Transcontinental: Stock Review

Transcontinental: Value trap or golden opportunity?

Transcontinental Stock

Transcontinental is Canada’s largest printer, and more recently (due to some major acquisitions) quickly becoming a leader in the packaging industry as well.  Over the last few years Transcontinental has deployed around 2 Billion dollars to acquire packaging companies such as Coveris & Trilex.

It’s been a wild ride for Transcontinental the last couple of years, as they have slowly been transforming their business from printing and speciality media to packaging.  Although Transcontinental may not be a household name, make no mistake, it is a massive company with a global footprint.  With over 9000 employees, and almost 3 Billion dollars in revenue in 2018.

The stock price has taken a beating.  Just over a year ago Transcontinental was trading over $30, today you can pick up shares for around $15. So what happened?

The printing industry continues to decline.  In 2016 the printing segment was responsible for 74% of Transcontinental revenue.  Fast forward to today, and printing revenue is responsible for just over 40% of their revenue.  That sounds bad, and most people (even analysts) still look at Transcontinental as a printing company with declining revenue.  What most analysts miss, and what they aren’t talking about, is that over the same time that printing revenue has fallen, their packaging revenue has skyrocketed.  In 2016 packaging was responsible for 11% of revenues – today packaging makes up 53% of revenues.

Transcontinental Revenue By Sector

*Above image courtesy of TCL investor presentation(page 8)

The market is still valuing this as a printing company that is struggling.   Yes, printing revenue has dropped – BUT- overall revenue has actually increased, so has EBITDA and earnings per share has been steady.  It’s not all gravy though, pretty much all of their revenue growth is coming via acquisitions (which isn’t cheap).  From 2009-2017 Transcontinental did a great job of deleveraging their balance sheet.  They managed to bring their net indebtedness ratio from 2.6x to 0.3x, all while growing revenues, increasing dividends, doing share buybacks and seeing the share price appreciate.  Unfortunately, to complete the transformation from printing to packaging, they had to take on a lot of debt (billions) for multiple acquisitions.  In 2018, their net indebtedness ratio was back up to 3.1x, but has already fallen to 2.7x.  Here is a quick view of Transcontinental’s net indebtedness ratio over the last decade.

Transcontinental Net Indebtedness Ratio

The big question is will they be as successful over the next 10 years, as they were in the previous decade getting that ratio down.

Transcontinental Stock Metrics

Price/Earnings:  As I mentioned, the stock is (and has been for a while) valued at a pretty low multiple  I believe this is because most people still aren’t convinced Transcontinental will be able to dominate the packaging space like they did the printing space. At the time of writing this, Transcontinental is trading at 8.9x earnings and just 6x forward earnings.  The company also believes the shares are undervalued.  In 2018 they repurchased over 500,000 shares.  So far in 2019 they haven’t repurchased any, although I believe that is because their top priority right now is debt repayment.

Dividend: Transcontinental has a long history of raising it’s dividend. It continues to raise its dividend each year, and currently pays a rather succulent 5.74% yield.  The payout ratio is creeping up, although still easily covered by cash flows.  Although they seem to keep raising the dividend each year, personally I’d prefer they used the money to pay down debt and buy back shares when they are valued this low.

Transcontinental: The Bottom Line

The big question is, will they be able to rebound, pay off their debt, start seeing significant gains from their recent acquisitions, and turn this company into one of the top packaging companies in North America?  I’m not a fortune teller, honestly I don’t know.  That said, I believe they are on the right track, and I’m betting on a turnaround.

In just 4 years they have grown the packaging business(via acquisitions) from 2 plants and under 50 million in revenue, to 28 plants and over 1.5 billion in revenue.

Transcontinental Stock Packaging Revenue

Although things haven’t been silky smooth, there was bound to be a learning curve, and I believe once they get everything sorted out, we will start to see a big turnaround. It may be a rocky ride for another year or two, but I believe if you are patient there will be big value to be found a decade from now.  The key will be paying down debt, and continuing to increase efficiencies in both the printing and packaging industries.  As a shareholder, I hope they wait to increase the dividend, and instead put the money to work paying off the debt faster, and continue share buybacks while the price is still sub $20.

Would you take a chance on Transcontinental? Let me know in the comments.

*Disclaimer* I do own shares ofTranscontinental, and amlong $TCL.

