Butchers try to entice you with a higher quality steak, telecom companies recommend more robust communications plans, and tradesman are always looking to expand the scope of their work.  Nothing wrong there.  Banks do not have your best interests at heart, but neither does your hairdresser or banker.  Welcome to the free market.  Some products that banks offer more economic value and higher margins to the bank rather than the customer, but the same could be said for Apple.  Margins on Apple products are enormous but no one complains about that, yet a $6 per month chequing account is anathema (for the record, I despise Apple and everything that company stand for).

One of the most important facts that people need to realize is that, fees aside, the interests of the bank and the customer are aligned.  They may not be perfectly correlated, as you care more about your money than they do. In a general sense, they make and lose money when you do.  For example, a bank can provide financing for a business venture or a mortgage.  If you are successful and repay it, it helps you grow your business or provides a stable place to live.  You make money or receive other benefits, and they receive their cut.  If your business fails or you default on your mortgage, they lose money and incur the administrative burden of getting a portion of their money back.  This is an arduous process for a lender.

I humbly suggest that you view your bank as a partner and not an adversary.  Yes, they will try to direct you to more robust services, but they can more importantly act as a gateway to accessing the capital required to start a business, obtain a mortgage, or upgrade your education.  The latter is infinitely more important than the former.  Banks want to lend you money and have a vested interest in seeing you succeed.  Maximize the value of this relationship by seeing the forest through the trees.  ATM fees and MERs are the cost of doing business.  Acknowledge it, move on, and focus on the more important aspects of the relationship and the potential it contains.

Disclosure: I do not work for a bank nor do I have any as clients.

PS I suspect PF bloggers criticize banks because they do not have the knowledge or sophistication to write about anything else.  Banks are an easy target; when in doubt or at a loss for material, criticize the banking industry.

Oct 212014
"When the bamboo runs out, I am so going to eat you."

“When the bamboo runs out, I am so going to eat you.”

Let’s start things off with a hypothetical situation. (I wrote something similar for Motley Fool last week, in the interest of full disclosure)

Say you and I were hanging out. FINALLY, A FRIEND FOR NELSON! TAKE THAT, DAD. I offer you a deal. You put in $20, and I flip a coin. If it comes up on heads, I’ll give you $60. If it comes up on tails, I get to keep your $20. Would you play that game?

I hope the answer is yes. If you could play that game all day long, you’d probably be a millionaire in a week. Once you had enough flips in to even the odds, you’d be effectively be making $20 on each toss. This would be an incredibly profitable game.

But what if I upped the ante? What if the game cost $10,000? Or $100,000? Would you still play? What if I limited the chances you had to just one coin flip? You still had great odds, but it would be a disaster if you guessed wrong.

I think I’d have far fewer people taking me up on the second offer. Risking your life savings on a coin flip is dumb, even if the odds are effectively in your favor. Winning is great, but losing is catastrophic.

How this relates to investing

I used this example for Motley Fool to prove a point about Penn West Petroleum. I’ll let you read the article if you want to learn more about it, but the skinny is this. The company has struggled for years, and now is facing the possibility of low oil prices hampering its ability to sell assets and ultimately pay down debt. If oil stays down for a long period of time, the company’s solvency could be called into question. If you were a debt holder, would you continue to hold if the company couldn’t afford to pay?

Because of this worst case scenario, Penn West is more hammered than a Scot watching a soccer match. Shares have dipped below $5.50 each, which is about a third of the company’s (probably inflated by a good 25% thanks to excessive goodwill) book value. As of this point the company still earns enough to pay the interest, keep its generous dividend afloat, and still have enough for capex, but that’ll get tighter if oil prices continue to decline.

I’m watching it, and will take a closer look once the inevitable dividend cut happens. I’d also like the company to sell a couple more assets to get the debt down a little more, so I’ll be patient. I’m usually too early on these types of investments anyway, I’m trying to stop doing that.

Penn West is pretty much exactly the kind of situation I described above. It could very well head to bankruptcy. If oil falls to $60 a barrel, I’m not sure how it will survive. Asset sales will stop, and it won’t have the cash flow to even service the debt.

