The Canadian Investor - Episode 20 - The Stars Group, NFI Group and withholding taxes

Episode Date: April 1, 2020

In this episode, we answer a listener question about withholding tax for canadian investors. We then discuss the company that owns PokerStars and NFI Group.Tickers of stocks mentioned : NFI.TO, TSGI.TO--- Send in a voice message: https://anchor.fm/the-canadian-investor/messageSee 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. Live from the great white north, 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 Beranger. Welcome back to the Canadian Investor. I'm Simon Beranger, joined by my co-host, Brayden Dennis.

How's it going, Brayden, in social isolation or social distancing? Am I missing any terms here? Physical distancing. That's the new World Health Organization in distancing. That's the new World Health Organization and Health Canada. That's the new topic. So, man, I'm good. You know what? I'm good.

Week three, I'm just feeling pretty grateful overall. I'm able to work from home, do what I need to get done. My company provides a very valuable service, and I'm still able to do it from home, my position anyways. And a lot of people are out there, they have to be at work, whether it's providing an essential service or just to make ends meet. You know what? Those people, they have to do what they have to do. And I just feel really grateful. Although I am trapped inside 24-7, it's not so bad, man. It really is not so bad. As they say, it could always be worse. How are you doing?

I would say it's kind of the same. I don't live in an apartment building, so I do have a bit more space and we have a backyard. So it's great for the dog. I am also located right next to a grocery store so it's kind of nice I can actually look when it's not too busy go by and because they do limit the amount of people in at once so it I don't have to wait in line I just look outside and if there's no line I'll go and grab some stuff if I need anything but yeah I definitely grateful same for me I can keep doing my job from home. We're extremely busy. So I guess that's a good thing. So I don't think my

job will be impacted anytime soon. But I wanted to say a big thank you to the people that are working those essential services, whether it's firefighters, police officers, paramedics, doctors, nurses, people at grocery stores. Yeah, big thank you because I'm sure it's not easy for them to go to work every day. I hear you. Even my colleagues, I work in power generation, as many of you know. My colleagues can't think of a more essential service than keeping the lights on. And the ones that have to be out there making sure that the plant's operational and we're generating electricity. They're just my heroes right now, man, honestly.

So, yeah, I mean, all is good with me. It's been rainy as heck the last couple of days in Toronto, but I find it's actually easier for me because then I don't have to look outside and have that like FOMO of being out in the park and just enjoying park and just enjoying the spring activities. But it's all good, man. It's all good. So today, we're going to talk about a couple of things. The first one is withholding tax between TFSAs and RRSPs. And this topic is one that still confuses people like Simon and I. We look at the chart between all of the different listed ETFs and different listed stocks, depending on the country and what account they're in. And yeah, tax is a horribly boring subject, but we'll try to make it a little bit fun for you because this could have slightly big implications in your portfolio. Yeah, so we got that from a listener question. Someone gave us a great account, is it tax-free for capital gains on U.S. stocks or is there withholding tax on U.S. stock when there's a capital gain? So the answer is quite simple for that.

So there is only a withholding tax for U.S. listed stocks for dividends. for dividends. If you're investing for example in growth stocks that are US listed and then you make a profit you sell it then that is tax-free because it's a tax event in Canada. So as a rule of thumb in terms of actual stocks you want to hold dividend payers that are Canadian companies in your TFSA. If you want to hold US companies that's, but I would tend to stay more towards companies that are growth-oriented for U.S. stocks or pay a very small dividend. That way you don't get too much of that withholding tax taken from the U.S. Do you have any comments on that, Brayden? Yeah, no, I'm just, that's good that you shout out the uh the review the five-star

review on apple podcasts or spotify uh this was colin he's also one of my stratosphere premium members great guy and uh thanks for the shout out and yeah i mean this is a topic we should definitely cover i think you just said what the main takeaway is is is that US securities and foreign securities have exempt withholding tax on the dividend. That is the main part there. So if you hold a stock in your TFSA that is listed outside of Canada, you will trigger 15% withholding tax on the dividend, only the dividend. So your capital gains are going to be tax-free in the TFSA. You say, have a position, it goes up 50%, you sell it. You're not going to get taxed on that in a TFSA, up 50%, you sell it, you're not going to get taxed on that in a TFSA, whether it's listed in Canada or in the US. However, if it pays a dividend and say it's a juicy 5% yielder, 4% bank or energy