 

 

Portfolio Deep Dive: 1 year later

Just over 1 year ago  I did a deep dive into my portfolio.  I looked at things like:

  • personal rate of return
  • asset allocation
  • dividend growth
  • account allocation

You can look back at last years deep dive HERE

The key takeaways from last year were:

  • My personal yield was low.  1.7% to be exact.  This was due to half my portfolio being invested in NON distribution paying funds, and also being focused more on growth than income.
  • Almost ZERO fixed income (2% of entire portfolio).  This didn’t bother me at the time, and still doesn’t as I am still (fairly) young and focused more on total growth instead of income.
  • I needed to reduce my Canadian exposure & increase my US/Global exposure.
  • Need to start thinking more about optimising my portfolio to make considerations for taxation in the future.  For example, more income in TFSA – less in RRSP.  More to spousal RRSP.

 

Investment Portfolio Growth

I first started tracking my investments closely in January 2015.  At the time, my total portfolio was valued at $160,314.49.  It has now been 57 months since I started tracking my journey….let’s see where are now:

MoneyMaaster Stock Portfolio Total value

My early retirement portfolio now sits at $347,088.02.  This means in 57 months (4.75 years) my portfolio has grown by $186,773.53 or $39,320.74 per year. To break it down even further, this means my portfolio has been growing on average by $3,276.72 per month.  Obviously these numbers include new capital going into the portfolio as well.  I’ll get into actual total returns later.

A few observations on portfolio’s growth:

 

  • I’ve continued injecting new cash (regular bi-weekly automated contributions, and some one off stock purchases), however over the last 18 months the amount of new capital has decreased.  This is due to a few factors, most notably higher expenses (new house, daycare costs).
  • Continued bull market run – Stock markets continue to be near all time highs.
  • Dripping/Compounding effect has continued to help the old portfolio snowball continue to grow.
  • Aside from a few small market blips, my portfolio has mostly gone up each month. In the 57 months since I’ve been tracking my portfolio growth, only 11 times did my portfolio decrease in value from the previous month.  The largest decrease in value was October 2018 (-7.15%), and the largest increase was October 2017 (+10.69).

 

To reiterate, the last time I did a deep dive into my portfolio there were 3 key areas I  wanted to work on.  They were:

  1. Try to increase my personal yield, without sacrificing overall gains.
  2. Reduce percentage of Canadian equities.  I was way over weighted in Canada(home bias)
  3. The biggest take away was that I needed to start thinking more about taxation in retirement, and balancing out my accounts to minimise future tax consequences.  My RRSP had grown quite large, but our TFSA’s weren’t maxed out, and I had just started a spousal account.  To reduce future taxes, I needed to start putting more into my wife’s spousal RRSP, less into my RRSP and more into both of our TFSAs. It’s been a bit over a year since I made those observations.  What have I done to correct them…What do I still need to work on?

1. Personal Yield

When I wrote this last time my personal yield was 1.7%.  This means for every $100 invested I was receiving $1.70 in dividends or distributions per year.  Typically a well balanced portfolio would be around 2-4% depending on multiple factors (risk tolerance, years from retirement, etc).  The main reason my yield was so low was because I had about half of my portfolio invested in 2 funds that didn’t pay any distributions.  I have since moved one of the funds over into my direct investing RRSP account, and into two funds that do pay distributions.  The funds I selected were Ishares XAW and RBC Canadian Equity Income.  Although the year is not over yet, I expect my yield to be somewhere around 2.6%.  This would still be considered on the lower side, but I am happy with the balance of lower yield, but high overall gains.  I also still have about 20% of my total portfolio in a fund that pays zero distributions.

Another reason my yield has gone up slightly this year is due to multiple stocks I own increasing their dividends.  Some notable increases over the last 12 months were:

  • Algonquin Power +10%
  • Power Corp of Canada +6%
  • Western Forest +12%
  • Interrent Reit +7.4%
  • Intertape Polymer Group +5.35%
  • Transcontinental +4.7%

So simply by swapping a couple of funds and letting dividend growth companies do their thing (consistently increase their dividends) I was able to increase my yield by almost a full percent over the last year.  With continued dividend increases, I expect by next year my yield will be over 3%.  Here is a quick chart of total passive income by month and year.  For the most part, things are trending the right way.

Dividend Income by Month and year

Yearly dividend income since I started tracking:

2015: $3341.30

2016: $5015.90

2017: $4650.16

2018: $6731.42

2019: $9133* (on pace for)

2. Reducing Canadian Equity Exposure

Last year when I broke down my portfolio I noticed I had WAY too much invested in Canada.  My Canadian exposure was almost 70% of my total portfolio! The reasons for this were simple:

  • I’m Canadian – I invest in what I know
  • The funds I owned from my Canadian bank were heavily concentrated in Canadian Funds
  • I use my TFSA accounts strictly for Canadian dividend paying stocks

I decided I needed to add more USA & global exposure.  To do this I picked up some more of the Ishares XAW fund (which owns over 8000 stocks from countries all around the world EXCEPT Canada), and I increased contributions into my spousal RRSP which was invested in a 100% US Equity index fund.