But, if oil slowly recovers and it becomes business as usual again, the company won’t just survive, it could thrive. I could see it going up to $15 in a few years once it gets the house in order.

A portfolio of Penn Wests

If you poured all your money into Penn West and then borrowed more, you’d rightfully be laughed at — even if it succeeded. You know it’s a dumb move when I’d laugh at you.

But what if you found 15 different Penn Wests, each with the same odds as the coin flip scenario? If you had enough opportunities to invest at those kind of odds, you’d end up doing well almost by default. It becomes a numbers game, and eventually the numbers even themselves out.

The Winnipeg Jets have a goalie who stat guys say is among the worst in the league, Ondřej Pavelec. In the 2013-14 season, he was dead last in save percentage in the entire league (for goalies with a minimum of 40 games played), and dead last in goals against average.

And yet, he still had a shutout. In fact, he’s had 11 of them over his NHL career. And he’s had plenty of nights where he’s allowed one or two goals and been a really good goaltender. Even though most of the time he’s terrible (at least, compared to a regular NHL goalie to put things in perspective a little), he still has moments where he’ll buck the odds.

The methodology

There’s just one problem with the coin flip analogy. There are three outcomes to investing in a troubled company, not just two. It can either succeed wildly, fail wildly, or not do much at all. If I were to guess, I’d say out of every 10 investments 1-2 fail, 5-6 are dead money, and 2-3 end up succeeding wildly, eventually tripling or more.

The whole point of qualitative analysis is to try to pick the best from the market’s reject bin. Ladies, think of it as going through the 90% off rack at Reitmans, a place I’m assuming you all shop at. Most of the stuff will be worse than a pancake stuffed with mustard, but there will be a few gems hidden among the crap.

The reason I hate debt on the balance sheet on a turnaround project so much is because it hampers the ability to turn things around.

The reason why I look for a company that has traded at a much higher price in the past is because that way investors can psychologically can more easily fall in love with a company again.

And so on. I look for these things not just because I want a margin of safety, but because I’m trying to skew the odds to my favor. Improving the fail ratio from 2 in 10 to 1 in 10 has a huge impact on returns. It’s an inexact science, but I think I’m getting better at it.

It sounds bad, but essentially we all do a form of coin flip investing. But instead of flipping for huge returns, most people are flipping for modest ones. Whatever floats your boat, but if you need me I’ll be doing my best to triple my money on coin flips.

Oct 202014

When I first heard about the concept, I thought credit card hacking was kind of cool. I could make hundreds of dollars just by getting credit cards and buying stuff that I would normally buy anyway? That doesn’t sound so bad.

But, like usual, my laziness won out. I have yet to replace my 15 year-old 1% cash back credit card. I just can’t be bothered. Over the years it’s served me well. I haven’t paid a nickel in interest, I’ve gotten approximately $80-$100 in cash back per year, and I’ve got it set up so most of my monthly bills come off it, leaving me just having to pay the credit card off. My credit card is most of the reason why I couldn’t care less about getting a no-fee bank account. I do less than 5 bank transactions a month. I’m not going to fret over 50 cents each time.

Essentially, like I’ve talked about, my life is about simplicity. I will gladly pay a little extra (or forfeit dubious “rewards”) to not have to do something. Plus, it’s not so lucrative for Canadians to do this. Americans get much better sign-up deals.

Still, I can understand why the concept of credit card hacking is attractive. In exchange for signing up for a credit card and spending a few thousand bucks on it (money that probably would have gotten spent anyway), you can get hooked up with hundreds of dollars in free hotel stays, airline tickets, restaurant stuff, free gas, and so on. The PF-o-sphere LURVES this stuff, and you feel like a sucker for being left behind.

Fret not little one. It’s just not that simple.

As the fine folks at Control Your Cash (R.I.P.) used to say, take a look at every transaction from the other party’s perspective. Just what exactly is the Hyatt Corporation or British Airways getting out of teaming up with Citibank or JP Morgan to offer schelps like us $999 in FREE HOTEL STAYS?!?!?!?!

It’s easy, once you think about it.

