This contributed to interest-sensitive high yielding U.S. equities, such as the utilities and real estate investment trusts coming under considerable pressure, extending losses that have already been accumulating over the preceding few weeks.

Despite the totally different outlook for Canadian interest rates, where the Central Bank very recently cut interest rates, longer-dated interest rates also jumped with the Canadian Government 10-year bond yield moving from a recent low of 1.30% to 1.58%.

In sympathy, a number of the Canadian equity income favourites also lost a good deal of value. At the broader index level, the S&P TSX Dividend Aristocrats gave up 4% since mid-February, while dividend favourites such as BCE Inc (TSX:BCE)(NYSE:BCE), Telus Corporation (TSX:T)(NYSE:TU), RioCan Real Estate Investment Trust (TSX:REI.UN), Choice Properties Real Estate Investment Trust (TSX:CHP.UN), and Fortis Inc (TSX:FTS) declined between 6% and 9% over the past few weeks.

While it always disconcerting to see one’s investments lose value, the situation for Canadian income-seeking investors has not changed materially. While 10-year Government bonds still yield well below 2% and shorter-dated bank deposits around 1%, investors in a high quality equity dividend portfolio can expect to receive a yield of over 4% with growth well ahead of inflation in 2015 and 2016.

Some investors would feel uncomfortable with the risk of capital loss, which may negate the attractive yield. However, dividend paying equities have a track record of inflation and overall market-beating returns over the long term. Based on data from the U.S., dividend paying stocks have returned 10.25% per year for the past 87 years, comfortably beating non-dividend paying stocks, government bonds, inflation, and cash.

High quality U.S and Canadian dividend-paying stocks have performed well over the past few years in the low interest rate environment and some have become overvalued. Nevertheless, high quality dividend stocks with attractive yields are becoming cheaper and almost certainly represent much better value than government bonds.

The stocks identified in the table below operate in different but relatively stable economic sectors and have great dividend-payment track records, solid balance sheets, excellent cash flows, reasonable growth prospects, and when combined,  produce a portfolio with an attractive yield and low volatility.

Source: Thomson Reuters

Opportunities created by the fear-induced sell off

A portfolio consisting of the stocks listed in the table has a high probability of delivering a tax advantaged 4.4% yield in 2015 with consistent growth over the next few years. Investors should take advantage of opportunities created in the Canadian market by the sell off in U.S. high yield equity market.

The post Rising U.S. Interest Rates: Opportunity or Trap for Canadian Dividend Investors? appeared first on The Motley Fool Canada.

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Fool contributor Deon Vernooy, CFA has positions in Telus Corporation, BCE Inc, Toronto-Dominion Bank, TransCanada Corporation, and Choice Properties Real Estate Investment Trust.

A reasonable full-year financial result

Enbridge announced adjusted earnings per share of $0.49 for the fourth quarter, which was 11% better than the comparable quarter last year while the full year result was 7% higher than the previous year.

Revenues increased by 14% as $10 billion of new assets were placed into operation during the year. Operating and other expenses increased by 9% while interest expenses for the year jumped by 19% as a result of higher debt levels.

Investors should note that the profit as sanctioned by the auditors and calculated according to generally accepted accounting standards, amounted to $1.15 billion which was 37% less than the “adjusted” profit as estimated by company management. The adjustments mainly reflect a net $320 million mark to market loss on derivative transaction mostly used for hedging purposes. While this is an uncomfortable large adjustment, a small consolation is that it less than half the adjustment made in 2013.

Liquid Pipelines, the largest of the three main divisions, had slightly lower quarterly profits but an 11% increase for the full year. The profit of this division was boosted by the Canadian Mainline system as higher crude oil supply in western Canada and higher downstream refinery demand, increased throughput volumes by 15% for the year.

The profits in the highly regulated Gas Distribution business were roughly unchanged for the the year while the Gas Pipelines, Processing, and Energy Services division experienced a sharp 33% decline in profits as the Aux Sable and Energy Services sections were impacted by unfavourable market conditions.

The sponsored investments, including the listed entities Enbridge Energy Partners, LP (NYSE:EEP) and Canadian listed Enbridge Income Fund Holdings Inc. (TSX:ENF), delivered a 37% increase in adjusted profits for the year mainly as a result of new assets that were placed in service.