stock, then you're going to get 15% taken right off the top on the dividend there. So it's something to consider. And the way I look at it is I buy dividend growth stocks and it won't make much of a difference right now because 15% on a small yield in the grand scheme of things, like really not a huge, huge deal. But later this compounding machine that I'm creating with dividend growth stocks, later when my yield on cost is very nice, then it'll start making a big difference for me. So I'm thinking long term, just like the rest of my portfolio, and I'm keeping those securities listed in my RRSP. Plus, you can get a nice tax break on your income too. Yeah, exactly. So if you want to invest in

US listed stocks, and we'll get into the ETF topic in a little bit So if you want to invest in U.S. listed stocks, and we'll get into the ETF topic in a little bit, if you want to invest in U.S. listed stock that pay a dividend, then I would definitely, like Brayden said, I would keep those in your RRSP. That way you really maximize the compounding effect. Where it gets a little more complicated, and've brit and i were talking about this before actually starting to record is etfs so etfs it gets a bit more complicated um we won't go into too much detail because like we're even a bit confused ourselves um dude every time i think i get this topic with the etfs and where they're listed and if they're in Canadian dollars or not I think I get it and I don't yeah yeah no exactly so I mean the one thing I would say that is pretty clear is that if you want to invest in US listed stock through an ETF you're better off buying that ETF listed in the US in an RRSP. So there you will minimize your

actual taxes. If you start buying that in your TFSA, even if it's a Canadian listed ETF that invests in US or foreign stocks, that's where you can get a lot of withholding taxes and we'll actually put in the show notes there's a great like i think it's a six pager from blackrock that gives you a bunch of different situation and the taxes that it can't trigger depending if you have it in tfsa rsp riff i think they even go through the non-taxable uh sorry the regular taxable accounts right yeah that black lock that black rock resource is really nice um and black rocks great company by the way side note um and this is a good guide so if you want to link to that in the show notes that would be very helpful and i'm looking at it. And this spark notes that you need to know are outside of Canada

pays a dividend, you will trigger withholding tax on the dividend only in an RSP and a TFSA. in an RSP, in a TFSA. Sorry, sorry, in a TFSA. And if you own a stock like Alphabet, for instance, the parent company of Google, and you own it in a TFSA, since they don't pay a dividend, no harm, no foul. That's fine. That's completely fine. So that's the main too long, didn't read right there is what you need to know. So Simon, tax, boring. Let's talk about something more exciting. Yeah, exactly. And just before we move on to our next subject, before you invest in ETFs, whatever the account, I recommend just look in our show notes, look at that sheet, and you'll have a better idea.

It has a table with all the different situations. So at least you won't just listen to Brayden and I being slightly confused on the subject. You'll actually get the information from a company that's well established. And that's pretty much a big part of their business ETFs. So now the next subject. So I guess we'll start with the STARS Group. And then we can talk about NFI. Let's do it. Okay. So I'm going to start with uh the stars group and then we can talk about nfi let's do it okay so i'm gonna start off with the stars group so um stars group they're best known

for poker stars uh so if some of you uh play online poker you might be familiar with poker stars which is the largest website uh for online poker there's other ones there's been some throughout the years that closed up shop or were purchased. PokerStars started, I think, early in the 2000s. I think it was PokerStars and PartyPoker at the time, the two biggest. And then PokerStars really quickly became the biggest one. There were some kind of shady business. Some people might be familiar in 2011 or 2012 about Black Friday, PokerStars and FoldTiltPoker doing business in the States when they were not technically supposed to and then being shut down for their US business by the

district attorney over there. Eventually, they came to a settlement poker stars purchased the assets of full tilt poker and integrated it through their website and a lot of frozen funds were unlocked for players so i actually had money myself on full tilt poker i had like three grand us it took me i think three four years until i was able to to get access to that money come on really oh yeah i'm not this literally hit you yeah yeah it did no i thought for a while i would never never see that money never see that again yeah interesting so there's a few things about poker stars um look at their financial statements you'll see their um their income has been pretty good it's been up and down a little bit but uh they've been uh free cash flow positive for a while