Fast forward to today, and my Canadian exposure, although still too high has decreased from 69% to 59%.  The goal is to get this down to closer to 35%.  One main reason my Canadian exposure isn’t dropping as fast as I’d like it to is because each month I am dripping over $300 worth of the Canadian Equity Income fund. Obviously this is a nice problem to have, but I still need to do something to get my Canadian exposure reduced.

3. Account Allocation & Tax Consequences

This was by far the one area I needed to work the most on, and admittedly the one area I had previously paid the last attention to.  I had let my RRSP account for 82% of my total holdings, meaning, if I let this continue I’d be due for a big tax bill when the time comes to withdraw those funds.  It doesn’t make sense to have 1 large RRSP, especially when there are (legal) ways to split it into 2 medium sized RRSPs (Spousal account).  It also doesn’t make sense to have a large RRSP but not max out my TFSA.  After my last deep dive, I started putting less money into my RRSP and increased the amount into my spousal RRSP.  I have also since reduced both again, and started putting more into my TFSA.

Here is how the accounts looked last year vs today:

Asset Account Allocation

RRSP TFSA Allocation

Ugh, the most important thing I wanted to focus on, and I barely made a dent.  I’ve officially stopped contributing to my own RRSP, but because the account size is such a high percentage, the compounding/dripping is making it hard for my other accounts to catch up.  The one bright spot here is that in just over a year, I’ve managed to grow my wife’s spousal RRSP to 7% of our total portfolio.  Obviously the goal would be at retirement, these two accounts are about equal, so that we can withdraw a smaller amount from each, to reduce taxes.  My TFSA has also gone up by 2%, and I expect by next year it should continue to increase, since all money I WAS putting into my RRSP in the past, is now being split between the TFSA’s and the spousal RRSP.

Final Takeaways

The good:

  • I was able to increase my personal yield without hurting overall returns.  My TFSA returns over the last year have been 18.42%, while my RRSP has been 5.63%.
  • Even after reducing my contributions quite substantially over the last year, my portfolio is growing at a nice rate.  Again, this is due to a nice run up in stocks, coupled with dividend increases and the power of compounding returns.
  • In just 1 year, I’ve managed to reduce my Canadian exposure by over 10%
  • Both total portfolio value and dividend income are at all time highs.

The bad:

  • My RRSP still accounts for almost 80% of my portfolio.  This needs to come down, and the only way to do that is to start putting more into other accounts.  Unfortunately until the kids are out of daycare, that’s going to be tough.
  • Canadian exposure, although reduced is still too high.  First step is swapping some of my Canadian Equity income fund for XAW, and transferring my last non distribution paying fund to my direct invest account, and purchasing more XAW!
  • We are still not close to maxing our TFSA’s or RESP accounts.  Higher expenses has really put a strain on the amount we’ve been able to contribute the last year or so.

Well, it’s a a bit of mixed review.  Some things are looking pretty good – while others clearly need a lot of work.  The most important thing is that I keep looking at this, and writing about it, because it puts pressure on me to continue to improve.  Hopefully at this time next year I’ll have a few more wins in the “good” and can eliminate the “bad” stuff.

 

Cheers!

Review #4: Four Roses Small Batch

Bourbon Review: Four Roses Small Batch

Small Batch Four Roses Bourbon

 

Just a reminder: Each review will follow the same template, and include a score.  Please enjoy responsibly 🙂

It’s been a while since I have posted a new review.  I also noticed my bottle of Four Roses Small Batch was almost empty, and figured I should get a review in before I killed the bottle.

Date Reviewed: October 19, 2019

Atmosphere: in a Glencairn glass, neat @ home.  Saturday night, kids are in bed, just finished watching the Winnipeg Jets beat the Edmonton Oilers in a shootout!

Distillery: Four Roses

Mash: Four Roses has 2 Mashbills:

#1: 75% Corn, 20% Rye, 5% Malted Barley

#2: 60% Corn, 35% Rye, 5% Malted Barley

Age: No Age Statement

Type: Bourbon

ABV%: 45%

Price I Paid: $45.00 Canadian

Appearance:  Gold/Caramel, but very light and looks almost watered down

Nose:  Very light hints of sugar and ethanol, but nothing stands out.  After a few swirls, a bit woody and spicy, but all very faint.

Palate: 90% of what comes through is wood/oak, which probably doesn’t sound great, but it’s not terrible…it’s just fine.  Second sip a bit more sweet and spicy notes come through, but again the wood is by far the most dominant characteristic.