Healthy cash flows but increasing debt levels

The operating cash flow of the business was 24% lower than the previous year and as a result of large capital expenditures, the free cash flow (that is operating cash flow minus capital expenditures) amounted to a whopping negative $8 billion for the year.

The negative free cash flow implied that Enbridge had to raise considerable capital from external sources, and in the process increased net debt levels to $39 billion, which is double the equity capital of the business.

Enbridge expects to finance the planned $44 billion roster of projects and the cost of the dividend through cash flow generated by the existing operating businesses, commercial debt, and sales of assets to its U.S. limited partnership, Enbridge Energy Partners, and Canadian-listed Enbridge Income Fund Holdings (ENF).

As part of the capital raising plans, Enbridge plans to transfer around $17 billion of energy assets with an associated capital expansion program of $15 billion to ENF by mid-2015. ENF will finance the acquisition and capital expenditure through multiple equity raisings over a number of years.

Despite the planned asset sales, the considerable additional capital expenditure plans for the next few years combined with the already stretched balance sheet are additional risks to the business and its ability to pay and increase the increased dividends, especially in a rising interest rate environment.

The dividend is safe – for now

Enbridge declared a dividend of $0.465 per share for the first quarter of 2015, which is 33% higher than the previous year. The dividend policy has also been revised to reflect higher payments at 75%-85% of adjusted profits compared to the previous 60%-70% payout ratio.

Enbridge has an enviable North American energy infrastructure and reasonable growth opportunities for the next decade. However, it will have its work cut out to finance the intended expansion plans, manage the operational and project risks, and at the same time generate a positive cash flow to support growth in the dividend payments over the next few years.

Perhaps I am overly risk averse but it does not seem to me that the 3.0% dividend yield adequately covers the risks. There is better value elsewhere.

The post Enbridge Inc.: The Risks Are Rising appeared first on The Motley Fool Canada.

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Fool contributor Deon Vernooy, CFA has no position in any stocks mentioned.

Some simple statistics may prove the point. Over the past 20 years, a portfolio of global gold shares, as measured by the NYSE ARCA Gold Miners Index, returned an abysmal 1% per year. In addition, the volatility of the returns (read “risk”) was exceptionally high with a worst rolling 12-month return of -58% and a best return of 107%. In 50% of all rolling 12-month periods, investors would have lost money. This is, to my mind, indicative of an investment only suitable for high-risk investors.

Gold, on the other hand, has been a better investment vehicle over the past 20 years. A bar of gold as an investment would have yielded a 6% investment return per year over the full period, while the volatility was much lower than for gold shares. In addition, an investment in physical gold would have lost money in about one-third of the rolling 12 month periods – much better than for gold shares.

The statistics for the past 20 years would clearly favour gold over gold shares as an investment – higher returns and lower risk!

However, gold shares have substantially underperformed gold over the past few years and this may have contributed to a somewhat skewed picture of the real investment profiles of gold and gold shares. The graph below indicates this poor relative performance of gold shares, which started in 2007 and despite a brief rally in 2009, continued into 2015.

There are several reasons for the poor performance of gold shares over the past few years, including high-cost capacity expansions during the gold bull market, overpriced acquisitions, highly leveraged balance sheets, and bloated cost structures. This all had to be worked out over time – a process that affected the profitability and viability of many gold producers. In addition, investors became increasingly wary of the high risk involved in gold mine investing, especially after the 2008-09 market crash.

Another point of interest from the graph is that gold shares normally performed better than gold during periods when the gold price increased. This happened in the early to mid 1990s and again between 2001 and 2007 although the gold price continued to move up until 2012. The opposite was also true with the price of gold in decline between 1996 and 2001, and again from 2011 onwards – during these time periods the gold shares performed poorly relative to the price of gold.

Noticeable is the fact that the ratio between gold shares and gold generally moved between 1 and 2 until June 2011. The ratio is currently at its lowest level for at least the past 20 years, which implies that gold shares are now exceedingly cheap when compared to physical gold. This will correct at some point, most likely when investors become confident that the next bull market in gold has started.

