The Canadian Investor - Alphabet Impresses while Meta and Tesla Disappoint

Episode Date: May 2, 2024

Simon and Dan start with a look at the GDP growth in Canada and the US and what it means for interest rates and investors going forward. They then go over recent earnings from Alphabet, Meta, Tesla, and Canadian Pacific. Alphabet's surprising dividend announcement and strong revenue growth across its various segments contrast with the challenges posed by current search engine dynamics. Meta's robust revenue growth faces the headwinds of future investment expectations, while Tesla navigates production costs and market demands amidst falling sales prices. Canadian Pacific reports a steady quarter. They finish by touching on 3M's strategic decisions, including a dividend "reset" following a major spinoff and legal settlements, providing a broader perspective on the implications for long-term dividend strategies. Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Sign up for Finchat.io for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. Welcome back to the Canadian Investor Podcast. I'm here today with Dan Kent. We're doing our news and earnings show that will be out this Thursday. I think it's going to be a fun one, Dan, because we have lots to talk about, a little bit of macro, but a lot more earnings.

I mean, it's always fun when we get into the quarterly earnings. I think we're in the thick of it right now. Yeah, especially like big US companies where the earnings often drive the market, really. There's not too much Canadian today, but that's also because there's not as many Canadian companies reporting. So it's definitely going to be a good episode. Yeah, I think so too. And obviously, I think we'll get more and more Canadian companies, I think, as it goes on. When are the banks reporting? I know that's always top of mind for a lot of people. Their last.

Like if I were to guess, they'd be end of May. End of May, a few weeks at least down the line. Yeah. Yeah. I'll look it up here. Yeah. Okay, perfect. We'll get started. So first of all, we'll start with the macro because we had recently Canada and the US GDP figures.

So I'll kind of talk a little bit about both and just say my thoughts on what I think the implications are for markets here and rates going forward. So Canada and US GDP. So Canada's GDP grew 0.2% in February, which was below market expectation. This followed a 0.5% gain in January. Now, stats can mention in the release that GDP likely grew at a pace of 0.6% for the first quarter of the year, which would bring the annualized pace at 2.4%. Now, it was definitely helped by mining and oil and gas extraction, which increased 2.5% in February. Now, in terms of the US GDP, so that came out last week, took the markets by surprise because it came in at an annualized pace of 1.6% for Q1. And that's compared to expectations of 2.4% for the market. So a big

miss here. What also worried markets during that time was the personal consumption expenditure, so PCE, which is essentially a measure of it's another measure of inflation. It's one of the preferred measures of the US Fed Fed as it tends to be broader than CPI. So if you do hear that, that's what it means. And that was higher than expected as well at an annualized rate of 3.4%. Now, what does this actually mean for the markets interest rates? Well, for the US, there are fears that they are entering a period of stagflation. Stagflation would be when there is stagnant growth, higher unemployment, along with higher inflation. So the most kind of cited time period where this happened would be the 1970s. And clearly, even if you don't know

too much about macro and the markets, I mean, most people know that the 1970s was not. It's a bad time. Yeah, exactly. Not necessarily a great period. I mean, it was a bit before our time, but definitely not a great period for the economy in general. And that's because recent also, there's been recent CPI prints that have also been on the uptrend in the US and the lower economic growth is causing people to worry about this because, you know, you had higher CPI prints and the caveat was always, well, the U.S. economy is doing much better than the rest of the world. Well, now there's doubt that this might not continue, right? And the current unemployment rate in the U.S. is 3.8%, which is historically low. The underlying numbers are a bit

more worrying when you start digging through them, especially when it comes down to full-time employment growth and people holding multiple jobs for economic reasons, which is not a great sign. We'll have to see whether economic growth continues or not. I think it's still too early to be talking about stagflation. These numbers probably make the Fed more reluctant to cut rates at this point to make sure that obviously inflation is under control and for the Bank of Canada they're still I think stuck between a rock and a hard place I mean the GDP print probably gives them some ammunition for a rate cut or two this year even if the Fed doesn't cut. But going beyond that, we've talked about it time and time

again, would put a lot of pressure on the Canadian dollar, which could also lead to more inflation. And that's something they want to avoid. It could also risk reigniting the FOMO in the real estate market, right? Even a few interest rate cuts may encourage people to get into the real estate market, bid up prices prices because they're hoping that rates will go down further. So there's a lot of implications here and it'll be interesting what they'll be doing while they're coming meeting. Yeah, you summed it up pretty well. The one thing, I guess, maybe just like an explanation on stagflation in general. So it's pretty much because you have three negatives. you have no economic output,

high unemployment and high inflation. So typically, you know, the cure for lower inflation would be higher policy rates to slow the economy and slow prices down, which typically increases unemployment, like in theory, prices should not be rising, at least not at an amplified pace during you know levels of higher rates and low economic output so when you get all of this together so you know when you have a low rate of growth raising policy rates even further to slow down inflation will ultimately hit the economy even harder and i think that's why like it's pretty devastating and i think like you know when you watch it in the 70s i think what it was like 15 some years in the markets i think i think they lost 30 40 percent over that period like it wasn't it wasn't a good time at all yeah it's uh the rate cuts i mean it doesn't look very positive i mean even that fed rate cut tool there, what is it? 13.5% for

