Rogers provides cable television, broadband internet access and video retailing through Rogers Cable Inc. It operates the largest wireless carrier and cable TV operation in Canada, with 7.41M wireless customers, 2.30M cable customers, 1.51M Internet customers, and 1.02M telephone customers at 31 Mar 2008. It has major cable system clusters in Toronto, Ottawa, Mississauga, Kitchener, London (ON), NB, and NL. It owns 6.6M shares of CCA (14%), 3.4M shares of CGO (20%), the Toronto Blue Jays, the Rogers Centre, TV and radio broadcasting and magazine publishing assets. Rogers Wireless represents over 75% of 2008E total EBITDA and 75% of our target NAV; cable contributes just 20% to our target NAV. The breakdown of revenue attributable to each business segment consists of: wireless telecommunications 53%, wired telecommunications 34%, and media 13%.
Archive for March, 2009
market watch
The markets
Strongest rally since November 2008
The TSX rally hit the brakes today, closing lower for the first time in two weeks as the drop in oil prices cooled the energy and material sectors of the index. Investors also took profits today after 8 days of positive growth in the TSX – close to 15 percent. Markets hit a high point this week, with pharmaceuticals, automakers and financial companies showing promising gains. In an unexpected move on Wednesday, the U.S. Federal Reserve announced plans to buy up to $300 billion in longer-term Treasuries – the first such move since the early 1960s. The aggressive measures helped spur the markets higher.
The Wall Street Journal reported that negotiations are underway for IBM to purchase rival Sun Microsystems in a deal worth upwards of $6.5 billion. The acquisition would substantially boost IBM’s competitive edge in the server market.
Democrats rushed to pass a bill on Thursday that will impose a 90% tax on bonuses given to employees of firms that received a government bailout and that have more than $250,000 in household income. The bill is meant to address the widespread fury over AIG employees who received a total of $165 million in bonuses, despite their hand in the insurer’s near-collapse and the subsequent $180 billion government bailout required to keep the firm afloat. After watching President Obama on Jay Leno last night, I can only assume that he will create a bill that will curb all bonuses and gain tighter control of the financial sector in the United States.
The big picture
Bank of Canada forecast tempered
Former Bank of Canada (BoC) Governor David Dodge countered the rosy forecasts of current BoC Governor Mark Carney and Prime Minister Harper in an interview on Wednesday, saying that the recession will be “long and deep”, and that expectations of recovery by the third quarter are “totally unrealistic.” On Saturday, at a meeting of G20 financial watchdogs in England, Carney conceded that earlier predictions of a recovery by the second half of 2009 will likely be adjusted downwards.
On Sunday, U.S. Federal Reserve Chairman Ben Bernanke made an unprecedented appearance on the television program 60 Minutes in which he defended steps taken by the government to resuscitate the banking system, adding that sustained recovery can only happen once the financial sector has achieved solid footing. Bernanke’s optimism was supported this week by the second consecutive monthly increase in consumer prices, offering hope that the economy will avoid a deflationary spiral.
However, more global economic cracks were exposed this week as U.K. unemployment soared to a record high of over two million. Meanwhile, the European Central Bank said it is mulling a further cut of its record-low 1.5% interest rate.
market watch
The big picture
PM strikes optimistic tone
Prime Minister Stephen Harper struck an optimistic tone Tuesday with his state-of-the nation speech on the recession. “Canada was the last advanced country to fall into this recession,” he said. “We will come out of this faster than anyone and stronger than ever.” Meanwhile, Statistics Canada reported on Friday that Canada lost 82,600 jobs in February, sending the unemployment rate up to 7.7 percent.
In London, a £260-billion deal resulted in the nationalization of Britain’s third-largest bank, Lloyds Banking Group PLC. As the majority stakeholder, the British government will insure more than $470-billion in assets on condition that Lloyds increases lending – primarily to businesses – by £28-billion over the next two years.