  • All sorts of free marketing, from the lobby of the hotel to the bank branch to the PF bloggers talking about it
  • Having the business’s logo on a primary use credit card for a minimum of 3 months, and most likely longer
  • Additional customer loyalty because they want to go to that hotel or airline to earn points
  • The chance to upsell customers stuff when they do show up. “Oh what the hell? The room was free!”
  • A cut of the fee the bank gets every time the customer swipes the card
  • Better leverage when it comes time to renew the fees for credit card transactions, which is a huge cost
  • Points encourage people to travel, which creates more opportunities to sell flights and hotel rooms

Using the hotel example, it’s easy to see what a sweet deal it is for Paris Hilton’s (smarter) relatives. Giving somebody a “free” room that would most likely have gone empty anyway hardly has any additional cost. You still need to heat the building, keep the lights on, pay the staff, and so on. There’s just a little extra work for the cleaning staff. In exchange, the hotel gets you in the door and hopes like hell that you get breakfast in the morning or rent some porn. Plus, you know, all that free marketing and a small cut of your purchases.

Even a room at Motel 6 is worth more to you than it is to Motel 6, at least most of the time. Which is why you either can’t use the points on a long weekend, or you’re paying out the wazoo for the privilege of doing so.

Even from the bank’s perspective, it’s a great deal. At a minimum, they’re getting a fee each time somebody swipes the card — why do you think the minimum purchases exist? — as well as a certain percentage of people continuing to use the card, racking up interest charges, annual fees, and even more swipe fees. Just look at these numbers, assuming somebody charges up $10k and doesn’t pay it off for a year.

  • Swipe fees: 1% ($100)
  • Annual fee: $99-$700
  • Interest: 18% ($1800)

And, of course, the points are structured so you’re practically obligated to use they to stay at the underlying hotel or fly the underlying airline. They intentionally make them such a good deal that you can’t pass them up.

So what happens? You get logic like this, from one PF blogger on the comment thread of another, talking about how much they’ve “saved” using credit card hacking.

Screen Shot 2014-10-20 at 1.39.09 AM

Congratulations, you saved $6,000 on this vacation.

Except you didn’t.

Anchoring is the oldest trick in the retail book, and yet we still fall for it. If potato chips go on sale every 3 weeks, did you really save $1 per bag by buying this week? Did you really save $200 on that vacuum cleaner that used to sell for $649 but has been marked down to $449 today only? Hell, if we take the logic to its conclusion, I could argue that because I didn’t charge you $50 to read this article, I saved you $50.

You’re welcome.

Besides, who outside of Taylor Swift spends $6200 to go to London and Paris for a week, and not even during peak travel season? It took me less than two minutes to find a direct flight from Toronto to London (via Air Canada) for less than $750 return (per person). I saved $500 for the blogger above in the amount of time it takes to have a bowel movement. If I was willing to make it an 8-day vacation I could fly non-stop for $637 per person. And that’s out of Canada, which is more expensive to fly than the U.S.

It’s the same thing with the hotels. I found many hotels in London for under $200 Canadian per night, which is closer to $150 for our friends to the south and their richer currency. Yeah, you’re not staying at fancy $600/night hotels, but it’s really easy to get 3 stars or better in a great location for under $200/night. And after an additional 5 minutes of poking around, I found out Paris is even cheaper than London.

It would be easy to stay in decent hotels in both places for under $200 per night, including taxes. So to review:

  • $1500 for flights
  • $1400 for hotels
  • $2900 total

In ten minutes I “saved” $3300 on my imaginary European adventure compared to whatever full price is supposed to be.

Okay, fine, I’ll concede that saving $6000 is better than saving $3300, and even if folks spend 30 hours to do it, that’s still $100 per hour. Good news, I have a better way to save $6000.

Don’t go.

Oh, like you’re one to talk, Korea boy.

I’m the first to admit travel is a frivolous pursuit that’s become the new status symbol, and I hate myself for liking it. But I’m also doing it on the cheap. My living expenses in Korea are a fraction of what they are in Canada. I’m running around Asia and still saving 80% of my after tax income. That doesn’t make travel any less frivolous, but at least I’m doing it cheaply.