next year, 2025 to be even 75 basis points lower. Yeah. Yeah, exactly. Well, so we have, so next year in 2025. So the way to look at this, I like to compare because in the span of two weeks, there's been a pretty big change in this CME FedWatch tool. So, yeah, we talk about it every now and then. And basically, it's just it takes different market indicators to assess probabilities, what the market thinks will happen with the next Fed meetings. And it's constantly been pushing out rate cuts. That's basically, you know, without going into too much detail, essentially, that's what's been happening. The rate cuts have been pushed back and back and back.

And then if you look at April 17, there was a 79% chance in the June meeting that's coming up that there'd be no change in the rate. And now that that chance is actually at 90%. So we're starting to see and for the following dates, it's kind of similar, right, you're seeing the probabilities of no rate cuts are getting higher and higher. And the rate cuts probabilities lower and lower, obviously, through the end of the year. So it'll be very interesting what happens, but it's been pushed out. And now the first month where there is a higher than 50% probability that the rates will be lowered, the first meeting I mean is September 18th. So it's the September meeting. And I've said it time and time again, if they get to that point, the Fed, and they still haven't cut rate and they

get to the September meeting, they would need a something to break in the market to do a cut if things are okay but not great they probably will not for the main reason that they do not want to appear uh you know to influence the upcoming election that will be happening in november so i've been saying that so I actually think the market is a little bit off here. I think there should be a lower probability of a rate cut in September than they're actually assessing. I don't think it's a zero probability, but I think it's probably much lower just because of the Fed wanting to appear politically independent. politically independent. Yeah. And I guess the one thing I should mention that 13 and a half percent, that would be a hundred basis points lower by next year. So like they're not really predicting large rate cuts over the next year, at least a slim chance, which is, I think a lot of people are, are kind of banking on that right now, especially, you know, here in Canada, like mortgage rates, things like that. like it doesn't look all that likely

that we get, you know, big, big rate cuts over the next year, which I mean, a year ago would have been heavily predicted, like heavily. Oh, yeah. Well, we when we did our bold predictions, right, you thought my predictions weren't that bold with like six or I think six or eight, you know, rate cuts in Canada, which would be like 150 to 200 basis point terms of rate cuts. So going from, I think we're at 5%, right? If I remember correctly for Canada.

So going from 5% to like three, three and a half percent. And now obviously I'll probably just call it now. I think this double prediction was just wrong. I think I said even more. And yeah, we'd be like it looks like we're gonna be lucky to even get 50 basis points so yeah yeah i think i think that's the max they would do because then you start getting to gap especially if the u.s doesn't cut which seems to be more and more likely that they won't be cutting this year or if they do it'll be at the tail end of the year. So if the U.S. doesn't cut, the Bank of Canada, I think they just probably only have enough room to do one or two cuts, and each cut is 25 basis points. So we'll have to see.

As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly.

Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY, do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time.

And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead,

blossom social in the app store and I'll see you there. Having said that, let's move on to the first company on the dock for earnings. So do you want to talk about the good old small company called Google or Alphabet as they're properly named now? Everybody calls them Google though. Yeah. So they reported a pretty strong quarter. I think last week they popped like almost 10% after the earnings came out. So revenue came in 2.5% higher than expectations, but earnings came in 26% ahead of estimates. So revenue grew by 15% on a year over year basis, 16% on a constant currency basis and earnings grew by 61%. So it's a pretty, pretty significant while growth in pretty much all of its segments, Google search by 14.3% and cloud revenues by 28.4%. But the biggest, you know, probably the

biggest surprise on the quarter was the return of YouTube ad growth. So like during the pandemic, when everybody was in lockdown, like YouTube was seeing a big surge in activity. You know, ad revenues were climbing at a pretty rapid pace because, I mean, you just, you have more time to sit down and watch a YouTube video than you do, say, you know, scrolling a Google search and reading an article when, you know, you're at work or something. But it's starting to see. No, people don't do that. They never do that. People don't do that. They never do that.