Earlier this week, U.S. Federal Reserve (the Fed) Chairman Bernanke stated governments should continue to intervene in the economy even after markets rebound. Chairman Bernanke will be appearing on CBS’s 60 Minutes this Sunday (March 15th) to discuss the recession and the Fed’s response.
The markets
Markets turning optimistic? Deals getting done and Citigroup making money
Investors received a welcome respite as Citigroup Inc. shares surged more than 25% earlier this week, prompting the market’s first major rally in 2009. Tuesday’s gains were largely in response to CEO Vikram Pandit’s report that Citi operated at a profit for the first two months of this year. Other financial institutions also gained, sending the TSX up 4% on Tuesday – it’s biggest single-day gain this year. Strength in the Financial and Energy sectors saw the gains in New York and Toronto extend through Thursday with the Dow and the TSX each gaining over 9% through the three previous trading sessions.
Weeks after Pfizer announced its $68 billion bid for Wyeth, further consolidation is taking place in the pharmaceutical industry. Merck & Co has announced a $41.1 billion merger with Schering-Plough Corp., giving the struggling drug firm access to key new businesses, a pipeline of products, and the chance to further cut costs and eliminate jobs. In addition, Thursday saw Swiss drug maker Roche clinch a $46.8 billion deal for the 44 percent of the U.S. biotech group Genentech it didn’t already own. Roche’s initial bid was rejected last year and the Basel-based company turned hostile after several months, during which the financial crisis raised doubts about financing and Genentech’s shares fell below the offer price.
Teck Cominco
Teck-Cominco Inc.(TCK.B)
Teck Cominco Ltd. is a diversified mining and refining company and the world’s no. 2 zinc miner and no. 2 metallurgical coal producer. The company also produces significant levels of copper, lead, gold, and specialty metals. The company’s major zinc assets include the Red Dog Mine, the world’s largest zinc mine, and the Trail lead and zinc smelter and refinery. The company also has 40% interest in Elk Valley Coal Corp., 100% in Fording, and a 22.5% stake in the Antamina copper and zinc mine in Peru. The breakdown of revenue attributable to each business segment consists of: copper 34%, refining and smelting 29%, zinc 19%, coal 15%, gold 3%.
Market Watch
The markets
No Chinese stimulus
Market volatility remained front and centre this week. On Wednesday the markets looked promising, as investors anticipated new stimulus measures in China, which helped lift oil prices and lit a fire under energy shares. However, the rally remained short-lived as the TSX gave back all its gains on Thursday. Two developments continued to put downward pressure on equity markets on Thursday. One: Chinese Premier Wen Jiabao failed to announce any new stimulus measures at the annual session of the National People’s Congress. Two: General Motors’ annual report said that the company’s auditors have raised “substantial doubt” about the troubled automaker’s ability to continue operations.
On Thursday, Wal-Mart announced February sales results that far exceeded analysts’ estimates. Select U.S. retailers continue to weather the slump in consumer spending better than expected. Wal-Mart also said it is raising its annual stock dividend by 15%. The increase comes as a wide range of U.S. companies have slashed their payouts to preserve cash during the global economic downturn.
Commodities & Energy
· Oil settled more than 4 percent higher on Friday as expectations producer group OPEC could reduce output again outweighed weak U.S. economic data.
· Copper prices extended their weekly rally as copper miner Teck Cominco (TCKb) was up 14% on higher prices of copper. Copper has been on run-up this week – up over 10% for the week.
· Gold finished at 939.50, up 11.70 points.
The big picture
Rate cuts across the board
The Bank of Canada (BoC) took short-term interest rates nearly as low as they can go on Tuesday, slicing the trend-setting overnight rate half a percentage point to an all-time low of 0.5%. The prime rate was cut to 2.5% as this comes as good news for people with floating mortgage rates. Meanwhile, the Bank of England and the European Central Bank (ECB) each cut interest rates by 50 basis points (a basis point is 1/100th of one percent) to record lows of 0.50% and 1.50% respectively.
