That’s not even clickbait, either. I really did that well.
Let me take you kids back to a special time in my life, last week. Ah, last week. What a time to be alive. We weren’t at war with North Korea and the UTTER HORROR of the Fyre Festival was yet to be upon us.
And your BOY Nelly was buying himself a stock.
That stock was Canam Group Inc. (TSX:CAM), which might be in the most boring business in the history of the world. The company is the largest fabricator of steel components in North America. These steel structures are then used in buildings, stadiums, bridges, and so on.
Canam has also historically been in the stadium roof business. If you know a stadium with a retractable roof, chances are Canam was involved in it. The roof business isn’t as steady as the steel structures business, since these roofs are complex. In 2011, Canam posted big losses because the new roof for Vancouver’s B.C. Place ended up costing much more than anticipated. The same thing happened in 2016 with some unnamed roof project that was probably the new Atlanta Falcons stadium. So management officially announced they are getting out of the stadium business.
Canam shares ended up reaching a low of $3.19 in late 2011 before recovering to more than $15 in 2014. A similar decline just happened, shares fell from a peak of $15 to below $6 before recovering a bit.
There was more to like about Canam, too. Earnings came in at $1.08 per share in 2015, $0.70 in 2014 and $0.74 in 2013. The company was clearly capable of posting decent earnings when things went right. Shares also traded approximately 50% lower than their stated book value. And I was paid a decent dividend of around 2.5% to wait.
So I jumped in on Tuesday and bought shares at $6.30 each. I set a target price of between $13 and $14, expecting the stock to trade at that level in 2-3 years.
It didn’t take nearly that long. On Thursday morning I woke up to news the founding family (along with a private equity firm) were taking the company private with a bid of $12.30 per share. Shares immediately opened at $12.15 each, and I sold into the strength. I got $12.17 each for my shares.
That translates into a 93.2% return in just two days. If we want to get frisky (or if I just want to brag), that works out to a 17,009% return annualized. Hot diggity daffodils!
And it was in my TFSA account, so that bad boy was all tax free. Now I just need to figure out where to put my new cash. I’m thinking all on red, baby!
Other stocks I bought
I won’t spend too much time on these, mostly because I have other crap to do. What? Video games count.
The first stock I bought was Yellow Media (TSX:Y). Yes, I’m well aware the Yellow Pages are no longer a thing. Approximately 70% of the company’s revenue in 2017 will be from its digital business, which is growing well and has plenty of potential for consolidation.
Free cash flow in 2016 was $97 million. Shares have a current market cap of $207 million. That puts shares at just a little over 2x free cash flow. Yellow Media might really be the cheapest stock in Canada.
Debt is a bit of a concern, with approximately $400 million outstanding. There are about $300 million worth of secured notes with a 9.25% interest rate that mature on Nov 30th, 2018. If free cash flow doesn’t fall off a cliff, I think $150 million of additional debt could be paid off by the maturity date. They also have the right to refinance starting May 31st.
I paid $7.95 each for my Yellow Media shares, so I’m down a little today. My target price is $18.
The other stock I picked up in the last month was Canaccord Genuity (TSX:CF). Now that I think about it, it’s a lot like Canam. Canaccord has a decent niche in the investment banking world, as well as an active wealth management business. Investment banking in Canada was the shits in 2016, but has recovered somewhat this year.
Canaccord also has a mountain of cash on its balance sheet and only a tiny bit of debt. Shares were just a little above tangible book value when I bought (I paid $4.83) and the company had posted earnings of $0.39 per share as recently as 2014. Management also bought back shares when the price was low.
Canaccord shares get crushed every time the capital markets part of the business falls into the toilet. It happened in 2008, 2011-12, and 2014-15. Each time Canaccord shares either doubled or tripled off their lows in a couple of years. I’m hoping to do the same. My target price is $12.
Hey, he’s back!
You guys are only excited because of incredibly low expectations, but I’ll take it.
Let’s talk a little about share buybacks. For those of you who don’t know what in the prey hell a share buyback is, it’s when a company takes extra money and uses it to buy its shares back in the open market.
A simple example. Say you had a $1 million company that’s divided into a million shares, each worth a dollar. It earns $100,000 one year, capital that doesn’t need to be reinvested in the business. So you decide to use the cash to buy back shares. Your company is still worth $1 million but there’s only 900,000 shares outstanding. So each share is now worth $1.11.
