This is my 100th column over the past six years for Grainews. I hope you’ve enjoyed the wit and wisdom, albeit limited, and that my musings helped your off-farm investing success. This is also the first column written following the May 15 anniversary of the Titanium Strength Portfolio (TSP). At its outset, the purpose was to demonstrate portfolio management with limited effort. Re-investment of accumulated dividends were the only decisions made after selecting the original stocks.
As of May 15, 2024, the portfolio was up a respectable 74.1 per cent. It is on track to double within 10 years, my original modest targeted performance. Much market tumult has occurred over the past six years, including three S&P 500 bear markets, COVID-19 and one of the most aggressive interest rate hiking cycles on record. Yet the portfolio continues to plug away.
The TSP would have performed better with some technology exposure, which was a significant oversight. However, the goal wasn’t to maximize performance, but rather to demonstrate solid performance with minimum effort. Over a similar timeframe my (now-discontinued) newsletter portfolio gained over 200 per cent. That portfolio included stocks and options in combination and entailed significantly more work.
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A couple of factors negatively impacting performance were the overall weak Canadian economy and stock market, and the underperformance of dividend value stocks versus growth stocks. What goes around comes around — and there will come a time we experience reversion to the mean.
There is, however, the possibility that value stocks become value traps. That is, they look cheap but face such headwinds they become permanently impaired. This can occur with declining sales or profitability.
Second thoughts
I have long considered Canadian banks and telcos as foundational blocks for Canadian portfolios, especially in RRSPs and TFSAs where income is protected from the taxman. Performance over the past decade has me questioning this status as reliable performers.
While both are essential industries, they are also heavily regulated, with government policy influencing profitability. Recall the 2021 election promise of an excess profit tax on banks.
I studied the profitability of these two sectors over the past decade. Canada has three national telcos: BCE, Telus and Rogers. Return on equity (ROE) is the most used profitability metric, representing the profit divided by the equity or book value of the company. In 2014 the average ROE of the three telcos was 20.1 per cent. In 2023, the average ROE had declined dramatically to 7.8 per cent, and it has fallen further in the current fiscal year. I really question investing in any company with an ROE below 10.
Ten years ago, the average share price of the three telcos was $36.84, and currently it is $37.76. The only return over the decade has been dividends. Much of the blame for the recent share price decline has been placed on increasing interest rates, but I would suggest blame is misplaced, with declining profitability being the main culprit. I don’t know all the factors behind the scenes but am confident one factor is regulation. When BCE responded to a government regulatory decision with job cuts, our prime minister referred to it as a “garbage decision.” I beg to differ, as any company facing the level of profit destruction that the telcos have faced needs to make tough decisions.
The banking sector is slightly more nuanced as one of the major five banks has performed significantly better than the others. Four national banks — BMO, Scotiabank, CIBC and TD — averaged an ROE of 14.9 per cent in 2014, and 8.6 per cent in 2023, with a marginal recovery so far in 2024. The average share price of these four was $62.54 a decade ago and is currently $72.33, with once again the main return to shareholders being just dividends.
RBC’s ROE was down more modestly, from 17.1 per cent in 2014 to 13.3 last year. Its share price has grown from $77.83 to $149.44, demonstrating once again the importance of profitability metrics, not just valuation metrics, on overall share performance. Luckily (or skillfully) I selected RBC as the bank in the TSP, and it is our largest personal holding.
I’m confident you have yet to shed a tear over the banks and telcos, yet virtually every Canadian owns shares in these companies through mutual funds, ETFs or pension plans. Declining profitability also often leads to declining service levels — something I have already experienced with telcos.
While I have not yet sold shares in these companies, contrary to my normal “buy cheap” behaviour, I plan no further purchases until financial performance shows signs of improving. I am slightly more optimistic with banks than telcos, but only in time will we know.
