The Canadian Investor - Episode 15 - Two Canadian Agriculture Stocks, Interest Rate Cuts and more!

Episode Date: March 9, 2020

This week on The Canadian Investor Simon and Braden discuss Nutrien and AG Growth International. We also discuss the recent interest rate cuts from the Fed and the Bank of Canada. As always, we finish the episode with our Tip of the D’eh!Tickers of stocks mentioned : NTR.TO, AFN.TO, CWW.TO, ALA.TO, TD.TO, GFL.TO--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee omnystudio.com/listener for privacy information.

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So today we're going to be talking a bit more about what's going on with the market volatility. We'll look at two companies that were requested a few weeks ago and we'll finish with our tip of the day. So, Brayden, how's it going in Toronto? I'm good, man. Things are really good. No complaints on my end. It's a great time to have some cash aside like I did. RRSP season ended Monday. We're recording this Wednesday. We're recording this Wednesday.

And yeah, there's been a ton of volatility. But man, this gets me excited when stocks are trading at a little bit more attractive valuations. So yeah, all things are good. How about you, man? Oh, it's good. I've actually soloed this week. Victoria's gone in Florida for an actual business trip. So I'm just a single dad with my big mean dog that you heard a bit earlier dude that guy sounded scary yeah how big is he he's 15 pounds oh he's only 15 pounds yeah oh

he sounds like he's like 400 pounds i guess i know if people don't know his size like he'd be a great guard dog so man yesterday i met a 215 pound dog in toronto called the leon burger it's this thing was a bear i've never heard of that before i mean i've seen big dogs but nothing that big 215 pounds biggest dog i've ever seen in my entire life um but yeah enough about dogs so yeah the market's been really crazy this week actually actually last week. So I don't, I can't really recall any volatility like that. So last Friday, we had a big, big run up. And then, or was it Monday? I think no, it was Monday, this Monday. And then Tuesday, markets went down, even though the Fed announced a 50 basis point, so 0.5% interest rate cut. And then today, as news came out that Joe Biden is doing better in the U.S., the market went up another 4, 4.5%.

So it's really crazy what's going on. Have you been following that a bit? Yeah, I've been following it a little bit. The volatility is wild. And you know what I find really interesting about this kind of volatility is just because the market opens or starts really high or low does not dictate how it's going to finish. Like, I think it was Monday, stocks were trading at really, really low futures. The market was set for a really, really bad day. And then it finished up 2.5%.

And then Tuesday, it was like, man, it's crazy. But I don't even hardly watch it. But there is a lot of things to be concerned about. I talk about real concerns, which are supply chains that will affect businesses when China is not manufacturing parts. But yeah, all this volatility can be exciting if you want to buy dips. Yeah, I mean, it's really hard to understand a bit what's going on with the market. Obviously, there's a little piece of news and it'll fluctuate way up and down. In terms of the market, the interest rate cuts, I'm not quite sure, I'll be honest, the purpose of that. The interest rates were already really low. Usually, you'll want to cut

interest rates because you make money cheaper. Therefore, people and businesses will be able to borrow more easily, therefore helping the economy. But that's not the problem right now. The economy was going well until this virus showed up and then China started shutting down parts of their country, affecting supply chain, like you just said and you talked about on our previous episodes. So it seems like I'm still a bit confused about why the Fed actually did that. And of course, now, usually that's what happens. The Bank of Canada had to follow suit. So they

did the same thing over there. Yeah. So it was today that the Bank of Canada followed suit with a 0.5% cut. And man, the stock market stays undefeated. They just inject stimulus. It's kind of crazy. I agree with you on is this really needed? But hey, man, low interest rates are good. I own tons of stocks that benefit from really low interest rates. Infrastructure projects in particular benefit from low interest rates, the Brookfields of the world, infrastructure services on the engineering side. These companies do really, really well in low interest rate environments. So I mean, hey, I'm not going to complain, man. No, I know there's a bunch of businesses that will do well, like real estate REITs will

definitely do well. And for those who have a mortgage and have the option of refinancing, that's definitely something you should be on the lookout for, especially if you have a much higher rate. Even if you have to pay a penalty, obviously, depending what the penalty is, it might be worthwhile for you to look at refinancing options. That is a really good idea. Refinancing can be quite lucrative. And yes, it'll also help real estate. Okay, so let's talk about two companies that were requested from a listener. This listener wants to know about two agricultural stocks, AFN, which is AG Growth International, and Nutrien, which is the old merger between Potash and Agrium, which are two huge companies in Canada that form Nutrien. Was Nutrien like $45 billion in market cap right now? So it's pretty massive.