From this analysis, it would be reasonable to conclude that investors who believe that the next bull market in gold is underway or will start in the near future, should emphasize quality gold producers such as Goldcorp Inc. (TSX:G)(NYSE:GG), Newmont Mining Corp (NYSE:NEM), and Eldorado Gold Corp (TSX:ELD)(NYSE:EGO), or gold streaming companies such as Franco Nevada Corporation (TSX:FNV)(NYSE:FNV) rather than adding gold bullion to their portfolios.

The post Which Is a Better Investment: Gold or Gold Shares? appeared first on The Motley Fool Canada.

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Fool contributor Deon Vernooy, CFA has no position in any stocks mentioned.

The company reported good results and increased the dividend by 8% but investors should be aware of the risks that they will face over the next few years as the company executes on huge expansion plans, manages a substantial debt load, and attempts to deliver a growing dividend stream.

A strong final quarter and solid full-year results

TransCanada announced adjusted earnings per share of $0.72 for the fourth quarter, which was 24% better than the comparable quarter last year and better than expected. For the full financial year, the profit per share was 8% higher than the previous year. The dividend per share was also increased by 8% in line with a previous undertaking by management to increase the dividend annually by at least 8% until 2017.

Revenues increased by 12% in the quarter and by 16% for the year as $3.8 billion of new assets were placed into operation during the year. Operating and other expenses increased by 16% resulting in income before interest and tax rising by 14% for the year. The interest expense for the year jumped by 22% as a result of higher debt levels, the higher interest cost on U.S. dollar debt translated into Canadian dollars and lower capitalised interest cost with the completion of the Gulf Coast extension of the Keystone Pipeline System.

Natural Gas Pipelines, the largest of the three main divisions, increased its earnings by 25% compared the same quarter last year and 16% for the full year. The profit of this division was boosted by the U.S. pipeline component, which recorded not only higher U.S. dollar profits but also a considerable translation gain of 11% for the year as a result of the weaker Canadian dollar.

Liquids Pipelines turned in a very strong performance with earnings improving by 44% in the quarter and 40% so far this year. The Gulf Coast extension of the Keystone Pipeline System, Mexican pipelines and the weaker Canadian dollar boosted the profits for this division.

Despite the positive impact of the weaker Canadian dollar, the Energy division reported slightly lower earnings for the year as the Western Power division experienced a sharp decline in realised power prices in Alberta.

Healthy cash flows but increasing debt levels

The cash flow of the business remains strong with a high 40% of revenues converting to operating cash flow. However, as a result of ongoing large capital expenditures, the free cash flow (operating cash flow minus capital expenditures) was a negative $278 million for the year.

The balance sheet is somewhat stretched with net debt of $26.5 billion representing 56% of total capital. Given the considerable additional capital expenditure plans for the next few years, the already stretched balance sheet will become an additional risk to the business and its ability to pay and increase the dividends, especially in a rising interest rate environment.

TransCanada management expects to finance the planned $46 billion roster of projects and the cost of the dividend through cash flow generated by the existing operating businesses, commercial debt, project finance, equity finance and sales of assets to its master limited partnership (“MLP”), TC Pipelines LP (NYSE:TCP.N.) The cost of the dividend in 2014 was already $1.4 billion and should grow to more than $2.0 billion per year based on the dividend growth guidance.

The dividend is safe – for now

TransCanada declared a dividend of $0.52 per share for the first quarter of 2015 which is 8% higher than the previous year. The company has grown the dividend on average by 7% per year over the past 14 years and built up a solid dividend payment track record since it cut the dividend in 2000.

TransCanada has an enviable North American energy infrastructure and reasonable growth opportunities for the next decade. However, it will have its work cut out to finance the intended expansion plans, manage the operational and project risks, and at the same time generate a positive cash flow to support growth in the dividend payments over the next few years.

The attractive 3.6% dividend yield is not without risk.

The post TransCanada Corporation: Solid Growth, but What About the Risks? appeared first on The Motley Fool Canada.

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Fool contributor Deon Vernooy, CFA holds shares in TransCanada.

The new CEO of Bombardier, Inc (TSX:BBD), Allain Bellemare, will arrive at work on his first day with the knowledge that the market just shaved another $600 million from the already depressed value of the company on the day that the fourth-quarter results, dividend suspension, capital raising plans, and his appointment were announced. It’s a difficult time for the company. Can Mr. Bellemare turn it around?

