BANKS © Connolly Report April 2000 p. 455
Analysts think bank valuations are attractive and advise you to purchase one or more. In fact, they recommend an overweight position in bank stocks. One report I read listed 16 favourable factors, trends, and events in their annual bank review. Among these were: strong earnings growth, strong balance sheet, cost declines, internet ventures, expected mergers. As is usually the case, the bank which gets recommended depends upon the source you consult. The current favourite seems to be CIBC.
None of the banks are in the top half of my list. In their February 11 report on the Canadian banking industry (Edition # 10), Value Line said, "The Timeliness rank of this group is well below average." Even though the banks are up from the bottom and into the middle of the list, I'm still not buying banks. It's getting close, however. Yields are very much better than two years ago. And because the payout ratio remains below the long-term average of 43%, better than average dividend growth is expected. Value Line is projecting, out to '02-'04, these dividend growth numbers: BMO 7.5%, NA 14.0%, BNS 7.0% CIBC 8.0%, RY 9%. If volatility in the markets continues and you can pick up an extra half point on the yield - say BMO nicely over 4%, then combined with dividend growth, you'll have a superior long term investment. I'm ready to pounce if there is a bank sell-off. My bank selection strategy is simple: the one with the highest yield.

In the print edition there were two position graphs here - BMO and Westcoast

Which to buy? Add yield and dividend growth.
ENB 7.5% - According to a headline I saw a few weeks ago, "Enbridge is the top pipeline play". That's not saying much: there are only three companies in this sub-index. Remember. Institutions usually follow industry representation guidelines. With TCPL out of favour, there's only ENB and Westcoast. Since bottoming out at $23 in January, Enbridge is up some 35%. Enbridge is a fine company. In 1999, for instance, revenues were up to $2.7 billion from the previous year's $2.3 billion. However, ENB is no longer in my buying range. And I'm not chasing it. Enbridge's dividend growth has been less than average over the last five years: 3.7%. Add dividend growth to the current yield of 3.8%: the sum is only 7.5%.
BMO 13.2% - Bank of Montreal has about the same yield as ENB. BMO's dividend growth, however, has been double the dividend growth of Enbridge: 9.4% annually over the last five years. Add average annual dividend growth to BMO's current yield and you get 13.2%. On this criteria, BMO would be the better buy.
CU 8.7% - Or do the logic this way. Canadian Utilities has had about the same dividend growth as Enbridge. CU's yield is over a point higher so 3.6% dg + 5.1% yld = 8.7%
W 12.8% - Now, if you are looking at Canadian Utilities at 5.1%, Westcoast's yield is the same. Westcoast has had dividend growth of 7.7% giving 12.8%. That's about the same as BMO.
BCG 9.9% - BC Gas is in between: a bit better than average dividend growth, a bit lower yield.

Notice in these examples, I am working with the top centre of the list. Stocks at the top have little or no dividend growth: stocks at the bottom, very low yield. It's the combination of yield and dividend growth that's important-especially if you are going to hold for a while. By adding yield and dividend growth, you get a better estimate of expected future income.

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Current Comment - April 14, 2000 from page 4 of the report page 453
Still the tiered list. Energy utilities on top, banks in the middle, and telecoms on the bottom. Generally, one could consider buying a pipeline or energy utility, maybe a bank but definitely not telecoms.
QTG - I sold the Quebec Tel in my RRSP for $22.45. I bought QTG at $9 in Feb 95. The dividend has been flat.

Aliant - We also sold enough Aliant at $41.05 on April 10 to get our money back. We can't lose now. I love common stocks. Even though our yield on the September 1995 purchase of MT&T was 6.9%, the Investor Relations people at Aliant told me to expect only "slight" dividend increases in the years ahead. Now that they are a growth company, they intend to lower their payout ratio. We might sell more AIT into a good bear market rally. As of the Feb 28^th federal budget, the capital gains inclusion rate is 66.67% - down from 75%.

High Dividend Growth stocks - (TCR Aug'99) Now that the bubble has burst, I'm keeping an eye on high dividend growth shares that may fall from grace in the months ahead. I'm probing Gennum and Laidlaw too.

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