And we're going to talk about their take. I guess since I already have the floor, I will go ahead. I am no expert in either of these businesses, but I will give my quick take on them. I'll start with AG Growth. This company has not covered the dividend since 2010. I think that this company is completely being gripped by this dividend commitment that they made of $2.40 a share. It was $2.04 a share in 2009. 2010, they bumped it up to $2.40. And they have not been able to pay that with earnings since. So every single year since that day, they have paid out more than 100% of earnings to the dividend, which is the payout ratio. So the closest they got to covering it was 110% in that 10-year period. So they're being completely gripped

by this, but they're too humble or too proud or don't want to send negative signals to the market to cut the dividend. They should have slashed this thing a long time ago. I don't know how they're paying for it, probably fueled by debt. So this is a really, really big red flag for any dividend payer. The top line growth has been amazing. the top line growth has been amazing uh really really solid like high double digits like 20 30 revenue growth it's been a really solid story they haven't really been able to translate that into consistent earnings growth and then again this big big red flag of this payout ratio exceeding 100 they're being being completely gripped or choked, if you will, by this dividend payment commitment.

And then Nutrien, I think, is a decent place for your portfolio for investors looking for nice high dividend yields. And in 2018, the stock literally did nothing. I think it gained a percent and a half in 2018. Sorry, in 2019, while the rest of the market did upwards of 20%. So the stock has not done particularly well. It's just kind of bouncing around, mostly flat. Two big, massive companies in agricultural, Podash and Agriumrium both solid companies but here's the problem for me the company relies on macroeconomic factors because they are a commodity business they sell

potash and fertilizer for the agricultural industry which is fine but they are completely reliant on the price of that for earnings to go up. It's the exact same reason why I don't invest in gold miners or any resource miners in that case. Same reason why I don't invest in any commodity business. I'm a Canadian. I don't even own any energy, any oil and gas. So this is the kinds of business that I just don't like because the macroeconomic factor of what the commodity price completely dictates their business, their earnings power, and it is out of their control for the most part. I like companies that are able to dictate their future and grow free cash flow no matter what kind of

macroeconomic factors are happening. They're still able to do well and grow the business. And these companies just don't fit that bill. Yeah, so a lot of good points you made, Brayden. So I'll start off with, I think we share pretty much the same beliefs on these two companies. First of all, yeah, their commodity plays. It's going to be hard to predict where the commodities are going to go. If people want a better idea, just look at the price of oil, for example, which is another commodity play. It'll give you a good idea.

For AG Growth International, my issue with it is the same thing. So you guys have heard me before. I always look at a payout ratio, but I love to look at the payout ratio in terms of free cash flow. Just because that really is a good indicator, in my opinion, with the money coming in and out. Whereas I've said it before, an income statement, you'll have some non-cash items that are usually added back in the cash flow statement. Just looking at it, they haven't covered in terms of free cash flow since 2015, so in over five years. And honestly, if they want to grow, it might be just worthwhile for management to just bite the bullet and cut the dividend. Not necessarily eliminating the whole thing, but at least cut it so they can reinvest in the business, pay down their debt, because that's another issue with them is their balance sheet is quite levered, more levered than

pot, sorry, not potash, but nutrient. So those are two big red flags. I don't know the business overly well. I'll be honest, it's usually a sector I'm not overly interested in but I know the listener was asking based on yeah playing the growth in human population so of course as were more and more people in the world more people to feed so these play in terms of fertilizer I know AG growth has also some equipment for farming not the traditional equipment but storage as well again I'm just just some quick things that I saw reading a bit up on it in terms of nutrient I agree with Braden on that for me it would be actually a

pretty good play for those looking for income if they're close to retirement or retired you can put that in your TFSA. It's tax free, pays a pretty nice dividend. They've covered it for the past couple of years, I think, for the most part. I think not fully covered by free cash flow, but definitely still in a better financial position. They're also not as levered than AG Growth International. So that's a big plus as well for Nutrien. But if you're looking for really, really long-term and dividend, you're not looking to collect the dividend on a short-term basis,