CEOs can make a difference

Canadian investors will be well aware of the significant difference that Mr Hunter Harrison made at Canadian Pacific Railway Limited after he was appointed in late 2012. The company changed from a mediocre performer to an industry and market star leaving the more illustrious Canadian National Railway Company behind and attracting a premium market valuation.

Mr John Chen was appointed as CEO of BlackBerry in late 2013 with the share price testing all-time lows. The jury is still out on whether he will eventually be able to bring the company back to sustainable levels of profitability, but investors are giving him the benefit of the doubt with a share price that doubled over this time period.

In both cases, these CEOs developed revised strategic plans and, as outsiders, were able to bring a fresh perspective on the problems facing the companies. Both also embarked on aggressive cost-cutting, brought in additional top management, realigned operating structures, and sold or closed underperforming businesses. Above all, they managed to instil renewed confidence among investors in the abilities of the companies to generate attractive investment returns.

Will Mr. Bellamare make a difference at Bombardier?

The new CEO is an acclaimed aeronautical engineer with an MBA from McGill University. Most recently he was the President of United Technologies Corp. Propulsion and Aerospace Systems divisions. These divisions included the engine maker Pratt & Whitney and aircraft component maker UTC Aerospace Systems and employed jointly more than 70,000 staff with sales of $29 billion and operating profit of $4.4 billion. By comparison, Bombardier employs 74,000 staff, but has lower sales at $20 billion.

Mr. Bellemare played a key role in the integration of United Tech’s $16 billion 2012 acquisition of aircraft components maker Goodrich Corp. The divisions under his supervision performed well during his tenure, but his role was effectively eliminated after a corporate reorganisation and he left United Tech at the end of January.

During the 18 years that he spent at United Tech he also operated as President of Pratt & Whitney in Canada and as Executive Vice President for Group Strategy. The experience gained in these positions would stand him in good stead in his new role.

The new CEO has without doubt the technical skills suitable for the Bombardier business. He has also gained considerable management experience in a first-rate, well performing company, and has gained knowledge of the Bombardier business as former supplier of engines and aircraft components.

However, the challenges that he will face are numerous. First, Bombardier is still controlled by the Beaudoin and Bombardier families. They will likely have to agree with major proposals from the new CEO. Second, the previous CEO, Pierre Beaudoin, has been appointed as the Executive Chairman, a title that indicates an active role in the business. Third, Mr. Bellemare will have to deal with the operational and financial challenges faced by Bombardier, including the delayed C-Series jet program and proposed equity and bond capital raising programs.

Should you invest now?

The new CEO will have his work cut out to turn the business around, deal with the operational and financial challenges, and manage the family involvement and expectations. I will remain a very interested observer from the sidelines for now.

The post Can a New CEO Turn Bombardier Around? appeared first on The Motley Fool Canada.

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Fool contributor Deon Vernooy, CFA has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National is a recommendation of Stock Advisor Canada.

Solid 2014 results

Profit for the full year amounted to $1.4 billion which, on an adjusted basis, was 10% higher than the year before. Revenue increased by 5.2% and with operating expenses 5% higher, operating income increased by 7.5%. As a result of considerable share repurchases, earnings per share rose by 15% to $2.31 while the dividend was increased by 12% to $1.52 per share. This was a good result.

Telus is forecasting profit per share growth of between 4% and 13% for 2015 while management has previously committed to continue a dividend growth rate of 10% per year until 2016.

Sound all around operational performance

In the wireless segment, the operating metrics all moved in the right direction during the final quarter with the number of subscribers increasing by 3.8%, average revenue per user by 3.8% and user churn slightly down. Data network revenue increased by 24% during the quarter reflecting higher data usage from continued adoption of smartphones and other data-centric wireless devices.

Equally positive from the business profitability perspective was the 5.3% increase in the number of post-paid users, which carry considerably higher average revenues than prepaid users. EBITDA in this division increased by 4.7% to $2.7 billion for the full year although margins were slightly lower as a result of the high cost of increasing smartphone sales.