It’s easy to see why the holders of the remaining 900,000 shares are fans of this scenario. Their shares are worth more despite not doing a damn thing.
Many top companies regularly buyback shares, but they really half-ass it. Each year, management get a certain number of shares as bonuses, mostly just for existing. To mask that dilution, companies will buy back just enough shares so the total outstanding shares don’t go up.
Aside: Here’s what I’m talking about — enough with the joke share buybacks.
I recently discovered an ETF dedicated to share buybacks. The First Asset Canadian Buyback Index ETF (TSX:FBE) “provides investors with exposure to a portfolio of equity securities of quality companies with active share buyback programs that have significantly and consistently reduced their issued and outstanding share count.”
Does it deliver? Let’s take a closer look.
The terrible ETF
There’s a simple way to check whether this ETF delivers on its promises. We can look at the top 10 holdings and see what’s happened to the share count from the end of 2013 to 2016.
Let’s table this up, bitches.
||% Change in Share Count
|West Fraser Timber
|Brookfield Asset Mgmt
|Canadian National Railway
So, overall, that ain’t bad. A total of four out of ten increased their share counts in the preceding three years, but two did so only marginally. WE’RE ONTO YOU, ROGERS AND CAMECO.
The fund has 40 total holdings, but it doesn’t actually put the holdings online, so I needed to consult the latest fact sheet. It’s limited to the top 10.
Before writing this post the most recent fact sheet I could find was from September 30th. Here are the top 10 holdings back then. Try to stifle your laughter.
||% Change in Share Count
The holdings back in September decreased their total share count by less than 1% on average over the preceding three years. Encana did two major share issues in the preceding three years. The CEO of Constellation Software has gone on record and said he dislikes share buybacks.
These are the kinds of companies to be included in a share buyback ETF? Really?
Check under the hood
Before we give this ETF too much crap, keep in mind it follows the CIBC Canadian Buyback Index, which actually has a history of outperformance.
Still, you’d think the index would be built in a specific way. The companies with the largest share buybacks would be top positions, while the ones that don’t make any significant progress wouldn’t make the list.
But it isn’t set up that way. Aimia has repurchased 12% of its outstanding shares since 2013. Telus has bought back 5.4% of its shares. They don’t show up anywhere in the top 10 holdings. The top holdings are a mix of true share buyback superstars and companies who take the practice as seriously as I take my latest diet.
The lesson is to look under the hood of these specialty ETFs. Which takes away from the entire point of buying an ETF in the first place. You don’t buy ETFs to do research. If you do the work, you might as well just build your own portfolio.
Anyhoo, if you’re looking for companies that buyback their shares on a regular basis, you can probably do better than the First Asset Buyback ETF. Just too many swings and misses.
It used to be that reverse mortgages were only considered as a last resort – like breaking the piggy bank once all other sources of retirement income have run out. However, this is no longer the case and a growing number of advisers are recommending reverse mortgages for their clients. Now, this is not to say that reverse mortgages are right for everyone. But if you are considering one, then here are five reasons why reverse mortgages can help retirees.
Before we get started, let’s look at what a reverse mortgage is. In simplest terms, these loans allow seniors to tap into the equity they have built up in their homes without having to make any payments on the interest or principal if they live in their home.
These loans have been around since the 1960’s and are only available to seniors age 62 or older. As mentioned, there are no monthly payments but borrowers will have to show that they can continue to pay property taxes, utilities, and homeowner’s insurance.
Perceptions of reverse mortgages are changing. According to All Reverse Mortgage, a direct lender of reverse mortgages in California, the program ‘has helped thousands of homeowners to safely access the equity in their home to better enjoy your retirement years.’
With that in mind, here are the reasons why a reverse mortgage can help in retirement.
Control Your Spending
Living on a fixed income requires discipline, a lot of discipline. For retirees, this means balancing withdrawals from their investment portfolios and savings accounts. However, this can be tricky – especially if their portfolio is comprised on securities – as timing withdrawals can be difficult at best.