ECB President Jean-Claude Trichet said this week that he still expects the euro zone economy to pick up by 2010, which he said is in accord with a number of current forecasts. Pierre Duguay, deputy governor at the BoC, stressed on Thursday the urgency of fiscal action to stimulate spending and ease credit as a string of bad economic news batters consumer and business confidence. However, he continued to reiterate the bank’s prediction of a sharp recovery leading to 3.8 per cent growth in 2010.
On Tuesday, The U.S. Federal Reserve rolled out a much-awaited program aimed at boosting the availability of credit to consumers and small businesses. The bold program was first announced late last year, and is projected to generate up to USD$1 trillion of lending for businesses and households. Today’s release of U.S. unemployment numbers for February was as expected; non farm payrolls -651k, unemployment rate 8.1%. President Obama called the latest job losses “astounding,” as he promised to get Americans back to work. Revisions to the previous months payroll numbers indicating higher unemployment does not bode well for the market.
Your investments can provide returns in the form of either income or capital growth. The decision to opt for one source of return over the other normally stems from your tax position, your immediate requirements for cash and your long-term plans. Here are some of the unique risks and rewards associated with investing for income and capital growth.
Regular income can provide stability
There are two primary ways to earn income: lend your funds to a borrower in return for interest and the eventual repayment of your principal, or own shares that produce dividends. The first type of security is often referred to as “fixed income” and includes bonds, debentures and mortgage-backed securities. The second type of income is derived through ownership of common and preferred shares and income trust units that distribute company profits in the form of dividends. With income investments, there are income tax consequences to bear in mind, as well as two types of risk. The first is interest rate risk. Once you are locked into a rate of interest for a certain term, you risk the chance that market rates might rise and the rate you are earning may no longer be competitive. The longer the term of your investment, the greater the interest rate risk. The second is credit risk - the possibility that your principal will not be repaid or that the issuer will default on interest or dividend payments. This risk can be minimized by investing in high quality instruments from secure issuers, such as the Government of Canada.
Growth can build wealth
Investing for capital growth is vital not only to build wealth, but to protect your capital from taxes and inflation. The most popular growth investment is common stock. Investors purchase shares in a corporation and become part owners of the company. As the company grows, profits are reinvested in the company, which can cause the shares to increase in value. There are two primary risks to consider with common shares. The first is market risk. The market price of your investment will tend to fluctuate with the stock market as a whole, even if there have been no material changes in the company whose shares you own. The second type of risk is specific to the company itself. If your investment portfolio consists only of stocks that are dependent on the petroleum industry, for example, any decline in oil prices will affect the value of your entire portfolio.
All of the above risks can be minimized by diversifying your investment dollars among income and growth, and among a number of different securities and even a variety of markets around the world.
Preferred Shares
Investing in Preferred Shares
Advantages
Tax Advantaged Investment Income.
The main reason to invest in preferred shares is for investment income. Preferred shares pay higher dividends than most common shares and provide investors with a tax advantaged source of income that, in some cases, offers a better yield than bonds of similar credit quality and risk. Also many of the recent issues in the structured or split share category offer a variety of tax-efficient distribution types to benefit investors across all tax brackets.
Security of Principal.
Greater security of principal may also motivate investors to invest in preferred shares as they rank ahead of common equity in the payment of dividends and in the distribution of assets in the event a company is liquidated. In addition, preferred shares’ dividend payments are often “cumulative”, which means that dividends accrue to the holder of the preferred share if the issuer misses a payment. The issuer must pay the missed dividend before any dividends are paid on common shares.
Lower Price Volatility.
The majority of term preferred shares have five or 10 year maturities. Shorter maturities are less sensitive to changes in interest rates than corporate bonds, which generally have longer terms. However, this cannot be said of perpetual preferred shares, which, due to their long duration are quite sensitive to changes in interest rates.
Exchange Traded Markets.
Unlike bonds, preferred shares trade on public exchanges where the bid and ask prices are visible to all market participants. This is an advantage for income investors as it provides greater transparency and efficiency in pricing.