The wireline division was again held back by the ongoing decline in local and international fixed phone lines although high speed internet and TV covered the gaps by increasing subscribers by 5.7% and 12.4% respectively. EBITDA increased by 5.3% to $1.5 billion during the year while margins moved marginally higher.

Stable cash flow generation but higher debt

Telus remains an exceptional generator of cash with operating cash flow 5% higher than the previous year and a high cash conversion rate (that is how much cash is generated from sales) of 28% of revenue.

The company had a heavy year of capital expenditures, including the $1.1 billion acquisition of the 700 MHz spectrum licenses. This resulted in free cash flow (that is operating cash flow minus capital expenditures) being slightly negative for the year.

Telus increased its dividend payment for the year by 12% and also completed the acquisition of 2.6% of the outstanding shares valued at $615 million over the past year. The total cash returned in this way to investors was $1.5 billion.

As a result of the heavy capital expenditures and shareholder cash returns, net debt increased by $1.8 billion during the year. The debt-to-capital ratio is now fairly high at 56% but interest cost is still comfortably covered by operating profits. Telus will ideally want to reduce the debt load before interest rates start to creep up.

Telus is a prolific cash generator and the current year decline in free cash flow should be reversed as the considerable investments in broadband infrastructure (to support the rollout of the newly acquired 700 MHz spectrum and fibre-optic cable connections), start to enhance profits. However, management indicated that the capital expenditures for 2015, excluding spectrum acquisitions, should again be around $2.3 billion. More spectrum license auctions are scheduled for this year, which may result in another year of heavy spending for the company. This remains a concern.

High quality business with an attractive dividend payment profile

The positive investment case for Telus is based on the sound historical track record, competitive market position, strong cash flow generation, and considerable distributions to investors through dividends and share repurchases.

On the negative side, one has to be aware of the limited domestic growth opportunities and the real threat of a government favoured fourth national telecommunications player and the increasing debt load.

The valuation of the company is reasonable with an EV/EBITDA valuation of around 7.8 times, a price/earnings ratio of 16 times and a dividend yield of 3.9% for the next 12 months. This valuation is in line with its main Canadian rival BCE Inc but higher than the U.S. peers.

I would argue that this valuation is perfectly reasonable for a high quality business.

The post Want to Soften Your Phone Bill? Buy Telus Corporation appeared first on The Motley Fool Canada.

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Fool contributor Deon Vernooy, CFA holds shares in Telus and BCE.

Bear markets in commodities always create a great environment for companies with strong balance sheets to acquire assets at discounted prices. As the full impact of lower oil prices hits home, Exxon Mobil Corporation (NYSE:XOM) is one of the oil majors that will be looking to acquire assets. Imperial Oil Limited (TSX:IMO)(NYSEMKT:IMO) may be on its target list.

The background

The history of Imperial Oil in Canada dates back to its incorporation in 1880. Today, Imperial produces approximately 310,000 barrels of oil equivalent per day and runs three refineries in Canada with a total throughput capacity of 420,000 barrels per day. Imperial also manufactures chemicals and operates a fuel marketing business under the Esso and Mobil brands, including 1,700 gas stations.

Exxon is the largest shareholder in Imperial, with a 69.6% interest. The current Imperial CEO, Richard Kruger, was a previously a vice president of Exxon, and several Imperial board members are linked to Exxon. The companies are jointly involved in various large-scale Canadian energy related projects, while Imperial benefits from the operational and technological know-how shared by Exxon. It is fair to say that the companies have a close working relationship.

Will Exxon buy the Imperial minorities?

Imperial owns and operates a highly attractive asset base with considerable further expansion potential.

At year-end 2013, proved reserves stood at 3.6 billion barrels of oil equivalent, with assets at Kearl, Cold Lake, and Syncrude contributing more than 90% of the total reserves. In addition, contingent resources of 13 billion barrels of oil equivalent are available for future exploitation.

Imperial is in the process of a significant capital expenditure program with planned capital expenditures of more than $40 billion in the current decade, $25 billion of which has already been spent over the past five years. The company estimates that production could double between 2013 and 2020.

Exxon is currently holding nearly US$5 billion in cash and equivalents, and these assets would be attractive if acquired at the right price. The “right price” is largely dependent on the assumption Exxon has for the oil price over the medium to long term.