there's probably some better place to be found, especially if the volatility continues in the next weeks, months, or years. You might find some really, really solid companies that will give you much better returns over the long term compared to them. So that's my take on them. If you last thing, and we actually didn't talk about this last one I'm going to bring up. If you're looking for a play a bit more on world population increasing you might want to look at some global water ETF so one of them the expense ratio is not super low at 0.66% it's CW w.to and it's basically an index of a bunch of worldwide

companies that do business with water in terms of commodity. So that's a play that I actually like a lot better than these two companies and gives you more exposure as well. 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb

or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make.ca forward slash host. That is airbnb.ca forward slash host. That is an interesting idea. And all those points I agree with fully. Nutrien, the dividend is nice. And correction, I just looked it up, is not $45 billion in market cap. It is $31 billion in market cap. Trades at five and a half times earnings, 1.2 times sales, 15.7 enterprise value to EBITDA. The company is relatively cheap when it comes to valuation. There is one other problem with this thing is that I just don't have enough data because if I look back on their statements, it's before the merger for the most

part. You're going to get like, it all of a sudden jumps massively in 2018 when the company's merged, of course. So I like a couple more years of data to really see a trend of how these companies have merged. If there are synergies actually happening between them being together, it is obviously really important for any merger and acquisition story. So that's another thing I'm looking for. It's the same thing where on Monday or actually it was yesterday, Tuesday morning, when GFL Environmental finally IPO'd. They've been trying to IPO for months now. They listed on the NYSE and they listed on the TSX, but I think it's really difficult to look at their statements that are on the SEC for their IPO because it's a mishmash of different companies right now as they acquire, take on a bunch of debt and continue to acquire that it's really hard to see what it looks like before 2018 when they took on $6 billion in debt. So, I mean, yeah, it's nice to be able to jump on IPOs and jump on these new companies, but you don't have to be quick to

make decisions. You can see a couple more years on the growth story, understand what's happening, and then make a decision from there. So I think that's really key. I like that you said AG has got to cut this dividend. Man, they have got to cut this dividend. I am no CEO or CFO of any company, I am no CEO or CFO of any company, but I don't know how their boardroom meetings have gone on for over 10 years without cutting the dividend. It baffles me. Complete mismanagement of money. I get it. I love dividends too, just like most people do, but this thing is just crippling them. I would be much happier if I owned the stock to see this thing slashed, which is an instant sell rule for me for the most part. But if I was holding this thing, I would be pretty happy if they slash this dividend. I mean, they don't have to completely cut it, but how about

down to like a 20% payout ratio where they can actually grow the business? Yeah. And what happens is oftentimes that's a good indication that management is not thinking long-term and more short-term basis because whenever a company slashes a dividend, what's going to happen is the stock is going to tank, at least for the short-term. A good example of that is AltaGas. So ALA.TO, they slashed a dividend I think a year and a half ago now. And their financial statement and position position it's actually looking much better than it used to so they might use much much much better oh yeah and I actually I invested in them when they slashed a dividend but one thing I did

was I listened closely to the conference call they could brought new management in the management had a plan going forward, really good plan. Obviously, there was some risk involved, but they had a very clear plan going forward. They wanted to sell some non-core asset. They wanted to pay down debt with that extra cash flow that they would starting to be able to invest a bit more in growth opportunities but also doing it in a kind of measured matter so i think that kind of approach probably if the i'm not familiar with their management and their um their c-suite but i don't know if they've been there for a long time but if they have it might be a good time for the board to start looking at bringing fresh blood in because our new blood because it's just it's be a good time for the board to start looking at bringing fresh blood in because our new blood, because it's just, it's not a good, a good thing to just be looking at the short term. Yeah, totally agreed. And they were doing so well up until about 2015 in terms of the stock.