This is one way which reverse mortgages can help as the added liquidity helps to balance out withdrawals and in some cases, can even allow retirees to keep the principal in their retirement portfolio. Doing so allows them to grow their account at a time when the added income can help to cover the costs of living longer more active lives.
Another plus of this approach is that retirees can use their reverse mortgage as a line of credit. This way they can use the reverse mortgage to cover regular monthly expenses and then time withdrawals from their core portfolio to pay down the balance.
Delaying Social Security
Did you know that delaying Social Security until the age of 70 can increase the benefit by more than 30%? While this sounds great, for many seniors holding off on applying for Social Security can be difficult to achieve.
Enter the reverse mortgage. By using this tool, senior can get the extra income they need to bridge the gap until Social Security kicks in. Granted, you don’t want to drain all the equity you have built up in your home; but small monthly payments can help to supplement income.
Paying Taxes from IRA Conversions
IRAs are a great retirement savings tool. However, converting a 401(k) or a traditional IRA accounts to a Roth IRA account does have one downside – taxes. Especially if you haven’t reached the age of 70 ½.
As such, a reverse mortgage can give you access to tax-free capital which can be used to pay the taxman when you convert your IRA. I know they should have made it simpler but let’s face it we are talking about taxes here and nothing is every that simple.
Increase the Size of Your Estate
I realize this might sound counterintuitive as one of the biggest concerns about reverse mortgages is how they will affect one’s estate. However, the reality is that a home is a single asset – and one which might rise or fall depending on market conditions.
As such, a reverse mortgage is a way to reallocate some of the equity into different investment vehicles – some which may grow faster than the value of a home. Thus, reverse mortgages can help to increase the size of your estate.
Setting Up a Rainy-Day Fund
Unexpected expenses can be the bain of your retirement as they can deplete the savings you have built up over years. As such, reverse mortgages can help to cushion the blow of expected expenses during retirement. In this way, you can pay the expenses while not having to worry about what will come next.
Math? Nobody told me there’d be math!
Shut it, italics man. We don’t have time for your shenanigans today.
Rant time. I’m sick of seeing people (including those of us who should damn well know better) consistently justifying buying too much house.
We’ve seen all the same arguments. Moving is expensive. I want my dream home. We’ll grow into it. All that matters is I can easily afford the mortgage. Hey, I need a sex dungeon in my basement.
Okay, maybe not that last one.
Most people can’t afford extra space. It comes down to that. Think about the average home buyer. They take out a fat mortgage which takes them 20 or 25 years to pay. If they do save any money, it’s 10-15% of their income. A lot of them are a few weeks without a paycheque away from being screwed.
Low rates have also pushed our expectations through the roof. People regularly pay 3x or 4x their gross income for property, justifying it by saying “hey, at least I didn’t pay 6x!” It’s the low-tar cigarette argument.
Extra space doesn’t even make economic sense (unless you monetize it, of course). If the average house costs $200 per square foot to put up (which is way too low, btw), a 12×12 spare bedroom costs $28,800 just to build in the first place, never mind furnish, heat, or finance. That spare bedroom that you use five times a year could end up costing $50,000 over the life of a house. It would be way the hell cheaper to foot the bill for your mother-in-law to just stay in a hotel five times a year.
The too much house equation
I’m strictly opposed to people who can’t afford it buying too much house. When I am GOD (and I will be one day, mostly likely on Tuesday), I will forbid it from happening.
How can we determine if someone has too much house? I made up a formula. Don’t worry, Italics Man, there’s hardly any math at all.
It goes like this: if your mortgage is greater than your liquid net worth (which excludes your principal residence), you can’t have too much house. It’s that simple.
The condensed form of the formula is: LNW > Mortgage
I don’t care how much you tell me you’re going to grow into the house. Or that it’s your dream home. Or that you can afford it. The answer is still no if you couldn’t conceivably sell off everything that you own and pay for the place.
(That’s a bad idea, of course, but it does nicely guard against people buying too much house)
People tend to forget that real estate you live in is a pretty crummy investment. You have to spend money each year to maintain it. The government taxes it. You can’t deduct any associated expenses. And it tends to only slightly outperform inflation over time.
And then, people make this investment even worse by buying too much house. It truly boggles the mind.
