...take a break

More Dividend Cuts?

It seems like the market is expecting either really, really bad quarterly results from the Canadian banks or it is expecting the banks to cut their dividends.

What am I talking about? Let's take a look at the current annual dividend payouts of the top 5 Canadian Banks:
Royal Bank: $2.00
TD Canada Trust: $2.44
Scotiabank: $1.96
Bank of Montreal: $2.80
CIBC: $3.48

Ok, now what are the stocks trading at (as of 9:50am February 20, 2009):
Royal Bank: $26.75
TD CanadaTrust: $33.46
Scotiabank: $25.23
Bank of Montreal: $24.96
CIBC: $39.43

That gives us yields of:
Royal Bank: 7.48%
TD Canada Trust: 7.29%
Scotiabank: 7.74%
Bank of Montreal: 11.21% (!)
CIBC: 8.83%

Prime is currently at 3% and I think has a fairly good chance of moving to 2.75% on March 3 when the Bank of Canada sets the target for the overnight rate, provided the banks pass a BoC rate cut along to consumers. So currently the spread between the prime rate and the yield on Canadian banks at a minimum of 4.29% and as high as 8.21%.

So the question is does the market have it right and will we see at least one Canadian bank cut their dividend (I'm looking at you BMO) or is the market just totally out to lunch? One way to get a feel for that is to take a look at the payout ratios of the banks and their payout ratio targets. The payout ratio is the percent of income the bank uses to fund the dividend. The Canadian banks vary in their target payout ratios but their target ranges fall in the 35%-55% range. Based on Q1 2009 earnings estimates (as predicted by TD Newcrest) here's what the target payout ratio ranges and the projected Q1 2009 payout ratio will be:

Royal Bank: Target: 40%-50%, Expected Q1 2009: 56% (based on 90 cents/share earnings)
TD Canada Trust: Target: 35%-45% Expected Q1 2009: 47% (based on $1.49/share earnings, which isn't a TD Newcrest estimate because they have a conflict in covering their parent)
Scotiabank: Target: 35%-45% Expected Q1 2009: 54% (based on 90 cents/share earnings)
Bank of Montreal: Target: 45%-55% Expected Q1 2009: 67% (based on $1.05/share earnings)
CIBC: Target: 40%-50% Expected Q1 2009: 58% (based on $1.50/share earnings)

So it looks like all the banks are going to be outside their target payout ratio range with TD Canada Trust being the closest and BMO being the furthest from their range. I would expect that a bank that is within up to 5% of their payout ratio target wouldn't want to move their dividend at all but a bank like BMO that could be almost 12% outside their range (and their range is the highest of all the banks) might want to make some adjustments.

Now the question is what would it take to get their payout ratio back into their target range? Well 55% of $1.05 is 57.75 cents. They are currently paying out $2.80 a year or 70 cents a quarter so a move to 57.75 cents would be a 17.5% reduction. Of course my bet would be that if they did decide to cut the dividend they would give themselves way more room than just hitting the top end of their target range. After all, if you are going to disappoint investors by cutting the dividend at all you might as well give yourself some breathing room and an opportunity to really increase the dividend once earnings start to recover. So if and I really mean if BMO does decide to cut their dividend I would expect to see a 20 or 21 cent per quarter reduction which would be about a 30% drop (21 cents/ 70 cents = 30%). That would put them in the low end of their target payout ratio range (at around 46%) and it would also put their yield down in the 7.85% range (based on the $24.96 price listed above) which isn't too far off the other banks.

So out of all the banks I think that BMO is in the worst shape with respect to dividend payout ratios vs. their target payout ratios and I think that if any bank has a slim chance of cutting their dividend it will be BMO. Even if BMO does cut their dividend I think they will cut it by at most around 30% (which will give them lots of room to increase their dividend when earnings finally start recovering) and the yield of the stock will fall roughly in-line with the other banks at around 7.85% based on a stock price in the high $24 dollar range. I'll take an almost 5% above prime yield from a Canadian Bank after a dividend cut thank you very much.