But yeah, when a lot of people went back to work, it kind of went through a multi-year lull and it was a bit of a drag. But this quarter saw a 21% growth in YouTube ad revenue, which is pretty much the largest increase year over year it had since the pandemic. If you look from a sequential basis, you might see a large decline, but this is pretty typical because it tends to peak in the final quarter of the year. I would imagine advertising-wise as well, a lot of advertisers, they burn through their budgets in the last quarter of the year. So there's typically higher RPMs in terms of ads, but it's also, if I were to guess, it's maybe like a holiday thing, people looking up reviews, like product reviews,

types of things like that. So sequentially, like it's going to decline. So year over year is the most important basis and it's growing quite well. The more surprising element on the quarter though, was the company started to pay a dividend. So it's only about 20 cents a quarter. So annually, the yield will work out to around 0.45%. In terms of trailing free cashflow, it would work out to be around 10 to 12% in terms of a payout ratio. If we assume they're going to be able to grow cashflow by double digits, it makes up a very, very small portion of the company's overall cashflow. And in addition to this like continual returns they announced uh it can buy back 70 billion of its shares outstanding

and i mean overall they're you know just returning more value to shareholders i mean they obviously think the stock is cheap tons of buybacks but i mean this is kind of like it's an interesting thing like the situation that that google search is kind of like, it's an interesting thing, like the situation that Google search is going through, like obviously being somebody in the online space, I'm quite involved with this. I mean, there's a significant amount of pressure on the company right now over just concerns over the lack of quality with its current search results. I mean, it's kind of a mess right now, to be honest. Over the last eight months or so, they've decimated pretty much a lot of smaller publishers in terms of, you know, in place of a

lot of major corporations. And one of the main theories, and this is just like pure speculation by a lot of people in the industry, is that it's a bit of an intentional effort to get more people back on Google. Because ultimately, as an advertising revenue, as an advertising company, I mean, the lowest value of somebody searching on Google would be somebody finding something and leaving. Whereas if they got to go back and forth, back to the platform, ultimately more searchers, more ad revenue. So it's pure speculation as to what exactly they're doing, but clearly it's

working because Google search, you know, it's posted two pretty consecutive rock solid quarters with some of the highest, you know, year over year growth for the company since the pandemic. And I mean, in terms of, you know, what's going on, I mean, it's a pretty fine line here, especially because like Google is effectively the conduit of information, like with, you know, 90% plus market share. So it's, you know, a lot of people are kind of thinking, you know, does this company have too much market share in that regard to the point where, you know, if it's all for profit, is it, is it clearly, you know, beneficial to the user? I mean, as a shareholder, Google, as I mentioned, clearly they know what they're doing, but as a, as a user of Google, um, you know, it's, it's pretty weird time in terms of, uh, you know, their search engine overall,

but yeah, I don't know your thoughts on the quarter. Yeah. I mean, I think overall, obviously I think it was a good quarter in terms of the search engine. I mean, I think that's something they have to be real careful, mainly because I don't know about you and I don't know about our listeners, but we, you know, I subscribe to ChatGPT. And obviously I'll validate information because you want to make sure, you know, it's up to date. And I think the training for ChatGPT went up into probably mid-early 2023. I don't know the exact dates but i think it's you know it's not the most up-to-date information but as these large llms actually start getting more better and better and up to date i think it could pose a you know people

want to actually get the most accurate information they may start using those over Google if Google is diluting the quality of its search results. So that's something I think they have to be very careful. And I think it goes with any business looking at the short term, the rewards of the short term, by looking at the potential impacts and adverse impact of that behavior versus a long term. And it's like everything, right? We look at how governments are spending right now, you know, in the short term, it might be good, but the long term effects might be terrible. You know, I think I can speak for the podcast business, too. We refuse advertisers, obviously, you know, a lot of them was would have been nice sums of money, but we refused it because we didn't think it was right for them to advertise on the podcast or didn't align with them. But I think longer term, it helped our

audience being, you know, I think it was good for the business long term is what I'm saying, right? Because people didn't lose confidence in us. And I think this is the same thing here for Google, where they really have a fine line to play in terms of maximizing profits in the near term, which tends to be what the stock market is looking at, you know, the next six months to a year versus what investors should be looking at, which is the next five to 10 years, if not longer. Yeah, exactly. Like you have a company with, you know, such a large market share, but it is a fine line to the point where you have to, it's, they're in a tough position. They have to increase, you know, revenues, which ultimately

in terms of Google search, like it's mostly due to more queries on the platform. So, I mean, obviously, as I mentioned, that was, that's just pure speculation, but I mean, there's a lot of things going around that just the overall quality of the results for a lot is it's relatively weak right now. And it is a fine line between people sticking with the engine and going elsewhere. I mean, I don't really have a lot of, you know, fear about it. I'm a relatively big holder of, of Google. I like the company moving forward, but it's just an interesting topic. I thought I'd bring up. Cause not a lot of people are, are, you know, they don't look into that end of things in terms of, you know, they look at the search revenue, the search profits. But I mean, in terms of, you know,

the actual strategic point of view from that Google search, it's a very important industry for sure. Yeah, well said. Now we'll move on to a company that's led by an outstanding person that clearly always has the best interests of humanity at heart and only a long-term vision. And I'm being slightly sarcastic here. I'm going to be talking about Mark Zuckerberg and meta earnings or Facebook. So Q1 2024, people know that I've been listening to this podcast for a while. I can be quite critical of Zuckerberg as I like to call him,, you know, I will give him some props here because I think there are some things that I think Meta is doing well.