But here’s the deal. I imagine that the above blogger and her husband will spend at least $1500 of their own money while touring around Europe. After all, the trip is “free,” so they can live a little. $200 was already spent on taxes for the tickets, so that leaves $1300 in spending money for a week. They gotta eat, get around, pay to sightsee, and go from London to Paris.

It’s not that hard to spend that kind of cash, especially with two people. So what if you did something different?

Instead of credit card hacking for hotel stays and free airplane rides, why don’t you use your points for things that are actually useful? A $300 iPod that gets used for 2 hours a day for 5 years is an infinitely better investment than a trip anywhere. It’s the same thing if you use it on mundane things like gas, groceries, or even gift cards to a local restaurant. Spend the rewards on stuff you’d normally buy anyway.

If you compare an exotic European vacation for $1500 compared to $1000 in free gas, it doesn’t look like a fair fight. The vacation wins every single time. But by buying the mundane, you’ll save $1000 while the European vacationers will spend $1500, plus had to spend the $1000 in gas. You’re up $3500. Sure, you don’t have a European vacation, but that’s a luxury you can easily go without, especially for an extra $3500.

I’m cool with credit card hacking. But the reality is most folks should stick to regular old cash back cards. Even if you only end up with 1% back from buying $5000 per year worth of stuff, you’d still be $1550 ahead of somebody who unnecessarily spent money on a fancy vacation. Don’t fall for the anchoring. Don’t fall for the emotional pleas. And certainly don’t fall for a blogger telling you to eschew consumerism at every turn unless it benefits them.

Bottom line? There’s a certain amount of bullshit that comes attached to all of this. It’s not quite as lucrative as it’s made out to be. Which is why most people reading this shouldn’t bother.


Oct 162014

It’s Thursday, AKA Nelson’s slack off day. Take it away, Eddie. 

I believe this will be PF groupthink assassination post number 5.

My post this week focuses on a rather technical detail in a recent Moneysense article.  I happen to read Dan Bortolotti’s article How to make it to $1 million that was published in the September/October 2014 issue.

The article postulates that it is very realistic even for a person of modest means to save a million dollars for retirement.  To accomplish this feat, Bortolotti espouses several principles:

  • Start Early – the earlier in life you contribute to a savings plan, the better
  • Make Saving a Priority – use salary increases and employer-matching programs
  • Don’t Buy Too Much Home – avoid large investments in non-productive assets like a home
  • Don’t Buy Too Much Car – completely minimize investments in non-appreciating, non-productive assets like a car
  • Be Frugal, Not Cheap
  • Have an Investment Plan
  • Let Your Plan Evolve Over Time

Bortolotti’s article espouses very basic financial principles and should be read by novices.  They fit with the target market of the magazine and the level of sophistication of the average Canadian.  For the more advanced, the article resides within the realm of Survive Mode.

My issue with the article pertains to a technicality in ‘Let Your Plan Evolve Over Time’.  He presents three scenarios in which people at different stages in life can save a million dollars within their RRSP using different contribution rates.  Bortolotti assumes that the tax refund on the contributions will be re-invested into the RRSP with a 6% rate of return.  In each scenario, the contributor possesses a seven figure portfolio by age 65.

My issue with his analysis is that $1 million held within an RRSP is not akin to having $1 million to freely spend in retirement.  This is because all of the funds is held within the RRSP and is subject to a tax liability upon withdrawal.  While this certainly isn’t news to anybody with a basic understanding of the tax system, accounting for it using reasonable assumptions would increase the amount of contributions a person would have to make to offset the tax liability.  By increasing the contributions, saving $1 million for retirement, rather than $1 million in an RRSP, just got a little more difficult.