Buying a house isn’t an investment. It’s nothing more than a big-ass consumer purchase. It’s a big purchase that makes sense in certain markets at certain times, while not making sense other times. Like in Toronto or Vancouver today.
This is the end
We constantly rag on people who buy too many video games or finance vacations, but we cheer people who make a similar mistake with their houses. The fact is the easiest way for the average person with only a small net worth to save more is to cut their fixed expenses, starting with housing.
You might think my too much house formula is too strict. Fine. Loosen it a bit, see if I care. The point is we’re all collectively buying too much house, and it’s killing our ability to save.
Let’s talk a little about investing with Investors Group, which is one of Canada’s largest wealth management companies. It has approximately $130 billion in assets under management, or about what I have hiding in the couch cushions for a rainy day.There are some 5,000 Investors Group
advisors sales people spread out across Canada.
The investing process starts with a financial plan, which goes over all parts of your finances from your mortgage to your insurance to your investments. The client is told the process is so their needs can be fulfilled in the best way possible. This is a lie. It’s a sales process, nothing more.
Recently, Investors Group has been in the news for a couple of main reasons. The first is the company’s opposition to Canada’s new mutual fund disclosure rules. Before, disclosure of fees in a percentage form was fine. These days, fees must be disclosed as an actual dollar figure.
The company also made headlines for announcing it was doing away with deferred sales charges. This meant investors who get out of Investors Group mutual funds before a certain time period (usually 5-7 years) don’t have to pay huge penalties any longer. Such generosity! The company also cut fees on many of its in-house mutual funds.
Investors Group is actually really excited about this. Veteran investors know you should never invest with Investors Group, but there are literally millions of Canadians who don’t know any better. This post is for you.
An apples to apples comparison
Let’s take a closer look at one of Investors Group’s largest funds to see just how serious the company is about cutting fees.
The largest IG mutual fund is the Investors Dividend Fund. Because this company likes making things complicated, there are about a million different slightly different iterations of the same damn fund.
After a little clicking around, I’ve come to the conclusion that you’d be most likely to be sold is the Series B. It no longer has a deferred sales charge and the prospectus breaks down what the advisor gets paid in great detail.
The fund has 88% of its assets in Canadian equities, with the remainder in bonds and cash. It has a total of 125 different positions, but 57% of assets are in the top 10 stocks. Top positions include:
- Royal Bank (8.4%)
- Scotiabank (8.1%)
- TransCanada (6.0%)
- CIBC (5.7%)
- Power Financial (5.6%)
- Bank of Montreal (5.5%)
The management fee? It was 2.48%, but the company SLASHED it, proving once and for all Investors Group cares about its investors. The new fee? It’s 2.38%.
OMG YOU GUYS I’D BETTER GET THE FAINTING COUCH.
In 2016, the fund paid a distribution of $0.77, giving it a yield of just over 3%.
Now let’s compare it to the largest Canadian dividend ETF, which is the iShares Dividend Select ETF (TSX:XDV). It has 100% of assets invested in Canadian stocks. The largest positions include:
- CIBC (8.2%)
- Agrium (7.6%)
- Royal Bank (5.8%)
- Bank of Montreal (5.7%)
- Scotiabank (5.0%)
59% of XDV’s assets are invested in the financial sector. The Investors Dividend Fund has 57% of its assets invested in financials. There’s a lot in common between the two funds, not just that. They’re not identical, but damn close.
XDV has a trailing yield of 3.7%, a full 20% higher than the Investors Dividend Fund.
Where XDV really shines is its management fee. Investors are paying 0.55% annually to own XDV. That’s a full 78% less than owning an equivalent product with Investors Group. (And 0.55% is a little expensive in the ETF world. You can find ETFs for less than 0.10%).
We could look at other fund categories, but it would yield similar results. If you invest with Investors Group, be prepared to pay a hell of a lot more for something that can easily be replicated with a cheaper ETF.
Just don’t invest with Investors Group
Investors Group does a great job of presenting themselves in a professional manner and the average advisor will instill a sense of confidence into a newbie investor.
But ultimately, that comes at a huge cost to the client. A 2% difference in fees will make a huge difference in your retirement.
The bottom line? You’re better off to choose a simple ETF portfolio on your own. You’ll save tens of thousands of dollars in fees (if not more!) if you don’t invest with Investors Group.