now. So it does look good from that perspective. I know they've done a bunch of acquisitions in the past years to get more present in online gambling. And the one thing that you have to keep in mind is they actually have a merger agreement or actually they'll be purchased by flutter entertainment which is a uk-based company um if some of you are familiar with betfair they're the owner of betfair so it's online gambling so they'll become i believe the largest online gambling company worldwide and they're really eyeing i know the u.s market last year was basically, it went to the Supreme Court to say that it was unconstitutional, that gambling was illegal in the States. So now I think state by state, they're making that legal. So they have a big eye on that market. So just be aware, the merger is

actually Flutter Entertainment will be giving one of their share for about 4.5 shares of the Stars group. And from what I read, it's anticipated that it'll close in Q3 of 2020. And they actually just got a few days ago, the green light from the competition body in the UK to go ahead with the acquisition. So just make sure you keep that in mind. In terms of company and business model, it's hard to not think that they're going to have a bit of a tailwind right now with what's going on with COVID-19. I mean, I do still play online poker. And I've noticed that the volume of player has gone way, way up in the past like two, three weeks, a lot of Europeans are online playing

the tournaments the price pools are way bigger than they used to so it's definitely it could be a tailwind for them but then you kind of compensate with people having less money to spend so i'm not sure if it'll kind of stay like that for a long time um do you have any comments brandon sorry i've been going on for a little bit. 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. No, it's good, man. You're just the absolute weapon on the poker table, so I'll leave it to you. I know that you've always been big into poker. I personally love the game. I think it's really fun. I don't think my poker face is very good, but I do enjoy the game. I've never played it online but i could see how that could be fun and yeah talk about tailwinds not even just the covid thing just all of the regulations

especially with sports betting loosening up in the states a lot last season um i know me and my buddies just love betting on nfl stuff like that. It's fun. Even though if it's just a couple bucks, get some skin in the game, and it's a good time. Have you ever tried DraftKings? I've never tried it. Yeah, yeah, yeah, yeah. I mean, there's definitely better odds than DraftKings in terms of like –

but it's a game. It's fun, right? And you get to go up against your buddies. And, yeah, it's a game. It's fun, right? And you get to go up against your buddies. And yeah, it's good. So there's a lot of fragmentation in online betting. So I look at a free cash flow generator like the Stars Group or the company that's looking to take them over from the UK. And I don't know the sector well, but I do know that they have a lot of tailwinds and it is very fragmented.

I do know that. There could be a lot of acquisitions happening in the next couple of years. With this name included, it looks like they might get eaten up and become part of a bigger conglomerate. and become a part of a bigger conglomerate. But I have a real appreciation in Canada in particular for some really, really good acquisition stories that grow free cash flow, take that free cash flow, rinse and repeat with acquisitions. Last episode, we talked about a whole bunch of them in the of them in the uh enterprise software space i look at this the same way as a ton of different ton of fragmentation and companies like this with deep pockets and large generation of free cash flow being able to take advantage of that yeah and they're a fairly not a small company either so they're no not at all right Yeah, it's eight point seven and a

half. Yeah. Oh, yeah. OK. I have eight point three, but it could be their dual listed on TSX and in the US. And it also went up like 11 percent today. So that could be that could be some delayed data. I think I'm looking at the not today included data. OK, that's probably it. And in terms of the revenue model, I'm not as familiar with like gambling. I know it's all about odds. And obviously, the house usually will edge your bets. But in terms of their main or poker stars, in terms of poker, they actually they don't really take money from players in terms like you're not playing against poker stars poker stars what they get is actually the rate so every time you play a tournament every time you play a cash game

there's a small cost that they charge you for playing so that's how they make their money so for them the more volume there is the more money they will make and i would have to assume that their cost stays relatively fixed regardless of the amount of players maybe they need a bit more customer service reps and stuff like that but yeah it's i mean it is a good business model the one thing i would say make sure you do your research i'm not sure if they'll be delisted altogether from the tsx and the New York Stock Exchange because the Flutter Entertainment is listed in the UK. The other thing is governance has traditionally been a bit of a challenge for those type of companies. So they're not, in the past at least, there's been