Risks
Interest Rate Risk.
Preferred shares are income investments whose yields and prices vary with the general level of interest rates. Investors in term preferred shares (i.e. those with a fixed maturity date) will lock in a rate of return upon the purchase of a preferred share but will be subject to reinvestment risk on dividends earned and once the principal is paid upon maturity. Investors in perpetual preferred shares are exposed to a greater degree of interest rate risk due to the fact that their investment principal need not ever be repaid.
Credit risk.
Credit risk involves any change in the creditworthiness of the preferred share issuer. The creditworthiness of an issuer refers to its general financial strength, including its ability to pay dividends and repay principal on maturity. The credit quality of preferred shares in Canada is monitored by two independent credit rating agencies: Dominion Bond Rating Service (DBRS), and Standard & Poors (S&P). Investors can consult these two agencies to assess the credit risk of investing in the preferred shares of an individual company.
GUARANTEED INVESTMENT CERTIFICATES (GICS)
Guaranteed Investment Certificates (GICs) are deposit instruments issued by Canadian banks offering investors a predetermined rate of interest for a stated term. In general, these are non-redeemable and non-transferable prior to maturity, but there can be exceptions. This product works similar to a savings account in many ways, while offering an enhanced rate of interest as compensation to the investor for locking in the funds for a period of time. Investors are typically provided with additional peace of mind through CDIC insurance. Canada Deposit Insurance Corporation (CDIC), a Federal Crown corporation, insures GIC purchases up to $100,000 per issuer and account type in the event of bank insolvency, provided the issuing bank is a CDIC member.
Ranking
Guaranteed Investment Certificates are classified as Senior Debt of Canadian banks and rank the highest in terms of investor protection and when considering the universe of fixed income instruments issued by Canadian banks.
Term to Maturity
GICs can be selected with a term to maturity as short as 30 days or as long as 10 years, thereby allowing the term to match the individual investors’ needs.
Yield
The GIC investment earns interest on a monthly, semi-annual, annual or compounding basis, either at a set or variable rate. In most cases, the interest rate is set upfront; however, variable rate GICs are issued with the return linked to an equity market index based on a pre-determined formula.
Investor Considerations
Investors must be aware that only some GICs allow you to withdraw money prior to maturity (termed a redeemable GIC), while others are locked-in for the entire term (referred to as non-redeemable). In many cases the investor cannot withdraw or redeem money prior to the maturity date; therefore, these investments are best suited to investors who are prepared to lock in their funds for a specific time period.
Product Example
The Bank of Nova Scotia offers 1 to 5 year non-redeemable Guaranteed Investment Certificates, along with a 1-year Cashable (or redeemable) option. GICs offered on a non-redeemable basis can have interest paid on an annual, semi-annual, monthly or annual compound basis. The interest rate is set-forth at the time of purchase, based on the term of the GIC. The Cashable GIC option enables investors to redeem the GIC prior to the one-year maturity date. If redeemed prior to maturity, the investor receives the interest for the time period held.
Exchange-Traded Funds
Exchange-Traded Funds
The past several years have seen the rise of a new type of mutual fund that is changing the way many Canadians invest. Exchange-traded funds (or ETFs) are open-ended mutual funds that are listed and trade on a stock exchange. There are a wide variety of ETFs available to investors, ranging from funds based on well-known stock indices to those focused on individual sectors. ETFs are unlike traditional mutual funds in that a portfolio manager does not actively manage them. Instead, they have a static portfolio that is overseen by an administrator. Buying an ETF is identical to buying a publicly traded stock where investors purchase units at any time during the trading day from current holders who wish to sell. This differs from traditional mutual funds where units are bought and sold at the end of the day directly from a mutual fund company. ETF units can be redeemed for cash or the underlying securities held by the ETF, however the primary market for ETFs is on a stock exchange.
Advantages of Exchange-Traded Funds
Diversification. Exchange-traded funds provide portfolio diversification through a single security. For example, an investor who buys a unit of the S&P/TSE 60 Index Fund gains exposure to the sixty different stocks held by the fund. This allows smaller investors to gain diversification quickly and easily.