In short, I don't see too much more downside in Canadian bank stocks based on the lows that they hit this morning. The earnings releases for the big 5 Canadian banks are scheduled to take place of the next couple of weeks ( starting on Wednesday next week and going into the first week of March). We could be in for an interesting ride on the bank stocks.
category: Personal Finance posted on Friday February 20, 2009 at 10:52:05 by: 0xCC

No Games Today

This morning the Bank of Canada announced it was lowering the overnight target rate by 50 basis points (0.5%) to 1.0%, a level not seen since the summer of 1958 (as a side note it may be interesting to take a look at what happened in the economy and markets in the 10-15 years after that to get some insight into what we may be looking at now). For the first time in months the Canadian banks lowered their prime rate by the same 50 basis points within minutes of the Bank of Canada's announcement. The banks still haven't passed on all the interest rate cuts since December 2007 to consumers (they are still 0.25% behind) but at least this time they didn't hold anything back.

The Bank of Canada made some interesting comments in their statement and they have Monetary Policy Statement due out on January 22 that could be even more interesting. I don't know how often this happens but they actually used the word recession in their statement saying that "Major advanced economies, including Canada's, are now in recession". They also say they are expecting the Canadian economy to shrink in 2009 by 1.2% "Canada's economy is projected to contract through mid-2009, with real GDP dropping by 1.2 per cent this year on an annual average basis.". For 2010 they are looking for real GDP growth of 3.8%. The Bank isn't concerned about inflation right now and in fact expects some deflation in the next 6 months or so because energy prices have come down so far from a year ago (remember $1.30/litre gas last summer compared to the 78-80 cent/litre we are seeing right now?).

So my question is, does anyone know of a good resource (book, website, whatever) that goes through historic economic conditions? I would really like to look into what happened in the 1955-1985 (or maybe 1987) time period in terms of the economy and the markets to see if there can be any lessons learned for what we may be seeing over the next 10-20 years.
category: Personal Finance posted on Tuesday January 20, 2009 at 12:39:40 by: 0xCC

New Year's Resolutions - Expense Tracking

Now that we are almost three weeks into the new year I suspect the enthusiasm for some of the resolutions made three weeks ago is starting to wane. I hope I can put some of that enthusiasm back into some personal finance related resolutions.

The first resolution that I want to discuss is simple expense tracking. I believe that expense tracking provides the foundation of any personal finance planning. Without having a solid understanding of your cash flows, how much money comes in and where that money seems to disappear to so quickly, there isn't a context to frame all the major aspects of financial planning.

The first thing that expense tracking does is point out where money is being wasted. Are you spending $80/month on a cell phone contract for a cell phone that you only use for emergencies? Is your habit of getting a coffee on the way into work every morning (when you could drink the free coffee at work) in addition to buying lunch everyday showing up as a $100/week cash withdrawal (that's a little more than $400/month)? Is that gym membership that you never use (there's another resolution) really worth that $60/month? Do you keep on paying it hoping you will feel guilty enough to actually go to the gym? Are you spending over $100/month for cable/satellite TV? How many of those extra channels (that all seem to be running episodes of the same shows) do you actually watch? I know you got that HDTV for Christmas last year but do you really need to pay that $12/month to rent the HD decoder box thing? For that price you could get a 1-DVD at a time unlimited rental plan with Zip.ca (you pay $11/month and like Netflix they mail you DVDs that you want to see and you mail them back when you are done and then get the next one on your list).

The second thing that expense tracking does is allow us to realistically estimate those once-in-a-while-but-not-every-month sort of expenses. How much did you spend on car maintenance last year? How about the year before that? Were those expenses surprises when you actually had to shell out the money for them? I'd be willing to bet that from year to year your car maintenance costs are fairly consistent (except in the year where your car crosses the 100,000km odometer mark, that year will be a little more expensive). How about gas for the car? Did your gas expenses go up last year? Have they gone down in the last couple of months? Do you expect those to go up again as we get closer to the summer driving season?

