Stingy Investor Contact - Subscribe - Login
  Home | Articles | Screens | Links | SNW | Rothery Report
 
Four deals in a pricey market

As a value investor, I can often be accused of being a contrarian. Last February, as the markets settled into their darkest depths, I was enthusiastically pointing to the big bargains on offer in my article 'The case for optimism.' But this February, as investors cheer on the markets' remarkable recovery, I'm much less upbeat. That's because when you consult the right numbers it's clear that most of last year's bargains are no longer available.

That's not to say that the markets couldn't continue to advance smartly, because as legendary value investor Benjamin Graham observed, the market is a voting machine in the short term. Stocks can stay on the high side of fair value for extended periods, and indeed, they have been more expensive on many occasions over the last decade. But Graham also pointed out that over the long run, the market acts more like a weighing machine, and eventually prices tend to settle down to levels that make sense.

That's why I like to measure the market using Graham & Dodd's price-to-earnings ratio, named in honour of the co-authors of the value investing bible Security Analysis. The Graham & Dodd P/E ratio is calculated by dividing the market's current price by its average earnings over the past 10 years. As a result, the ratio focuses on long-term earnings trends without being overly influenced by temporary fluctuations in the business cycle.

Stocks tend to trade at bargain levels when the Graham & Dodd P/E ratio falls below 10. History shows that long-term returns from such low ratios have been excellent. However, stocks have been less kind to long-term investors when the markets hit ratios of 20 or more

So, where are we today? The Graham & Dodd P/E ratios in both Canada and the U.S. recently moved back above 20. As a result, both markets are expensive compared to their long-term historical norms. But it's also true that stocks have been expensive for much of the past decade. The Graham & Dodd P/E reached a dizzying high of 44.2 at the peak of the internet bubble. It then declined to a median level of 26.1 during the last decade. The market only moved below 20 during the recent collapse when it briefly slipped under its long-term median of 15.7. So recent history shows us that stocks can climb above 20 and stay there for a while. Still, caution is warranted because, as we've seen, returns during the first part of this century were less than generous.

Despite the recent rise in prices, a diligent search still reveals a few bargains. After all, individual stocks follow their own patterns and a few will be cheap even when the markets are pricey.

When looking for investments in a hot market I like to stick to safer names. That's why I'll focus on the 60 large stocks in the S&P/TSX 60 index. The index contains premier Canadian firms which tend to be safer than their smaller counterparts.

I also appreciate a strong record of dividend growth over the last five years, which I view as a measure of a firm's success. Even more importantly, stocks that managed to maintain or grow their dividends during the economic turmoil of the last few years have demonstrated their mettle in hard times.

Only a handful of stocks in the S&P/TSX 60 sport good five-year dividend growth records. Even fewer pay dividends that are well supported by earnings. I'll highlight four that pass both tests, and also happen to trade at modest price-to-earnings ratios.

I'll start with Telus (T.A, $32.36). The Vancouver-based telecom giant is a favourite of dividend investors due to its juicy 5.9% dividend yield and 18.9% average annual dividend growth rate over the last five years. Telus's dividend payout ratio (dividends divided by earnings) is a reasonable 53%, which indicates that its dividend is well covered by earnings. The firm also trades at a low price-to-earnings ratio of 9.1. But the low price comes with some risk due to the arrival of new competition in the form of recent wireless startup Globalive.

Second up, Enbridge (ENB, $47.93) pays a dividend yield of 3.6%. The pipeline company has a very pleasing habit of regularly growing its dividend, which it has done at an average annual rate of 13.2% over the last five years. Even better, it announced a 15% dividend boost in December and Enbridge has been paying dividends to its shareholders for over 50 years.

The third member of my dividend growth quartet is Metro (MRU.A, $39.10) which generates a modest 1.4% dividend yield. But the grocery store chain from Montreal is a regular dividend booster (10.1% annually over the last five years) and has a strong growth record. For instance, the company's revenues have climbed at an average annual rate of 13% over the last five years and analysts expect even more good things to come.

Finally, my current favourite is Canadian Tire (CTC.A, $56.38), which pays a 1.5% dividend yield, sports a price-to-earnings ratio of 13.5, and a five-year annual dividend growth rate of 10.9%. Importantly, the firm's earnings have held up quite well during the economic collapse. It has earned a profit every quarter over the last two years and every year for the last decade. That sort of resilience puts the Toronto-based company in good standing with investors.