Is now a good time?

The price of Imperial in U.S dollars has already declined by 25% since the recent peak of the oil price in mid-2014.

Exxon will be looking to buy assets at discounted prices. The most appropriate method for valuing Imperial is the present value of the discounted cash flow of the operations and projects under development. This is highly dependent on the assumptions used for the key variables, including production and the oil price, but a number of reputable analysts currently estimate that the price of Imperial represents a discount to the present value of between 5% and 20%.

What will it cost?

The minority shares of Imperial currently have a market value of $13 billion. If we assume a takeover premium of 30% to 40%, the cost will be somewhere between $17 and $18 billion. Given the strong Exxon balance sheet, the company should not have a problem financing such an acquisition.

What other precedents have been set?

In a very similar situation in 2006, Royal Dutch Shell launched an $8.7 billion offer to acquire the 22% of publicly traded Shell Canada that it did not already own. The transaction was eventually closed in early 2007 at $45 per share in cash, which represented a 45% premium to the price prevailing in the weeks before the transaction was announced.

Exxon is one of the global oil majors that will be in a strong position to acquire energy-related assets if the oil bear market grinds on. Given the already close working relationship between the entities, Imperial could be an attractive target at the right price.

The post Will Exxon Mobil Corporation Buy the Imperial Oil Limited Minority Shares? appeared first on The Motley Fool Canada.

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A sound financial performance in 2014

Adjusted net profit for the 2014 fiscal year amounted to $2.5 billion, which was 9% higher than the year before, while adjusted profit per share amounted to $3.18, or 6% higher than the year before.

Revenues increased by 3% during the year driven by a good performance at Bell wireless, and operating costs were reasonably well controlled with a 4% increase.

The fourth quarter delivered an earnings per share of $0.72, which was 3% better than the same quarter the previous year and in line with the market consensus expectations. The company also declared a 6% increase in the quarterly dividend to bring the total to $2.47 per share for the full year.

Wireless the star performer… again

The Bell wireless segment had an excellent quarter, with revenue increasing by 10% and earnings before interest, taxes, depreciation, and amortization (EBITDA) increasing by 11% to $585 million on the back of a 2.4% increase in subscribers and a 6% jump in the average revenue per user. Positive developments were the 4.6% increase in the number of post-paid users, which carries considerably higher average revenues than prepaid users, as well as wireless data revenue (that is, mobile internet use, video streaming, and gaming), which improved by 26% in 2015.

In the wireline division, the secular decline in local and international fixed phone lines continued, with network access line connections 6% lower than a year ago. However, high speed internet connections (+5%) and TV connections (+6%) fared much better. EBITDA in this division increased by 2% to $953 million for the quarter, although the annual profit was slightly lower than the previous year.

The media division reported a 17% decline in quarterly EBITDA to $192 million, mainly as a result of soft advertising revenues in conventional television, higher costs for sports rights, and start-up costs for Crave TV. BCE also reports that the world championship game of the junior hockey tournament, broadcasted on TSN, set an all-time record of 7.1 million viewers for Canadian specialty television.

The quarterly EBITDA profit of $292 million at Bell Aliant, now fully owned by BCE, was 4% lower than last year. TV, wireless, and the internet performed well, but local and long-distance phone services provided a drag on profits.

Excellent cash flow but the debt levels increased

Operating cash flows increased by 3% during the year, but as a result of higher capital expenditures, free cash flow declined slightly to $2.4 billion. The ongoing strong cash generation is good news for income investors as the dividend is linked to free cash flow.

The balance sheet deteriorated somewhat, with net debt increasing to $22 billion (6%) since the start of the year due to the acquisition of wireless spectrum assets and the cash expense of the Bell Aliant acquisition. The debt-to-capital ratio at 58% is somewhat on the high side but should decline over time as a result of the increased cash flow from the Bell Aliant acquisition and additional benefits from the spectrum assets.

Outlook for 2015

BCE also announced its projections for 2015, with earnings per share expected to grow by 3%-6% and free cash flow by 8%-15%, resulting in an expected dividend of $2.60 per share, which will represent an increase of 5%.