To be fair, accounting for this tax liability can be tricky and is obviously dependent upon a person’s particular situation.  Specifically, the overall tax liability is affected by the following factors (non-exhaustive):

  • Residency
  • Marital status
  • Timeline of withdrawal
  • What form the RRSP takes when it is being withdrawn (Annuity, RRIF etc)
  • Marginal tax rates of both partners (which is dependent upon other assets and forms of income)
  • Income splitting measures

Withdrawing from an RRSP has some parallels to withdrawing from a corporation.  Each can provide legal mechanisms to defer tax.  A person may hold real estate, a business, or other assets within a corporate structure.  However, the shareholders are limited as to how they can spend corporate funds.  For example, in virtually all circumstances, the sole shareholder of a corporation cannot use the corporation’s assets to fund a year long trip around the world, as it would be deemed a personal benefit and not in the interests of the corporation.  Similar to an RRSP, it would be foolhardy to assume that cash sitting in a solely owned corporation is equivalent to the same amount of cash held personally.  There are significant tax implications which affects how much can be flowed to the shareholder.

I will delve into these issues in future posts and on my blog at Summaticus.

Oct 152014

After talking about popular companies for the last couple days, I’ve had enough. I hate things that are popular. It’s like grade 9 all over again.

Instead, let’s talk about another unloved Canadian small-cap, FP Newspapers Ltd. (TSX:FP), which is the owner of several newspapers in Manitoba, most notably the Winnipeg Free Press and the Brandon Sun. It also owns a half dozen weekly community papers, along with a commercial printing division.

Yeah, it’s a newspaper. If you remember, I talked about Torstar back in the day, the parent company of the Toronto Star. I presented it as a way to profit off the Rob Ford crack scandal, all while getting paid a generous dividend. Plus, it has the highest circulation in the country, even beating out the nationally distributed Globe and Mail.

I didn’t end up investing in it, because I waited too long. I was hoping for the stock to dip below $5, but Prem Watsa showed up and announced a big stake in the company at about $5.20. I would have been up almost 50% if I would have bought then, and even 37% if I would have bought back when I wrote about it.

Oh well.

There are a lot of similarities between Torstar and FP Newspapers. Both are solidly profitable, even though revenues keep slowly declining. Both have dominant positions in their home market, and both pay succulent dividends. Both have traded at a huge discount to book value as well. And I think FP has a couple of potential catalysts that could propel the stock higher.

FP Newspapers has been publicly traded since the early 2000s (I’m too lazy to look up the exact date, but it’s been awhile). 51% of the company is privately owned, while the other 49% is publicly traded. The current market cap is $26.4 million, with 6.9 million shares outstanding. This stock isn’t as illiquid as others I’ve talked about, trading about 6,200 shares per day.

Throughout its history as a publicly traded company, PF has paid out just about all of its earnings to shareholders. It did the same while it was an income trust, and then paid out a little less when forced to convert back to a corporation. The stock currently pays out $0.05/share as a monthly dividend, good enough for a 15.67% yield. No, that’s not a typo. You’re really getting a 15.7% yield.

Well, at least for now.

2014 hasn’t been a kind year so far. Print advertising revenues have fallen by 7.7% compared to last year, while circulation revenue also took a bit of a hit. Folks are still (mostly) buying the paper, but advertisers are continuing to withdraw their ad dollars.

Of course, this problem has been going on for years, and FP is no stranger to it. The company continues to cut costs and lay off workers in interesting ways. The latest offering was giving several senior staffers an incentive to take a cash deal on their pensions. Here’s the money (plus a little extra), now get out so we can not replace you.

Earnings have been slowly declining. Let’s look at the last dozen quarterly profits, on a per share basis. Remember, the stock pays a $0.15 dividend each quarter.

  • 2014 Q2 – $0.17
  • 2014 Q1 – $0.08
  • 2013 Q4 – $0.23
  • 2013 Q3 – $0.12
  • 2013 Q2 – $0.22
  • 2013 Q1 – $0.14
  • 2012 Q4 – $0.29
  • 2012 Q3 – $0.14
  • 2012 Q2 -$0.19
  • 2012 Q1 – $0.12

We’ll stop there. You can see the gradual reduction in earnings, something that’s bound to continue over time. Therefore, investors should expect the dividend to slowly creep down. It could hit $0.04/monthly as soon as next year, but unless the business really takes a dive, it’s reasonable to expect it to continue, albeit maybe at a lower value.