And then it's just been not so hot since. So yeah, they definitely have to do something different. This dividend, I mean, I've said it 10 times already on this podcast, but they got to do something different. It looks like when I'm looking at Nutrien and AFN, these agricultural companies, it looks like I'm looking at oil and gas because it's all the same similar metrics. You're looking at relatively cheap valuations when it looks on earnings, modest growth, pretty much flatline earnings, flatline share performance or negatively performing shares, and really high payout ratios. So these are the kinds of things I get. They want to distribute cash to this shareholder, but I think most investors would rather a safe and predictable long-term dividend than fueling it by debt and mismanagement. yield. They've paid it forever. It's been such a good compounder over the last 20 years. But they're barely covering the dividend from an earnings perspective all the time. And it's just something I've never really understood. And I've never invested in these types of companies and

I've done really well by not doing it and dodged some major bullets by staying away from these red flags. So yeah, I mean, I think this is very, very similar. Yeah, definitely. And if anyone's really interested in investing in these type of businesses, you have to look at how they do on a long term basis, whether you're looking at this or oil, have a look at like, especially oil, if you're looking to invest, especially in producers, you'll want to look like hard at their financial statement, but over a long period of time and how they've done when prices were really low. And you'll usually want to stick to the really strong companies

if you're going to be investing in those sectors, because those are the companies that will make it through. The companies that have too much debt, they're too levered, they're not well managed. If prices of commodities go down, that's usually when you'll see them go bankrupt and to zero. All right, do we want to talk about any other companies, any other news in the market that you have on your mind?

I mean, for me, it's been interesting following the market almost on a daily basis with those, those wild swings. I still have a lot of cash on the sidelines. I haven't yet invested all that too much. I know it's been super volatile. But if you put things into perspective, and you started looking at the metrics were still in my opinion a bit overvalued and I still think people are not factoring in all the implications with what's going on with the coronavirus or the supply chain but also people spending less afraid of going out retail potentially being impacted by that I know I just saw today that they'll push out the release date for the new James Bond movie because they're afraid it's going to flop if

people are not going to theaters. So there's all these red flags going on yet the market, it's like one day they realize it, the next day it's like, okay, Joe Biden may win the U.S. Democratic selection. So, well, the market might as well go up 5%. So it's, I mean, I'm not trying to make sense of it. I have valuations in mind. I've said it before, companies that I'm looking at. And once they hit that ratio, I'm going to start, I have like a detailed plan cut into four investments for each

and I'll start dollar cost average based on that. I was about to say, this is why we dollar cost average and then you finish your sentence with it. This is why we dollar cost average, guys, seriously. Whether you contribute to your account monthly, quarterly, annually, whatever it may be, this is why we regularly invest in stocks because we want to ride out this volatility and take advantage of it in a way when they are trading lower. There are a lot of concerns over this thing. I get it. I get it.

Hopefully, it passes through. The outbreaks in certain countries are obviously a lot scarier than others. And even if the outbreak isn't that bad, there's a lot of fear in the public, right? So even if hardly anyone was sick, which is the case outside of China, like realistically, over 98% of cases are in China still as of today. But fear is still dominant. So if people are not going to the movie theater, in your example, because they're scared of said thing,

well, then that's going to affect actual business results. So that makes sense. A lot of airlines are pulling different routes. They usually make the cruise line. Yeah. Good luck getting anyone to go on cruises right now. They're going for real cheap.

Maybe I should go on a cruise, Simon. Well, yes, now that you're saying that. I'll be a value investor on my vacation. Yeah, well, my girlfriend and I, so she's actually my fiance, but I find the word like really weird. So I just still say girlfriend. Because you can't say it with your accent. Well, fiance, yeah uh it's just a way

i find it a little snobby in terms of weird i'll just say it with uh like a southern accent maybe fiance but never do that again please no but uh we're looking uh to get married in bali just her and i but we haven't uh bought the tickets just yet and we're planning to do it at the end of may but now with like everything going on we're kind of waiting and seeing where it's going at and yesterday i looked and we actually could get like pretty close to like premium economy uh overseas which is like awesome seats uh for like less than two thousand dollars round trip for each person which is amazing if you're flying to Asia. So that's something we're looking at,

keeping an eye on because we're like, it's probably going to be some pretty good deals coming up. That's a good point. And I bet there's more cases here in Toronto than in Bali. I mean, I have not looked at that data at all, but seriously, it's probably like, we're literally value investors at heart. Look at us trying to get cheap vacations. That're literally value investors at heart. Look at us