The main attraction is in the dividend but growth remains solid

The main attractions for many investors in this company are the consistent and growing dividend payments and the very attractive yield of 4.4% on the current price. BCE has an excellent dividend payment track record, and it has increased the dividend by 5% per year since 2000.

BCE is a cash generation machine, and despite a heavy ongoing capital expenditure program and the increased debt load, it should be able to grow the dividend payment at the historic rate for the foreseeable future. The declining landline business is currently a drag on profits, but the growth dimensions of the business, including mobile data and broadband internet services, will keep the growth rate positive.

The post BCE Inc.: Great Dividend, but Can it Become a Growth Stock? appeared first on The Motley Fool Canada.

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Fool contributor Deon Vernooy, CFA holds shares in BCE.

Apologies to former U.S. President Bill Clinton for borrowing from his 1992 campaign logo, “It’s the economy, stupid”, but investors in Suncor Energy Inc. (TSX:SU)(NYSE:SU) are acutely aware that it is the price of oil that matters most when it comes to share price performance.

In a lower oil price environment, the company will be less profitable and the fourth quarter results have already started to show the impact of the declining oil price.

Sharply lower fourth-quarter profits

Suncor announced an earnings per share of $0.06 for the fourth quarter, which was 80% lower than the comparable quarter last year. Operating earnings and cash flow per share, which are better measures of financial performance, declined by 59% and 35%, respectively.

The main reasons for the sharp declines were, first, the lower oil price, which impacted product price realisations, and an inventory write-down partly offset by the much weaker Canadian dollar. A considerable unrealised loss on debt held in U.S. dollars was also recorded and impacted net profit but not the operating earnings or cash flows.

The refining and marketing section (including Petro-Canada) recorded sharply lower operating profits as an inventory revaluation, necessitated by the lower oil prices, took a $372 million toll. Otherwise, the division performed well, with increased production and refinery utilisation.

Total upstream oil production was unchanged at 557,600 barrels of oil per day compared to the same quarter last year. The exploration and production division delivered an increase in production to 138,300 barrels of oil per day, mainly as a result of a temporary contribution from the Libyan facilities (which has now stopped).

The oil sands operations decreased production by 6% to 384,200 barrels per day compared to last year, mainly due to unplanned maintenance at Upgrader 2, while production at the Firebag reached record levels.

Price realisations per barrel of oil produced were generally lower as a result of lower benchmark prices than the previous year, but the weaker Canadian dollar and narrower discounts for Canadian oil compared to the international benchmarks cushioned the blow somewhat.

Operating production costs in the quarter amounted to $35 per barrel for oil sands and $45 per barrel for Syncrude, which in both cases represented a decline in cost. While total cost is obviously considerably higher, this implies that the company can still remain cash flow positive with regard to the oil-producing activities at the current oil price.

Weaker cash flow but a sound balance sheet

The cash flow of the business weakened considerably during the quarter, with an operating cash flow 37% lower than the previous year. Free cash flow (that is, operating cash flow minus capital expenditures) amounted to $2.1 billion for the year.

The company paid a $0.28 per share dividend during the fourth quarter, which was 40% higher than the previous year, while 42 million shares were repurchased from the market over the past year. Total cash returned to shareholders amounted to over $3.1 billion during 2014, which left a shortfall when compared to free cash flow and resulted in an increase in company debt.

Despite an increase in net debt to $7.8 billion, the balance sheet remains in good shape, with net debt representing a very manageable 24% of total capital.

Further share purchases have now been suspended due to the lower oil price and weaker cash flow. The dividend, however, does not seem to be under threat for the foreseeable future, unless the oil price declines further and remains low for an extended period.

Outlook for 2015

The 2015 outlook was provided on January 15 when management stated its objective to reduce operating costs by $600 to 800 million over the next two years. Capital expenditure has also been lowered by $1 billion for 2015, although it will remain at an elevated level of around $6.5 billion.

Most importantly, company management was working with a West Texas Intermediate (WTI) oil price assumption of $59 per barrel for 2015, which may still prove to be somewhat optimistic.

It all depends on the direction of the oil price

Numerous factors, including the Canadian dollar exchange rate, play a role in the profitability of the Canadian integrated oil producers, but Suncor’s profit remains highly sensitive to the price of oil.