some iffy things that have been done by these, at least uh the stars group in terms of their management so keep that in mind but i think that kind of provides most of what i have to say on on the stars group what a shocker a casino online gambling company has governance issues whoa shocker that is so that is uh ticker tsgi and the company is the stars group inc most known for their poker stars platform so um if you want to know more about poker just hit up simon man this guy's a guy's a weapon on the table all right let's talk about the next company nfi the bus electric bus manufacturer out of winnipeg canada ticker n NFI. And this is a company that I've written about tons. I've provided little graphics about on my Instagram, Stratosphere Investing.

Follow me, of course. And it's less than a billion in market cap as of today. They have taken a massive hit. Production is completely stopped because of COVID and they cut the dividend. So all of those things are like, wow, this is a horrible story. I actually think this is not a horrible thing for NFI because I believe that they have been gripped by this dividend. As a fast-growing, fairly small company in a space that's growing really fast, like electric buses getting big contracts from municipalities, they were paying out way too much cash flow to the dividend. They were yielding 5% before they cut this, and this was before their stock dropped off in a massive amount. So there was no reason for them to be paying out 80% of earnings for the dividend. As a growth stock, I don't want them to be. And they were increasing the payouts a lot, which is really nice to see. But it's like, you don't need to do that. So I'm just wondering why they were doing that. And then everyone was concerned about their balance sheet. And then it feels like six months

ago, no one talked about balance sheets except for us. And now everyone's talking about balance sheets. I have group chats with some of my buddies, guys that I've never heard talk about balance sheets are talking about balance sheets. So is this the return of the balance sheet? I think so. Because now it's like the first check, how much cash do they have on hand if they're not producing any buses and how many current liabilities and interest payments, like what do they have to meet in terms of obligations in the next six months? So this is becoming a huge question. I mean, nfi is beaten up a lot right now and for good reason and it's been getting beat up for a couple years now so i think this dividend was a

huge huge problem for them uh because they're just paying it way too much cash for it when they need to grow and focus on the business so that's my that's my take on NFI. Yeah, I would definitely agree with that. I mean, I was familiar with them. My main thing with them was always the total liabilities. So there's been an increase, especially in the past few years. I'm not quite sure if they did some acquisitions or exactly the reason behind it. But you see, especially their long-term debt went way up and if you look at their income statement they pay quite a bit in interest as

well so that's another issue i have i mean i did write an article on the for your blog or for your website recently about the things you need to look at when you want to invest in business um during these times during uh you know when there's a lot of uncertainty they've been paying it out to the dividend that the business has a lot of cash on hand especially when you know production might stop sales might go to a complete standstill so you have no revenue coming in so you want to see until when the company can actually sustain like stay alive basically that's So you want to see until when the company can actually sustain, like stay alive, basically. That's what you want to assess. Can it actually stay alive if there's almost no revenue coming in? So I mean, I don't know with this company, I'll be honest, I really don't know. The main thing I

see that's alarming me is they do not have a lot of cash on the balance sheet. That's the first thing. And they have a lot of inventory. So that's another issue. Yeah. Yeah. And the inventory is way high. I know they had production issues, I think the past year. I'm not sure if it was related to the supply chain, but I know it started before the whole COVID-19 way before I think all of 2019 I remember reading they had some production issues and then you add that with a complete lockdown yeah I mean I would not personally touch it but you know make sure you do your due diligence if you do want to yeah put some money in there. Probably better off playing poker on PokerSars. 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. That is Airbnb.ca forward slash host. Of course. Logically, right? That's what you should do. Yeah, exactly. Yeah, no, this stock just had, you know, as soon as things were starting to recover for them in 2018 and 2019, I watched it closely because it always scored so highly on my metrics because the growth was so impressive and the stock was so cheap. So that usually triggers good math when you're