So revenues were up 27% to $36.5 billion on a year-over-year basis. The rest of the world's segments saw the biggest increase with 42%. Europe was 34%. Asia-Pacific, 25%. And Canada, Europe was 34%. Asia Pacific, 25%. And Canada, US, 21%. Now, net income was up 117% to $12.4 billion. And EPS was up 114%. Free cash flow was up 78% to $12.9 billion. And family daily active people, which is a really weird metric.

I never realized they were using it because I was like looking. I was expecting to see like, you know, daily active users or something like that. I guess there's multiple people using one account. I don't know, but I didn't dig into the reason for it. But the Family Daily Active People was up 7% over a year to $3.24 billion. And they spent $14.6 billion towards share repurchases during the quarter. And on that point, the share repurchases, I think, and I'd like to hear what you have to say,

because I think that's a bit of a head-scratcher, given how multiples had expanded for Meta and the shares not being exactly what I would call cheap on a valuation basis. So I'm not sure that's actually the best value for shareholders. What's your thought on that? Yeah, I mean, the price is at, well, not all-time highs, but pretty close to. But on a free cash flow basis, just because they've grown it so much, it's virtually the same price as it was six to eight months ago. the same price as it was six to eight months ago. But I mean, it definitely is. When stocks are hitting all-time highs, you kind of wonder if the best option is to continually buy back shares,

but if they don't really have anywhere else to spend the capital. Especially when you probably know that you'll be coming out with the guidance that you'll be coming out with that'll probably send the shares lower and i'll talk about that and that's where my point was a little bit is because they clearly knew like what they would provide for guidance like probably they've known this for several months so that's where i'm a bit a little confused but i'll expand a little more on that once i get to the guidance and reality labs is still bleeding quite a bit of money so that's their metaverse uh kind of venture ar arm i guess yeah yeah exactly i think that's uh that's the best way to put it so i lost 3.8 billion on 440 million in revenues and that's compared to a loss of 4

billion last year on 339 million in revenue slight improvement, but still bleeding tons of money. Operating margins were 37.9%, which is a massive jump from the 29.2% last year. Overall, I mean, very solid quarter by Meta based on the numbers. The reason this saw tank was because of the guidance, which I alluded to. So for guidance revenues to be between $36.5 billion billion and 39 billion in Q2, that would be an increase of between 14 and 22%. Now for the full year, expenses are expected to be higher than their previous guidance. They adjusted the bottom end of the guidance here from 94 to 96 and left the top end unchanged, but still they're narrowing that range upwards for reality labs they mentioned that we continue to expect operating losses to increase

meaningfully year over year due to our ongoing product development efforts and our investments to further scale our ecosystem and they also said that CapEx for the full year will be 12% higher than previous guidance. And I'm using the mid range of the guidance here and the reissued one. They now expect it to be between 35 and 40 billion up from 30 to 37 billion. So a pretty significant increase. And this is to accelerate the buildup of their AI infrastructure. And they expect CapEx or capital expenditure will continue to increase next year as they continue to invest aggressively into AI. And that's the part here, the aggressive investments. I think long term, I mean, for what they're trying to build, I actually think that's a

pretty smart decision to do. I think you can say whatever you want about Zuckerberg is that he tends to have a long term vision. So I think he's not always just focused on the near term. So I'll give him props for that. But to go back on the share buyback, if you know you're going to be increasing your expenses, you know, the markets will probably react negatively for that. Like, why would you not wait a little bit and then start buying back your shares after that news comes out? Yeah, and it did tank. It went from $527 to, I think right now it's sitting at like $432.

So, yeah, I guess there is logic there because like you said, they would have known about this beforehand. They didn't decide this the day before doing the earnings announcement. I'm sure that's something they probably were doing since the start of the year. Maybe even last year they were thinking about ramping up those investments in AI. So that's why I'm a bit you know share buybacks because share buybacks could be great if they're done properly yeah and i i'm just kind of questioning the properness of these yeah it's definitely and like just the the reality labs like that is a lot of money for you know they spent what four billion dollars for $100 million in revenue growth. So, like, that must be a long-term thing there.

Like, what, I'm wondering, like, what infrastructure are they actually building out for that type of money? That's pretty crazy. Yeah, I think it's probably just an ecosystem and having, like, developers get on board. I'm going to assume it's that. And obviously, you know, developing more and more products, like the actual the actual hardware so i think it's probably a combination of all of these but anyways i think overall you know if you own this stock not you know pretty good quarter if you're interested in buying this stock i mean keep an eye on it because you know say what you want again about him but he does have a long-term vision whether that will

come to fruition or not we'll have to see but he does definitely think more in years rather than just the next quarter so i guess anything else there or we're gonna go with the uh tweeter or xer in chief yeah it's no that's it for meta tesla is definitely interesting right now. I mean, it was a pretty, pretty soft quarter. They missed expectations by a reasonable amount on earnings and revenue, but it ended up popping post earnings. So I'm not really sure, like maybe people thought it would be a bit worse than it was or some positive outlook in the rest of 20. So they mentioned in 2024 that the next, or sorry, they mentioned in the conference call that next quarter is going to be a bit better. So maybe