Three reasons to buy

Forget the dividend for a second. Yes, it’s nice to collect, but it’s silly to buy into a company with nothing going for it but a big dividend. There are a few other catalysts that could send shares higher.

1. Paywall

This is the weaker argument, so we’ll explore it first.

In the company’s last quarterly report, management openly mused about instituting a paywall, strongly hinting that something could be happening on that front sometime soon. While a paywall will cut down traffic to the website significantly, it will also bring in steady revenue. This could help stem the tide.

The company has a sort-of paywall now, for folks outside of Canada. I did a little poking around and saw that I needed to hit 50 articles before the paywall kicked in. That seems a little generous.

A paywall would help, but it’s not a game changer by any means.

2. Strong, local brand

The circulation numbers in Winnipeg aren’t even close. Counting all print and digital sales, The Free Press is the winner by a mile, distributing 687k copies weekly. The Winnipeg Sun only manages to do about half of that, or 391k copies weekly. Metro Winnipeg is a distant 3rd, coming in at a weekly circulation of 207k. Metro is a free paper, but is printed by FP.

To put those numbers into perspective, they’re pretty much on par with the leaders in other cites with larger populations. The Calgary Herald has a total distribution of 708k, just a little higher than the Free Press, but with a significant population edge. The Vancouver Province has a circulation of 840k, but it has pretty significant competition with the Vancouver Sun, which leads it by 130k.

It’s the same thing with larger cities like Edmonton (The Edmonton Journal leads with a circulation of 583k), Ottawa (The Ottawa Citizen leads with a circulation of 661k), and even Montreal, which has more than 5x the population but its leading newspaper — Le Journal — only has a circulation 3x that of the Free Press.

Per capita, the Free Press might be the strongest newspaper in Canada. Buying the best is important in a weak industry.

3. Consolidation

Last week, Postmedia made news (heh) when it acquired Quebecor’s English speaking newspapers. These mostly include the Sun papers across the country, as well as a bunch of small community weeklies. The purchase price was $316 million, give or take a few bucks.

The reasoning is simple. Postmedia owns most of the dominant players in Canada’s major markets. It owns the Herald in Calgary, the Journal in Edmonton, the Citizen in Ottawa, both the Province and Sun in Vancouver, and so on. In most markets, the Sun is squarely in second place. The plan is to run both papers separately, while getting synergies by doing stuff like having one sales force and consolidating office space.

Does this mean FP is the next target? It makes sense, depending on how well this works in other markets.

It isn’t just Postmedia that’s consolidating the media space. Torstar owns dailies around the Toronto area, as well as a stake in most of the Metro papers across the country. Power Corporation owns 7 daily newspapers in Quebec. TC Media (a division of Transcontinental) owns 11 daily papers across the country from Nova Scotia to Saskatchewan. Even Glacier Media owns 7 dailies in B.C., including the only daily in Victoria, the Times Columnist.

FP has a market cap of $26 million, which represents half the company. It isn’t a big deal for one of these larger players to acquire it. Torstar is flush with cash once it closes its sale of Harlequin romance novels to News Corp. for $445 million. Transcontinental has a market cap of over $1 billion. Power Corporation has all the money in the world. There are plenty of potential buyers, and it makes sense to consolidate the space.

Wrapping it up

While I like the name, I think you shouldn’t be in any rush to buy it. At least, I’m not.

The stock does tend to move with the TSX, and there’s no end in sight for the slaughterfest that is the index. If I was in charge, I’d probably use this general weakness to cut the dividend to 4 or 4.5 cents, but I can understand management’s thought process in keeping the divvy intact.

When it does cut the dividend, reaction should be pretty muted. There’s still plenty of cash flow to cover a slightly lower dividend, and earnings are still holding up pretty well. Expect to see more of the same going forward — a slow deterioration of the business.

FP Newspapers offers investors the chance to invest in an income stream that should return greater than 10% for the foreseeable future. It returns 15% now, and earnings are only slowly deteriorating. If you add in the potential for a takeover, FP could be a winner. But be patient, I think you’ll be able to buy at a lower price.