The average WTI price in 2014 was $93 per barrel compared with the current spot price of $48 per barrel. Should this become the average price level for 2015, the profits of Suncor and other oil producers will be seriously affected.

From an investment perspective, I would remain on the sidelines until the oil price settles.

The post Suncor Energy Inc.: It’s the Oil Price, Stupid! appeared first on The Motley Fool Canada.

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Fool contributor Deon Vernooy, CFA has no position in any stocks mentioned.

Rogers Communications Inc (TSX:RCI)(NYSE:RCI) announced the first full-year results with CEO Guy Laurence at the helm. During this time he outspent his main competitors on the 700 MHz auction with a $3.3 billion outlay and made a multibillion-dollar investment in NHL broadcasting rights. His key strategic objective is to be to enhance customer experiences and focus on higher value customers. It has yet to bear fruit.

Not a good year for Rogers but some improvement in the final quarter

Net profit for the fourth quarter amounted to $355 million which, on an adjusted basis, was 1% lower than the year before. For the full year, adjusted net profit declined by 13% and on an unadjusted basis (that is, a pure IFRS accounting basis) by a whopping 20%.

For the full year revenue increased by 1% and operating income increased by the same margin. The fourth-quarter results indicated improvements of 4% and 6%, respectively, although it has to be noted that the comparable quarter of 2013 provided a low base for comparison.

Adjusted earnings per share for the quarter was unchanged at $0.69 per share but declined by 13% to $2.96 for the full year. The results were in line with the consensus market expectation.

The dividend for the final quarter was increased by 5% to $0.48 per share which brings the total for the past four quarters to $1.85 per share and a yield of 4.1%.

Below par operational performance

In the all-important wireless segment, the operating metrics indicated a mixed performance with a decline in the number of subscribers for the quarter and the full year. On a more positive note, the blended average revenue per user increased by 2% during the final quarter to $59.86 although there was a slight decline for the full year. Data network revenue increased by 8% during the quarter reflecting higher data usage from continued adoption of smartphones and other data-centric wireless devices. Adjusted operating profit in this division increased by 4% for the quarter and by 3% for the full year to $3.3 billion.

The cable division demonstrated the all too familiar pattern with growth in internet line connections and revenues but declines in phone line subscribers and revenues. Adjusted operating profit for the year declined during the year by 3% to $1.7 billion while margins moved lower as well. Apart from a subdued operating performance in this division, operating costs also increased by 3% during the year as a result of higher programming and customer-related costs. One would expect tighter expense control with revenues under pressure.

Reduced cash flow generation and higher debt

Mainly as a result of higher interest payments, operating cash flow was 7% lower during the year but still represented a high cash conversion rate of 29% of revenue. As a result of considerably higher capital expenditures and acquisitions, free cash flow (operating cash flow minus capital expenditures) was negative for the full year and the company accordingly had to increase debt and reduce cash balances to finance the expenditures and dividend.

Net debt increased by 25% to $14.7 billion at the end of the year and finance costs amounted to $817 million, an increase of $75 million for the year. This represents a very high debt-to-equity ratio of 2.68 times but interest cost is still comfortably covered by operating income. The low interest rate environment is working in currently favour of the business but the high debt level will provide a major headwind in a higher interest rate environment.

An underperforming share price… when will it turn?

Company management indicated that adjusted operating profit could improve slightly during 2015. Consensus expectations indicate at this point that earnings per share could grow with low single digits while the dividend would increase by 5%.

The valuation of the company reflects an EV/EBITDA valuation of around 7.3 times, a price/earnings ratio of 14.7 times and a dividend yield of 4.3% for the next 12 months. This valuation is at a discount to its Canadian peers but probably well-deserved given the high debt levels and ongoing below par performance.

Rogers’ share price has underperformed its main competitors, Telus Corporation and BCE Inc. over the past few years. The jury is still out on whether the new CEO can help the company to regain traction.

The post Rogers Communications: Can the New CEO Make a Difference? appeared first on The Motley Fool Canada.

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Fool contributor Deon Vernooy, CFA has no position in any stocks mentioned. Rogers is a recommendation of Stock Advisor Canada.