looking at metrics. And I never entered the stock and I advise that people be very careful with it because of the safety of it. For the reasons that I've already mentioned, the sketchy balance sheet, it because of the safety of it. For the reasons that I've already mentioned, the sketchy balance sheet, and I think that has all been driven from the dividend payouts that they're just being gripped by. I don't know what the incentive was for them to keep raising it and pay out so much when they're in their growth phase, especially for a clean technology like electric buses that is just getting started. It just seems so bizarre to me. So that's why I always stayed away from it. And thank God. It's like every time I thought, okay, it can't get any cheaper. It got way cheaper. Even before the COVID thing and they stopped,

you know, completely stopped production. I thought, holy, this thing can't go any lower. It's so cheap. And then boom, 80% right off the top. So it's just wild to see. And sometimes this is just a reminder that things can always get worse. It can always get worse. And you need to be able to be aware of that you need to be able to stomach that and know how you're going to react if it's going to be you absolutely liquidate your entire portfolio then that's probably not a good reaction you need to be aware of how you're going to react so we've talked about this self-awareness thing before yeah yeah totally agree with that um did you have anything else on nfi i think that kind of covers it uh for me at least yeah i know it does it's uh it's one that i'll continue to watch because

it has it's in the it's in the right space and it has a very uh good position in the electric bus market between their subsidiaries across North America. So it's not just a Canadian player. It is a big, big player south of the border, which is something that I really like and have an appreciation for small cap growth companies out of Canada that have big North American business, not just business in Canada. So I'll keep watching it. I think it could be a turnaround story now that they've been given the okay to cut the dividend. Because just like these energy companies, cut the dividend now,

figure out your finances in the meantime as oil drops off a cliff per barrel, just like this one not being able to produce buses figure that stuff out now while everything's being reset you know it's not like the analysts are going to absolutely crush you because you're cutting dividends right now because it's almost expected so nfi should use this time to figure it out uh and and i'm going to keep watching it because i think it could be a promising turnaround but it still needs some more time for that to develop. Yeah, that sounds like a good plan. Do you have a tip of the day?

No, we didn't really. Yeah, we didn't really talk about it, but we can think about it. And for our next recording this week, we can come up with a good one. Sure thing. Yeah, I think the two of us, before we started recording, we're trying to get our head wrapped around boring tax implications. But hey, it's important. Tax implications are important not only in the fees, total crap, but you lose control entirely. You go hands off. And when I think about tax, these are things you can control.

You can't control what's going to happen with the market, but you can strategize how you're going to be efficient with your tax. So it is important and it can be complicated, but once you get it, you kind of understand that US stocks listed should be in an RRSP if you do not want to pay withholding tax on the dividend. That is the number one thing you need to remember. Do you have anything else to add there, Simon? No, I would say for our tip of the day, just look at the withholding tax reference document that will be in the show notes.

That's our tip of the day. Before you invest in an ETF, look at that tax document so you understand the withholding taxes. That's a good idea. BlackRock provides lots of really cool research, as they should, as a huge, huge asset manager and a very interesting stock that is definitely on my radar right now. They are dominating the ETF game, them and Vanguard. It's kind of a duopoly

for the most part in the non-niche ETF world. So I think that ETFs are just getting started as the DIY investing revolution really, really takes off. It's still in its infancy, in my honest opinion, even when there's so much cash going into ETFs right now, I still think it's ground level and this company will only benefit from that. Thank you for listening to this episode of The Canadian Investor. If you guys want access to some really good dividend growth screeners, go to getstopmarket.com. I know Brayden recently updated those, so it's worth to have a look. If you haven't done so already, it would be great if you guys could give us

a five-star review on the platform of your choice or the platform you're listening to us right now. The reason for that is it helps us reach more people. So when people search for Canadian investing podcast or an investing podcast, the more reviews we have, the more likely they are to find us and the more likely we are to find to reach more Canadians, more international listeners. Hopefully we actually have international listeners that are listening to us. So if you guys have a chance to do that, that would be great. And if you want to ask us a question in that review, we'll be more than happy to talk about it on one of our upcoming podcasts.

Like I mentioned it before, we'll try our best to have two a week with everything that's going on with the markets. We might not be super consistent on which day it comes out, but we'll do our best to have two episodes a week, at least for the foreseeable future. Thanks again for listening, and stay tuned for the next episode later this week. 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.