that's kind of what propped it up. Automotive revenue, which makes up more than 82% of revenues dipped by 13%. Its energy generation and storage segment grew by 7% and services segment by 25%. They continue to see some pretty big gross margin declines. So they fell another 200 basis points on the quarter. The company's gross margins have gone from over 27% in 2022 to 17%, 17.4% as of the most recent quarter. Operating margins continue to shrink. They've been effectively cut in half. So first quarter of 2023, they were 11.4%. Year later, they sit at 5.5%. So they said they're starting to see a reduction in production cost, the production cost of

a vehicle primarily due to lower material and freight costs. So overall cost of goods sold per vehicle declined by about 2%. But just the overall decline in selling price and deliveries are more than offsetting this, along with higher than expected Cybertruck ramp up costs. Adjusted earnings came in at 45 cents a share. So this is a year over year decline of 48%. Total production fell by around 2% on a year over year basis and total deliveries are down 9% over the same timeframe. And the average selling price of the vehicle declined by 5%. So I mean, they're reducing the costs of one, but I mean, it's also

the vehicles are also falling in price. Pre-cash flow for the company is effectively in free fall. It has been for nearly two years now. And I had mentioned, I think it was last week or maybe two weeks ago, that Elon possibly has a bit too many irons in the fire when it comes to companies he's leading. Oh, no. I'm shocked. Yeah. An analyst asked him the same thing in the conference call.

He actually asked him where his heart is. He's like, where is your heart at in terms of Tesla? And apparently, Musk said that Tesla takes up the majority of the time and he's going to make sure it's prosperous. So we can probably put that out of the question on whether or not he's going to pass it off or anything like that. He's sticking around. He also stated he's fairly confident that Tesla will have higher sales this year than last year. But for a company that is still so expensive relative to its earnings and cashflow, I think just simply stating sales would be higher wouldn't really be much of an assurance for me. I mean, sales could be one percent higher two percent higher twenty percent higher i mean just overall demand is follow falling materially

for their products and just ev in general i know they they're planning on ramping up like a i think they i don't know if you've heard of that robo taxi yeah oh yeah i heard about it yeah and they got uh they're putting out they're trying to put out a lower production vehicle. I think they said the starting price will be around $25,000. So, I mean, it's- Yeah. I heard that as well. Yeah. And they're also, I think, they're trying to push to launch full self-driving in China. I think he's there right now to try and push that. Yeah. I think there was a bit of news on that the last week or so. Yeah. There were some approvals over there for, but yeah, it's, it's, it's been tough for Tesla over the last, I mean, I think it's what the worst performing S&P 500 stock over the last

two years by, by quite a bit. Oh, really? Yeah. I mean, and I have it for a joint TCI listeners because you were mentioning free cash flow. And we can see that they were losing money up until 2018 on a free cash flow basis. And then it really ramped up and peaked in 2022. Surprise, surprise. Obviously, that's kind of when rates started coming down. And then it's been steadily going down. It peaked at $7.5 billion roughly. And now it's down to $1.3 billion in the trailing 12 months. So it's definitely, you know, almost done a round trip.

And look, it's, I think, I would not bet against Elon. I'll just say that. I mean, when people bet against him, he ends up, you know, proving them wrong. But there are definitely challenges. And I think it's for the auto industry as a whole, because I think Volkswagen also came out with some lackluster results. So I think they're starting to see more pressure there, which I think logically to me is not surprising.

I mean, people are getting kind of feeling the pinch, right? So they're spending less. Like, why would you go buy a new car when you want to cut back on expenses so that's kind of logically where my brain goes especially you know expensive cars like even though prices are declining teslas are are not cheap right now and it's actually yeah it's interesting like uh when you'll go over canadian pacific like the the trend of auto shipments, like I was actually quite surprised to see that they're actually holding up quite well. But yeah, it's Tesla.

I mean, it's just right now, I don't think people are willing to spend the money, especially like Musk even said that himself, like, you know, when interest rates make up the bigger chunk interest rates make up of the payment, the less demand there's going to be for the vehicles, especially when they cost as much as they do. But they definitely got a lot of things on the go. I wouldn't bet against them either, but I think they need economic activity to pick back up again, rates to go down. I mean, people to be willing to spend more money in terms of EV. I mean i said everybody on my street drives a tesla but i just got the volkswagen jetta yeah yeah me too my good old my good old jetta standard yeah it's uh in the top 500 cars most stolen in canada it's at the bottom of the list so

i'm just kidding it's not i don't think it's that much risk of getting stolen so especially because a lot of people don't know how to drive standards. I think you'd have trouble reselling it anyways. They couldn't get it off the driveway. That's it. No, I think that's always a good report. I think too, the last thing for Tesla is, you know, reality is, is they're facing intense competition from China, like BYD in particular. And, you know, I think that's why they're adjusting their pricing. But I think that is one thing that Elon said, like the China competition factor will be, you know, an issue for years to come. And I would not be surprised to see Western governments led by the

US starting to impose some pretty steep tariffs. Like I wouldn't be surprised if that starts happening in the US and also Germany for obvious reasons, because they have, you know, a big auto industry to protect those. So that'll be interesting, especially if Trump comes into office. I think he's been pretty outspoken with slapping tariffs on China specifically. So, you know, we don't want to get in politics, but the reality is, you know, we have a behemoth down south next to us in Canada, and we have to take notice when there's a presidential election, especially if there's going to be a big change in policy. Yep, absolutely.