Oct 142014

After identifying it as an interesting investment in yesterday’s post about Pepsi, I decided to crack open Kellogg Company’s annual report and see what was going on. What I found was a company that’s suffering from stagnant revenues, lower margins, and for some reason it had a ridiculously profitable 4th quarter in 2013. Check this out.


Once you factor in that gigantically profitable quarter, the investment doesn’t look so sexy anymore. It’s also odd that the company’s 4th quarter was weak, unlike every other food company in North America. It’s also struggling with a shrinking of the cereal market in general, which is still a big part of its business even though it has diversified into different stuff like Nutrigrain bars, Rice Krispie snacks, and Pringles, which it acquired in 2012. And Eggos. Still plenty of terrible toaster waffles.

Undeterred, I kept reading. After all, many of Kellogg’s competitors are suffering from a lot of the same problems, yet they trade at a pretty significant premium in the price-to-earnings department. General Mills trades at 18 times earnings even after falling 10% over the last month, and it grew revenue all of 1% in 2013. Kellogg, meanwhile, has a P/E ratio of 11.75 times. I can endure a lot of uncertainty for an earnings multiple that’s almost 50% less than its nearest competitor. Maybe Pepsi could even throw it a bone and let it buy Quaker. (Note: there is a 0.0% chance of this happening)

Kellogg is doing a few other things right, including embarking on a pretty sizable cost cutting plan, and the other usual things, like paying out a rising dividend and buying back shares. We don’t care about a rising dividend, of course, but if it’s a side benefit to buying a business with significant upside, I’m there.

And then I discovered something that stopped me dead in my tracks. I finished the annual report, but don’t see myself investing in the name unless it gets so cheap I’m practically forced to. That won’t happen, unless consumer stocks somehow start to underperform, and dividend growth investors stop buying them.

This is what I read.

Screen Shot 2014-10-14 at 1.41.02 AM


…Okay. What’s the deal? Aren’t share buybacks supposed to be good?

Normally, they are. One of the reasons why I invested in Danier Leather is because the company is so aggressive in buying back shares. The company doesn’t really have a good use for its mountain of cash, so it’s using it to buy back shares that are trading at 63 cents on the dollar (although, admittedly, the company hasn’t brought back any lately).

In theory, even buying back shares of a company that trades at many times book value like Kellogg is supposed to be good. Less shares outstanding will boost earnings for existing shareholders because it increases their share in the company, all without triggering a taxable event.

And yet, when I checked the numbers, I found that the share count during 2013 decreased from 362 million shares outstanding to 358 million. What happened to the other 5 million shares?

The answer is simple. They were issued as bonuses.

The company’s top 6 execs were awarded stock bonuses worth more than $6 million. The CEO, John Bryant, took home the most, getting himself a cool $2.5 mil. The company’s chief growth officer got more than $1 million worth of bonus stock, even though he has a salary of $698k and DIDN’T ACTUALLY GROW THE G.D. COMPANY.

But wait. There’s more. The company’s top 6 managers also got stock options valued at more than $4.1 million. These can’t be exercised for a decade, but still, they exist, and they’re massive.

I dug a little deeper. Let’s talk a little about the company’s growth officer, Paul Norman. The company sent him abroad, presumably to manage the international business. Guess how much they paid him to move. $1.45 million. That’s on top of his stock options, his stock bonuses, and his $700,000 salary. All in all, Stormin’ Paul made $4.4 million to, I dunno, live in China. It’s a pretty good gig.

I’m as capitalist as they come, but I’m getting tired of this stuff. I don’t like the compensation, but I mostly don’t like the number of shares issued to management. At $60 per share, 5 million shares is $300 million in additional compensation, on top of salaries that look to be pretty competitive.

Kellogg make a profit of $1.8 billion in 2013 (which was about double 2012’s total). Is $300 million of it too much to give back to staff? I’m not sure I have the answer to that, but I’m sure most investors would rather have dividends or real share buybacks that are 15% higher than current levels. Too often, share buybacks are just a screen to partially cover stuff like this up. Keep this in mind when investing.