The most important thing that expense tracking does is give you information. The information that you get from tracking expenses is priceless. What happens if your spouse gets laid off? That emergency fund that you have put a little bit of money in (you have started a TFSA for that, right?), how many months of living expenses will that cover? What are the first things that you could cut out of your monthly expenses if your household income dropped for some reason? Long-term expense tracking (over 5 or more years) should start to give you good insight into what your expenses might look like as you approach financial independence. If you track your expenses you should get a very good feeling for when you will actually achieve financial independence. Once your investments start generating greater absolute returns than your annual expenses then depending on the stability of those returns that is pretty much the definition of financial independence (which some people like to call retirement but there isn't anything that says that financial independence means stopping work although it could).

So tracking expenses seems like a daunting task, doesn't it? You have to go out and buy some software and then spend hours in front of the computer trying to figure out how the software works and entering in all your bills. Or you have to save all your receipts and plug all the exact amounts into some software that comes up with some strange numbers that you don't understand. It doesn't have to be that complicated. I have a made up a fairly simple spreadsheet that you can get from here: Expense Tracking Spreadsheet. There are pre-defined categories for spending categories in that spreadsheet which you can modify to suit your situation. The numbers that you enter in that spreadsheet don't have to be exact. If you start by just trying to track to the nearest ten or twenty dollars what you are spending for one month I think you will be able to find some areas that you could adjust your spending slightly. At the very least after one month of expense tracking you will have a better idea of where your money seems to go so quickly. You will have the beginnings of the foundation you need for planning out your personal finances.
category: Personal Finance posted on Monday January 19, 2009 at 13:41:07 by: 0xCC

Happy New Year

Yes, I know it is a little bit late. I've been trying to set up some new routines in order to implement some 2009 resolutions and unfortunately those haven't been leaving much time for posting here.

I wanted to do a quick little recap of how things went through the end of 2008 and how things have started to go for 2009.

So for 2008 our portfolio had a return of right around -38%. Lovely. The TSX was down around 35% so we underperformed the TSX a little bit, the S&P 500 was down around 38% as well so we weren't too far off that. and the Dow was down around 33%-34%. Things looked pretty good from an investment income perspective though (despite some issues as we approached the end of the year). Our total investment income grew by a little more than 30% in 2008 (compared to 2007) and the overall increase in investment income was a little over 5% (compared to what we would have received if there were no dividend increase over the year). That 5% growth in investment income was a little less than I was hoping for, it was on track to be just over 9% until the energy companies started cutting their distributions late in the year. If the BCE deal had gone through at the full $42.75 per share purchase price we would have beat the TSX over the year. There was a silver lining to that deal falling through though. BCE has re-instated its dividend.

Looking forward I think 2009 is going to be quite a volatile year, much like the end of 2008 was. I have no idea where to expect the markets to be at the end of this year. I can say however that from an investment income perspective things are looking pretty good in 2009. It looks like we should be able to increase our investment income at least 30% over what our portfolio generated in 2008. There are some risks to that though. We have already seen one energy company in our portfolio reduce their distributions (Bonavista Energy) and I suspect we will see a few more in the next few months if oil prices don't get to the $50 a barrel range soon. The nice part about owning energy companies is that although distributions are probably going to go down our budget for fuel can also go down. Overall for the income aspect of our portfolio I don't think we will see any significant increase in distributions or dividends from companies in 2009 which I hope means that 2010 or 2011 will see some very nice increases.

I hope to start posting a little bit more regularly in the coming weeks. In the meantime if you haven't already you should look into opening your Tax Free Savings Account. Remember, it probably makes the most sense for the first couple of years to use the TFSA to build up an emergency fund (or transfer your existing emergency fund into a TFSA).
category: Personal Finance posted on Thursday January 15, 2009 at 15:54:21 by: 0xCC

TD Canada Trust Having A Meltdown

Happy New Year! I've been doing some last minute financial house cleaning today including opening a Tax Free Savings Account for my wife and attempting to do a lump sum payment on our mortgage. Setting up the TFSA took probably a little bit longer than it normally would have probably because a lot of people have left it to the last minute like we did. We were able to get that account set up for her though and overall it only took about 30 minutes on the phone (for some reason opening the account online for her didn't work).