As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission-free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly.

Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY, do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like

learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. Do you want to go on to Canadian Pacific? CP. Yes. So Canadian Pacific earnings, a little bit of canada here in the uh the earnings now cp their revenues were up two percent when factoring the kansas city southern acquisition

because the acquisition was closed around this time last year so i really like what they're doing is they're factoring that in so they're basically comparing as if the acquisition had already been made in q1 because if not clearly like i don't know what it would be but revenues would be up like 30 40 some ridiculous figure yeah or 55 yeah so i i mean that kind of shows you that i like really don't pay attention to those because i think you're not comparing apples to apples but so i do like that they present that they had strong u.s grain shipments that were partially offset by weaker canadian grain shipments due to weather higher pot ash export volume so uh you know nutrient nutrient investors that's probably

because of you right there yeah i'm gonna say it's mostly nutrient strong auto performance despite production holds strong international intermodal shipments but flat on the domestic side now intermodal is shipments that are they use more than one form of transportation so think of it as the large containers that would come from a ship then be put on to a train so on cp and then you know for the last kind of little bit goes on to a truck to be delivered at their destination so that's intermodal typically they'll just be using reusing keeping the goods in the same big container and then just transitioning them from the different modes of transportation shipment volumes were up one percent year over year. The operating ratio was a 400 basis point to 67.4%.

Now this, you compare operating expenses to revenue. So lower is better. It's kind of the opposite of operating margin where it measures operating profits versus revenue. So keep that in mind because sometimes people may see like, oh, it's getting up, but it's not a good thing. Earnings per share was up 3% when factoring the acquisition of KCS, Kansas City Southern. They saw good progress on most operating metrics, including average train speed and average terminal dwell. The average terminal dwell is the time where the trains actually aren't moving and

are at terminals. So if you can lower that, obviously it's better because it keeps moving to destination. They continue making progress, although slow towards reducing their debt. Their total debt peaked at $23.9 billion last year and now it's down to $22.7 billion. I mean, this is something that management said they would be looking to reduce. If I remember correctly, they're also kind of saying they won't be increasing the dividend for some time to focus on that debt reduction, which I think is the right strategy. I don't know about you, but I think that's the right strategy to do is reducing that debt.

Yeah. CP has never really been... Unlike uh canadian national who's i think they've raised a dividend for 27 or 28 straight years now cp's kind of been they don't really have a particular dividend strategy so they'll be you know they typically raise they have been an aristocrat before which is five plus years our aristocrat like leniency is is ridiculous here in canada i mean you got to raise it for five years and then you cannot raise it for two and still be in the index yeah it's ridiculous but cp is hitting that two-year mark so i'm pretty sure because they didn't raise last year they will be removed from the aristocrats index which i mean ultimately isn't a big deal it does remove

them from some you know index funds index funds, you know, that track particular aristocrats. But I mean, the debt reduction should be a priority at this point. And it's actually better that they're doing this rather than rather than raising the dividend. Yeah, yeah. And, you know, for the joint TCI's listeners, I have the chart here, you'll see it slowly coming off after peaking. And, I mean, I think to me that's just the right approach considering where interest rates are. Even if companies have fixed rate debt, at some point they'll have to renew. And like we've talked at the beginning, people can try to guess when interest rates will be coming down.

But the reality is Dan and I don't know. when interest rates will be coming down. But the reality is Dan and I don't know. Even the most prominent economists don't know because they've constantly been wrong. Some have probably been right. It's probably 50-50. But the reality is like people don't know. So one thing that you know is

you'll have to renew that debt. So why not, you know, do everything in your power to reduce it so if it is higher, then you're paying less interest when you renew on that debt. You'll still, you know, you'll still pay probably a decent amount of interest costs because interest rates will be higher, but it'll be more manageable. And if rates happen to be much lower, then you probably have more cash to invest elsewhere down the line. Like, I just don't see really the downside and you know being removed from certain little index like for a company as massive as cp like it won't move

the needle at all no no i mean this is in pretty stark contrast to what a company like bce is doing they oh no you're bringing it up i went there yeah they like They should be, at the absolute minimum, not raising the dividend and maybe dedicating some money towards debt, but they're not only not cutting it, they're continuing to raise the dividend despite some pretty dire financial numbers. But I mean, this is the best route to go, I think, for CP. I mean, they'll just get back to raising the dividend when they have room to do it. And I mean, as you mentioned, the Canadian Dividend Aristocrat Index is, yeah, it's not going to move the needle. Yeah.