+ First Published: MoneySense magazine, February 2010

  MoneySense Articles
 Cdn Top 200 2016
 US Top 500 2016
 Retirement 100: 2015
 Cdn Top 200 2015
 US Top 500 2015
 Retirement 100: 2014
 Cdn Top 200 2014
 US Top 500 2014
 Retirement 100: 2013
 Cdn Top 200 2013
 US Top 500 2013
 Retirement 100: 2012
 Buffett Buys
 FB IPO
 Stocks that pay
 Value in the S&P500
 Cdn Top 200 2012
 US Top 500 2012
 Retirement 100: 2011
 Where to invest $100k
 Where to invest $10k
 Summer Simple Way
 A crystal ball for stocks?
 Cheap & safe
 Risky business
 Cdn Top 200 2011
 US Top 500 2011
 Retirement 100
 Dividend investing
 Value investing
 Momentum investing
 Low P/E P/B
 Dividends
 Dividend growers
 Cdn Top 200 2010
 US Top 500 2010
 Graham's prescription
 Income 100: 2009
 The case for optimism
 Cdn Top 200 2009
 U.S. Top 500 2009
 Wicked investments
 Simply spectacular
 Income 2008
 Small stocks, big profits
 Cdn Top 200 2008
 US Top 500 2008
 Value that sizzles
 So simple it works
 Income 100
 No assembly required
 Investing by the book
 Cdn Top 200 2007
 US Top 500 2007
 Invest like the masters
 A simple way to get rich
 Top Trusts 2006
 Stocks for cannibals
 Car bites dogs
 Cdn Top 200 2006
 US Top 1000 2006
 So easy, so profitable
 Top Trusts 2005
 Dogs of the Dow
 Top 200 2005
 Money for nothing
 Yield of dreams
 Return of the master

MoneySaver Articles
 2 Graham Stocks for 2017
 3 Stingy Stocks for 2016
 5 Graham Stocks for 2016
 3 Stingy Stocks for 2015
 3 Graham Stocks for 2015
 3 Stingy Stocks for 2014
 4 Graham Stocks for 2014
 8 Stingy Stocks for 2013
 6 Graham Stocks for 2013
 9 Stingy Stocks for 2012
 8 Graham Stocks for 2012
 Simple Way 2011
 5 Stingy Stocks for 2011
 7 Graham Stocks for 2011
 Simple Way 2010
 5 Stingy Stocks for 2010
 8 Graham Stocks for 2010
 Simple Way 2009
 Timing Temptation
 19 Stingy Stocks for 2009
 4 Graham Stocks for 2009
 Simple Way 2008
 Active at Passive Prices
 Unbundling ETFs 2008
 5 Stingy Stocks for 2008
 5 Graham Stocks for 2008
 Is your index too active?
 Graham's Simple Way
 Canadian Graham Stocks
 5 Stingy Stocks for 2007
 8 Graham Stocks for 2007
 Top SPPs
 The Simple Way
 A hole in your IPO?
 Monkey Business
 8 Stingy Stocks for 2006
 Graham Stock Gainers
 Blue-Chip Blues
 Are Dividends Safe?
 SPPs for 2005
 Graham's Simplest Way
 Selling Graham Stocks
 RRSP Money Market Funds
 Stingy Stocks for 2005
 High Performance Graham
 Intelligent Indexing
 Unbundling Canadian ETFs
 A history of yield
 A Dynamic Duo
 Canadian Graham Stock
 Dividends at Risk
 Thrifty Value Stocks
 Stocks in Short Supply
 The New Dividend
 Hunting Goodwill
 SPPs for 2003
 RRSP: don't panic
 Desirable Dividends
 Stingy Selections 2003
 10 Graham Picks
 Growth Eh?
 Timing Disaster
 Dangerous Diversification
 The Coffee Can Portfolio
 Down with the dogs
 Stingy Selections
 Frugal Funds
 Graham Revisited
 Just Spend It
 Ticker Temptation
 Stock Mortality
 Focus on Fees
 SPPs for the Long Term
 Seeking Solid Stocks
 Relative Strength
 The VR Approach
 The Irrational Investor
 Value Investing

Globe & Mail Articles
 Indexing advice
 Media-shy stocks
 Curse of size
 Market uncertainty
 Be even lazier
 Scary beats safe
 Small, illiquid, value
 Use the numbers
 What value is good value?
 Sculpt for value
 Value vs CAPE
 Graham Rules
 CAPE vs PeakE
 Top value ratio
 Low Beta
 Value and dividends
 Walter Schloss
 Try unloved AIG
 Why I'm a value investor
 New world of ETFs
 Low P/Es possible
 10 yielders
 Be happier
 Long-Short
 Dividend Downside
 Shiller's P/E
 Copycat investing
 Cashing in on class
 Index roulette
 Theory collides
 Diving too deep
 3 retirement villains
 Scourge of inflation
 Economic omens
 Analyst Expectations
 Value stock scarcity
 It's all in the index
 How to pick good funds
 Low Beta Wins
 Hunt for dividend stocks
 Think garage sale

Advisor's Edge Articles
 Passive Rebundling
 Doing the math

Norm Speaks
Flip Books

Tools:
 Asset Mixer
 Periodic Table
 ETF Fee Calculator



 
About Us | Legal | Contact Us
Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...