Portfolio Flexibility. Exchange-traded funds allow investors to adjust their portfolio exposure between different markets and sectors through a limited number of securities. For example, an investor wishing to increase U.S. equity exposure can simply purchase the S&P Depository Receipts (SPDRs), an ETF based on the S&P 500 Index, through a single transaction.
Lower fees. Fees for ETFs tend to be much lower than those for comparable mutual funds and this can contribute to higher returns after fees. For example, the management expense ratio (MER) for i60 units is 0.17% compared to fees of 0.80% to 0.90% or higher for most Canadian index mutual funds.
Liquidity. ETFs can be bought and sold at any time during the trading day on a stock exchange. This allows investors to take advantage of any intraday price fluctuations. Trading volumes tend to be good for more popular ETFs. For example, trading of i60 units averages over 2 million units daily.
Tax Efficiency. ETFs that track an index change their portfolio holdings only when there is a change in the underlying index. This means lower turnover than actively managed mutual funds and less taxable distributions at the end of the year. EFTs pay out dividends and the investor receives a dividend tax credit, increasing their overall income gained. Mutual funds pay out interest income and the investor is taxed 100 percent of their marginal tax bracket, thus reducing their overall income.
Small Cash Positions. Because investors buy and sell them in the market, ETFs do not need to hold large cash positions to manage redemptions. This means more money is invested in the underlying portfolio at any given time, which enhances returns.
Risks of Exchange-Traded Funds
Liquidity Varies. Average daily trading volume will vary widely between different exchange-traded funds. While some trade millions of units a day, others may only trade several thousand units.
Bonds
Bonds:
A bond is simply a type of loan taken out by a company or government in order to raise capital for either long-term investments or in the case of government bonds, to finance current expenditure. Investors loan companies money when they buy its bonds in exchange for interest, or “coupon” at predetermined intervals and return of principal on the maturity date, ending the loan.
Bonds and stocks are both securities - the major difference between the two is that stockholders are the owners of the company, whereas bondholders are lenders. If a company or government is unable to pay back the loan, this is known as credit or default risk. When a firm goes bankrupt, it pays money back to investors in particular order as it liquidates. After a firm has sold off all of its assets, it pays out its bondholders. Senior debt is paid first (secured bonds), then junior (subordinated or unsecured bonds) debt, and stockholders get whatever is left over, which is usually nothing. Therefore, if you invest in government bonds or companies with good credit ratings, the default risk is extremely low and your principal is almost always paid back.
Bonds are formal contracts to repay borrowed money with interest at fixed intervals (semi-annual or annual). Since the bond pays out interest, an investor must consider their tax consequences of this investment. It is prudent for an investor to place interest-bearing vehicles such as bonds in their registered accounts like RRSPs.
There are four basic goals for buying bonds. The first being a steady and predictable stream of income paying interest either annually or semi-annually. The second goal would be securing income. You would expect the bonds of high-grade firms to fully mature on the proposed maturity date. If you were to buy a bond below the maturing $100 par value, you will receive a capital gain in addition to the income received annually. The third goal is obtaining consistency in returns. Bonds vary in price due to interest rate risk; however, knowing that the bond will mature at full value gives the investor a peace of mind. The fourth goal for buying bonds would be to diversify your investments. When you diversify your investments, you decrease the risks associated with your portfolio losing its value while increasing the rate of return.
Below is an example of a current bond issued by a company with a coupon of 5.714% and purchase price of $87.19, which matures on December 31, 2013. This discounted bond gives the investor the opportunity for a $12.81 capital gain in addition to the regular interest payments.
|
Issuer Name |
Coupon |
End Date |
Price |
Yield |
S&P credit rating |
Moody credit rating |
|
Industrial Alliance Cap Trust
|
5.714% |
31-Dec-2013 |
$87.19* |
9.00% |
A- |
A- |
*Price on February 6, 2009.