And that's one thing that I don't understand about BCE is when they tried to justify this, they basically use the interest rate card. They're like, well, we anticipate that rates will come down. Well, how's that looking for you right now? So that's why I, yeah. And that's why I think, if I was a major shareholder of a company like that, I would be pushing to remove management.

Like that's the kind of statement that tells me like, okay, your strategy is hope. Hope is not a strategy. Like that is not what good management, good management plans for the worst. And if, you know, it happens to be better than that, then you're in a fantastic position. You probably can actually take advantage of it versus competitors that haven't. But anyways, I think we've talked a lot about it. Yeah, we can probably do a whole episode on BZ for sure. But yeah. Yeah, it gets my blood boiling.

But let's do, speaking of dividend cuts, do you want to talk about 3M? Yeah, so I thought 3M would be good to go over like a quick recap. I mean, not solely on an earnings basis, but just on the idea of historical dividend payments and how a dividend cut, it's never impossible, I guess, past dividend payments means that a cut is nearly impossible. I mean, not only is it always possible, it's not necessarily a bad thing. So they reported sales of $8 billion, which are down around 0.3%, and adjusted earnings per share of $2.39 are up double digits on the year. So the company completed its spinoff of Solventum, which is a healthcare company that makes products for wound care supplies, supplies for doctors and surgery, even products in the dental industry. And the reason why I mentioned that spinoff is they attributed this spinoff in kind of a way in terms of adjusting the dividend down. So like they would always say

as a result of the solventum spinoff or, you know, after the solventum spinoff there, you know, they state the company will, the dividend will make up 40% of adjusted free cash flows. And I mean, it's, it's kind of weird. Like, I don't know why that spinoff is, is impacting the, you know, the decision to cut the dividend, but they said that it's going to make up 40% of adjusted free cash flows moving forward with the opportunity for growth. So they're trailing 12-month free cash flows. Their payout ratio is around 65%. So on the surface, it doesn't look like a huge cut, but cash flows will likely be impacted moving forward from the spinoff. And I think that's why they're kind of integrating the two for, you know, to give an idea of how much cash flow they're going to pay moving forward. plus years of paying a dividend. Obviously, the 100 plus year streak of paying one continues on,

but the 60 plus years of dividend growth is effectively done now. But the thing here is, I mean, the market reacted positively to the dividend cut because the results were not all that good. And I know a lot of people, I hate to bring up BCE again, but they also say, if know, if BCE were to cut the dividend, the stock would tank, the stock would tank, like people would sell, which, you know, it's not necessarily the case at all times. But the other thing which kind of, you know, it was a bit weird is they kept, they didn't call it a cut. They kept calling it a reset. Like, come on, you're cutting the dividend. they kept calling it a reset like come on you're cutting the dividend sounds like yeah sounds like one of them has been in the front office of a nhl hockey team when they're they have to you know get younger it's like no no it's not a rebuild it's just a reset i think yeah a retool yeah yeah retool i think macbeth javane when he was gm of montreal canadians did uh did a couple of reset

or retools or whatever the term they were using. Instead of just being straight up and say like, okay, we're rebuilding. It's going to take time. It's like, it seems like diversion of that. Oh, yeah. The retool is a way to get people to continue those season's ticket renewals because it's going to turn around quick. But yeah, it was the reset versus the cut is a bit odd. I mean, the company is like, it's so,

the thing about it here is like, so the free cash flows, they covered the dividend. Like they more than covered the dividend. Like on a surface level, if you were to just dig into some like raw numbers on this company, you would look at the dividend and not necessarily feel that it needed to be cut, but I mean, they did it anyway.

So it's- What was it at again? Like 60%, something like that? Like I'm just looking at the chart here I have up for the viewers on Join TCI and that's kind of roughly, so the blue is the dividend and the orange is the net income

and then free cashflow is the red. So it seems like, yeah, even for both free cash flow and net income, they were probably around what, like 60% ish. 65%. Yeah. And they said on a forward basis, they're going to go down to 40%. I don't exactly know how big that spinoff will affect them. So you don't really know truly how much the dividend is getting cut because that will obviously take away some cash flow. So it'll be interesting as to what they decide to actually pay. I don't think they issued an actual number. They just said they're going to declare it next quarter. And I mean, the other interesting thing about this company is it's been in a ton

of lawsuits over the last while. It settled a few of of them so the one i looked up was was with public water suppliers so apparently they had like some chemicals bad chemicals in like fire water or something that like don't don't degrade so they got sued for that and then um combat arms ear plugs so the ear plugs were defective which pretty much led to like military people with permanent hearing damage from the earplugs not doing their job. Yeah. So they settled on both of those and they'll have to pay public water suppliers. I think it's like a 10 plus year payment for like $11 billion. And then the earplugs one is like $6 billion.