Finish: Long on the tongue, but little to no burn. The wood flavour remains for quite some time.

Conclusions:  The most honest thing I can say, is “it’s just fine”.  A bottle I’d gladly stock in my home bar, but would most likely be using it in cocktails, instead of a daily sipper.  That said, it is fine on it’s own and not overly expensive.  Still, for 45.00 there are better bottles to be had.

Overall Score:  65/100

 

The Old Fashioned: Tinkering with a classic cocktail.

The Original Cocktail

The “old fashioned” is probably the most classic cocktail there is – and has always been one of my favourites.  There are a few reasons this drink has stood the test of time, and why I like it so much:

  • Easy to make
  • Easy (and fun) to tinker with
  • Stiff – but smooth (that’s what she said)!

So what exactly is an old fashioned?  Technically it’s any cocktail that mixes a base spirit (typically rye or bourbon), with bitters and a sweetener.  The most common recipe would be:

  • 2 oz Bourbon/Rye
  • 2-4 Dashes bitters
  • 0.25-0.5 oz Simple syrup (or a sugar cube)

Once the drink is mixed with ice, you give it a citrus twist(usually orange) for some extra flavour, and more importantly an unbelievable aromatic experience.  Some people also add a dash of water – or top it off with club soda, however I prefer it with neither.

When I am feeling fancy, I’ll mix the drink in a mixing glass, with ice, then strain it into a rocks glass over a large ice cube (like in the top image).  Other times (most often) I will just make the drink in a glass with ice cubes.  It’s not as pretty, and gets slightly more diluted, but tastes just as good, and is a lot quicker.

Rye, Bourbon or something else?

Now that you know how easy it is to make the Old Fashioned, the fun part is experimenting with different variations – depending on your preference.  Are you more of a Rum gal?  No problem.  Swap out the Whiskey for a nice dark rum. The base spirit isn’t the only thing you can toy with either.  When I make a Rum old Fashioned, I like to to swap the simple syrup for a demerra syrup.  You can also play around with the bitters and citrus too!

Here is a variation of a Rum Old Fashioned I made:

Old Fashioned Cocktail

Following the “classic” recipe from above (a base spirit, bitters and a sweetener) I made a few substitutions.  Here is what I used:

  • 2.5 Oz Diplomatico Exclusiva Rum*
  • 3 Dashes Abiding Citizen Manitoba Aromatic Bitters (local company)
  • 0.25 oz 100% Pure Canadian Maple Syrup

*If you like Rum, and haven’t tried the “Diplomatico Exclusiva” – I HIGHLY recommend it! It’s great in a spirit forward cocktail like an old fashioned, but also a great sipper.

Rye, Bourbon, Rum, Mezcal – Doesn’t matter – but use the good stuff!

In most cocktails, or if you are having a rum and coke, you won’t notice much of a difference between your “Top Shelf” stuff vs the cheap stuff.  This is not one of those.  Certain cocktails deserve the good stuff and the Old Fashioned is a prime example.  If you have a nice Rye/Bourbon or Rum, or whatever your favourite poison is – treat yourself!  The Old Fashioned is meant to showcase whatever base spirit you are using, so find one you enjoy sipping on its own, and see how the bitters and syrup can help make it pop.  I was lucky enough to score a few bottles of Weller Antique a few months ago, and although it is not the most expensive bourbon around (in fact it’s actually pretty cheap), it is rare/hard to find.  I was able to get my bottles for under $40 Canadian, however they resell for over $200 USD in a lot of places.  Weller Antique is a wheated bourbon, and higher proof (107), although when you sip it, it’s very smooth, you wouldn’t think it’s 53.5% ABV.  I had mostly been sipping my bottle neat, however I decided to finish off the bottle and treat myself.
Weller Antique Bourbon Old Fashioned

As usual, I mixed things up a little bit when I made this drink.  Here is what I used:

  • 2.5 oz Weller Antique Bourbon
  • 2 Dashes Angostura Aromatic Bitters
  • 2 Dashes Angostura Orange Bitters
  • 0.5 Oz Home Made Demerra Syrup (2 Parts Demerra to 1 part water)
  • Orange Zest & Peel in glass*

*When in season, I really like to use a grapefruit instead of an orange.

I made this one in the glass.  It doesn’t look as pretty without the big ice cube, but I assure you it tasted just as good!

Anyways, it’s the weekend!  Hopefully this inspires a few of you to try making your own at home.  Aside from a great tasting drink, and a bit of a buzz you are sure to get, if you can master the art of a good old fashioned, you can also save yourself some $$$ by not having to order them at the bar…this is a personal finance website after all 🙂

In the comments, let me know your favourite Old Fashioned recipe!

Cheers!