Trying to make a lump sum payment on our mortgage is a different story. First I wanted to just take a look at our accounts online so I entered my login information into the Easyweb login screen. I got a message saying that "Your request could not be processed, please try again. If the problem persists please call Easyline." I tried again and got the same problem. So I called the Easyline number and was cheerfully greeted with... a busy signal. Ok, so it seems like everyone is having this problem. Hang up. Redial. Busy. Hang up. Redial. Busy. Hang up... After about 5 minutes of back to back redialing I finally heard a phone ring instead of the busy signal and the automated system picked up and asked me to enter my card number and access code. I then navigate through a couple layers of menus to get to the selection that I think will allow me to make a lump sum payment. The automated voice tells me that I am being transferred to a credit specialist and the next thing I hear is a fast busy tone. Nice, Easyline just hung up on me.

I go through the whole redial-busy-hangup-redial exercise again and after a few minutes I get through again (I should note that every other time that I can remember every calling Easyline I get through with no problems at all on the first try) and I navigate through the menus again to get connected to a credit specialist. This time I get properly put into the call queue and after a couple more minutes waiting on the line I get a live person on the phone. I tell them that I would like to make a lump sum payment on my mortgage and he tells me that he can't help me with that right now because their systems are down.

Lovely. Easyweb (and WebBroker, the web access to TD Waterhouse) is down and Easyweb is referring people to Easyline. I didn't try any of the automated features of Easyline but my bet is that if a live person can't do anything because their systems are down the automated system won't be able to do anything either. I could have saved about half an hour of time if the Easyweb screen said that they are having technical difficulties impacting Easyweb and Easyline account access (and I wouldn't be surprised to hear that branch account access is down as well) that they are working on resolving.

Hopefully they can resolve these issues quickly. I wonder if the TSX and TD Canada Trust have some systems from the same vendor...

Anyway, Happy New Year and I wish all me readers a prosperous 2009!

Update(@ 14:40): Easyweb seems to be up and running now so they resolved whatever issues they were having fairly quickly.
category: Personal Finance posted on Wednesday December 31, 2008 at 14:16:53 by: 0xCC

The Other Rate Cut

At the end of October I took a look at the interest rates were on some high interest savings accounts. It seems that the interest rates on these accounts have quietly dropped since the Bank of Canada dropped the overnight target rate by 0.75% on December 9. Let's take a look at the interest rates from the end of October compared to now.

First on the list is the PC Financial Interest Plus Savings account. At the end of October it was paying a 3.05% interest rate for balances over $1000. Now that is down to 2.75%.

Next is ING Direct's Investement Savings Account. At the end of October it was paying 3% with no minimum balance. That rate has dropped to 2.70% now.

Back at the end of October I also looked at HSBC Bank's Direct Savings Account. It was paying 3% at the end of October with no minimum balance and it is paying 2.75% now but they seem to be offering a 1% bonus for new deposits.

I also took a look at ICICI Bank's HISAVE Savings Account which was paying 3.4% with no minimum balance and it is paying 3.10% now on Canadian dollar deposits (and 2.5% on US dollar deposits).

An interesting thing that I found while looking around at mortgage options for that mortgage post earlier this week is that Scotiabank has what appears to be a new savings account called the Scotia Power Save account. On balances of less than $5,000 this account pays no interest but on balances $5,000 and over it is currently paying 3%. So if you have more than $5,000 sitting in one of the other popular high interest savings accounts it looks like you can increase your interest payout by at least 0.25% by moving to this Scotiabank account (unless you are with ICICI bank). What would be very interesting is if Scotiabank offered a Tax Free Savings Account version of this account.
category: Personal Finance posted on Friday December 12, 2008 at 06:30:00 by: 0xCC

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