And I think they have more litigations that are currently in the process too but yeah it's it's been a rough go for uh for 3m over the last bit yeah they make a whole slew of different things i mean i know they're kind of known for like scotch tape and they had a lot of ppe equipment i think masks and stuff like that during the pandemic i think they did quite well because of it but it's also a very mature company. So you could have made a case easily that they could have kept the dividend, you know, keep it growing slowly. You know, payout ratio in the 65% for mature company like that is actually pretty sustainable. You know, for a tech company, I'd be a bit more concerned because tech is can is highly vulnerable to disruptions. Right. So having a payout ratio that that's high, but a company like that, you know, without knowing it very well. Yeah, it's a bit surprising. But again, I think you're right. The market at some point, you know, investors are not stupid. Like they'll see if a company's dividend is at risk and if management take the right decisions,

I think long-term, the shareholders will be rewarded. I think that's my firm belief is when management thinks long-term and not satisfying the market in a quarter-to-quarter basis, there tends to be good things. Yeah. The one thing about 3M is if you look to their actual top and bottom line growth, it's really not all that good. I mean, their revenue has only grown by 2.7% over a 10-year period. I mean, it's effectively flat and earnings are kind of the same. So I mean, know, if revenue is flat, you can only do so much to increase free cash flows. Like you need to, you know, you need to grow the top line eventually. And I mean, they just haven't grown all that well. And I mean,

I'm not exactly sure what they're going to do with the money coming out, you know, post dividend cut. But I mean, I think it was just important to highlight the fact that dividend cuts can happen from even, you know, 60 plus years of consecutive growth is a very long time to grow the dividend for 60 plus years and, you know, pay it for 100 plus. I mean, those are some really big numbers. And when you would combine those big numbers with, you know, payout ratios on the surface that don't look that bad, you know, this company cut the dividends. So it's never impossible. Yeah. And that's why I think I get into it sometimes with on

FinTwit with people that just look at dividend income and, you know, it's fine if that's a strategy you want to adopt. But my argument is always like, just make sure you understand the business and you know that the dividend is sustainable. Even if your goal is not to maximize total returns, it's fine. That's my goal. But if that's not your goal, that's okay. You know, a lot of them I've noticed is they don't even take a look at the payout ratio. No. Which I think to me, if you're a dividend investor and that's your main focus, I think it's probably right up there in terms of the most important metric to look at. You should be looking at more than that. Don't get me wrong. But if you're not

at least looking at the payout ratio, why are you investing in dividend stocks? You should not be at that point. You should just buy an index uh etf that follows the you know dividend aristocrats or whatever right at least you won't have to look at each business kind of company by company but that to me is the absolute minimum that you should be doing is making sure the payout ratio is sustainable and even from like you know even some specific businesses in terms of payout ratios like telecom And even from like, you know, even some specific businesses in terms of payout ratios, like telecom is a prime example, like earnings, like they have a ton of, of non cash expenses, which will hit earnings, but not cashflow. Right. So, I mean, even,

you know, standard payout ratios on some websites that just, you know, utilize earnings, they might, you might even need to go further than that and start to look at free cashflow and maybe even operating cashflow depending. But yeah, I mean, it's like you said, invest however you want. But I mean, I kind of like to educate people to the point and then they can do what they want. But it's a strategy. It's actually, I would say it's the most popular strategy in the country like there's so many uh dividend investors here it's kind of a it's definitely an ingrained mindset and primarily because we have a ton of blue chip dividend payers here in canada i mean if you look at the index that's pretty much all it is for the most part whereas you know in the

u.s you've got big tech just dominates none of them pay dividends yeah well they do yeah and i mean like and i get it look who look who doesn't like to get paid for doing nothing which is you know what a dividend is uh my point is always like make sure you still do your research because you know it's one thing to have that strategy and it's another to like actually do your proper research and picking the right companies instead of just identifying, you know, a high yielding company and just going based on the yield. Oftentimes there is a like a very good reason for that company to be yielding so high and it's usually not that great. So that's kind of my big point here. But anything else you want to talk about before we let people go

because i do have another recording to get to soon so nope that is it no that's it well i mean i think it was a fun episode uh you know it's always fun when earnings are coming in from companies we'll have probably another like four weeks of earnings solid four weeks so it'll be fun going forward do appreciate everyone listening to us if you haven't done so if you can give us a five-star review on apple podcast spotify or whichever platform you listen to you can find me at fiat underscore iceberg on twitter slash x you know our handles are in the description of the show. You can find that at stocktrades underscore CA. Yep. Yeah, perfect.

And stocktrades.ca, obviously. Yes. So you can find them on both platforms here. And yeah, I'd like to thank everyone for listening to us. And we'll be back next week with another one of these earnings and news episode. Yeah. Thanks for listening, everybody. The Canadian Investor Podcast should not be

construed as investment or financial advice. The host and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.