trying to get cheap vacations. That'll be beautiful though, man. Bali looks really, really nice. I will transition to the tip of the day, which is actually really timely with what we're talking about right now, which is do not buy a stock for its current dividend yield only. That should never be the thesis for why you are buying the stock. Cold hard stop. Sure, it may be one of the reasons or one of the factors that you're looking for income if you're into retirement and you want those yields through retirement. I get that. Real estate investment trusts are a great way to get high yields safely in your retirement. But if it is not a real estate investment trust

and it is a stock and you are buying it just for that high yield, I would rethink your whole analysis because one, we talked about the safety of the dividend and we want to buy really quality companies. And sometimes that yield is through the roof because the share price is so low. So as the share price goes low and the market hates it for one reason or another, maybe the business is rapidly declining. It's trading at cheap valuations. And then all of a sudden, the yield gets pumped up to 10, 14 energy stock at 16% yields. I mean, it would be great. You think, wow, I can make 16% of my money just by doing nothing. That is great. But that is not a good reason to only buy the stock just based on that. That's a great tip of the day.

And it's an easy mistake to make to strictly look at the dividend yield. I understand it can be very attractive, but at the same time, if a company's yielding a lot, usually there's some underlying issues with the company itself. Anytime you see something double digit, there should be some red flags there. But it's also important to compare with its industry peers. So if you have a tech

company that's yielding like 6%, 7%, it might not look that bad. But when you're comparing to other tech companies that are yielding 1%, 2%, 0.5%, then there's definitely some red flags coming up for that company compared to its peers. Always do your due diligence like Brayden and I always mention. Look at the payout ratio. I would recommend looking at it from an earnings perspective, but also from a free cash flow perspective. Make sure it's on solid grounds. I know it can be tempting, especially if you're looking for the extra income, you're retired or you're looking to retire soon. I know it can be tempting, especially if you're looking for the extra income, you're retired or you're looking to retire soon. I know dividend stocks can be a great alternative to low yielding government bonds or low savings account. That's a good approach to take. But

at the same time, you need to make your due diligence because there's nothing worse than counting on the dividend and then the company cuts it because they can no longer afford it. Either you no longer have a dividend or the dividend is much lower than it was and usually what is going to happen like I mentioned on the this episode a bit earlier is the stock is going to tank after that at least on a short-term basis when the company cuts it. So make sure you do your due diligence. If the yield is extremely high, there should be some red flags there,

and there's usually a good reason for that. 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. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and

vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at Airbnb.ca forward slash host. That is Airbnb.ca forward slash host. Couldn't agree more. If retirees are looking for high yields, I say, why not the big Canadian banks? I think Canadian banks are heavily undervalued.

TD is my favorite Canadian bank because the growth in the US. Achieving low double-digit earnings growth and revenue growth for a company that's trading at 10 PE, that's really, really attractive in my opinion. You're going to get that 4% or 5% yield at very safe 40% payout ratios compared to what you're going to find elsewhere with like 80% payout ratios. So that safety is there. I would say maybe just boring, I know, but the big Canadian banks are not a bad play at all. I am finding undervalued dividend growth stocks all the time for my Stratosphere Premium subscribers. Every month, I'm feeding that information to them.

I just had a position, raised their dividend 45% because earnings shot up 45%. They're just throwing that on the yield. They can because the payout ratio is at 14%. So why wouldn't they? They want to reward shareholders like that. And these are the kinds of things you want to own. Because if you own the stock, and maybe it only has a 1.5% yield, but they double that yield in a couple years, because they're growing earnings very quickly, your yield on cost is really, really exciting. So if 10 years out, you buy a bunch of dividend growth stocks now, you're going to be getting those really, really nice yield on costs in the future without having to sacrifice some of the risk that comes with buying really, really high yielders now.

some of the risk that comes with buying really, really high yielders now. And if they pull that off, the earnings grew, the company grew, you're going to have that share price performance. That's going to make up the bulk of your returns, of course, because these companies did so well. So that is my recommendation. Stay away from those scary 15% yielders. They might look attractive, but that should not be the single reason to buy a stock. Thank you guys so much for listening. We will see you guys next week. Get over to GetStockMarket.com. Keep supplying those questions.

We're getting through them. Thank you so much, guys. Bye-bye. The Canadian investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions. Thanks for listening to this episode of The Canadian Investor. To get a list of the top Canadian dividend stocks right now and other valuable investing resources, go to GetStockMarket.com.