Thursday, October 28, 2010

Aaron Dun, Toronto Money Show 2010

Aaron is from KeyStone Financial Publishing Corp. His talk was on Investing in Dividend Growth stocks. He said to get their recommendations, we should sign up for their research at Income Stocks. This is their report that talks about investing in dividend growth stocks. They have another report on high growth small cap stock and this is also available at Key Stocks.

Dun said that what they recommend profitable and growing businesses at attractive prices. Their model is GARP, or growth at a reasonable price. They provide a company profile on dividend paying companies that have strong free cash flow, a strong business model and a proven management team. They mine data to find companies that are posed for growth. They expect that these companies will be held for 1 to 3 years for clients to earn a good return. He also said that the way his company gets paid is by selling its investment letters.

He said that some of these companies are small cap companies and he defined small caps as being worth less than $500 million in market capitalization. He stated that past recommendations were for Telus Corp (TSX-T), DirectCash Income Fund (TSX-DCI.UN) and Ag Growth International (TSX-AFN). He said they recommended Telus as it had a strong yield with a conservative payout ratio (of less than 50%). Telus has a history of profitability and of trading at less than 4 times cash flow. He said that some of the best dividend payers, like BCE, Rogers and Telus are good solid companies.

Dun said that Ag Growth has successfully converted from an Income Trust to a corporation. They have maintained their dividend (or distribution) level. They have minimum debt and a conservative 56% payout ratio. Their valuation is still at 10 times earnings. They have a tax pool that will last for a couple more years. Dun says that lots of countries need better gain handling and storage equipment. He feels when credit eases, this company will get more business that is international and it will grow. He thinks that this company is still a buy.

For DirectCash, he says that it has a strong business model with recurring revenue. Dun says that the ATMs that they own account for 50% of the company’s revenue. This company is also into prepaid credit cards. This is a high growth company with an attractive valuation and it is trading at 5 times cash flow. The good thing about this company is that it is largely unknown by the investment community. This company is consolidating the ATM business (although ATM business itself is declining by some 2 to 3% a year). KeyStone feels that there is not much growth in this business on a go forward basis.

This company puts ATM machines into bars, gas stations and shops. It puts in its own ATM machine (and gets a fee for each transaction), or it rents the ATM and gets rental income. They had expanded into Mexico and this did not go well. They are looking at going into Latin American currently. KeyStone’s status on this stock is a sell. (By the way, I have blogged about DirectCash. Click here or here for my November 2009 blog entries. For the spreadsheet see dci.htm. For Telus, I have a spreadsheet, but I have never blogged about it.)

So, let’s go back to this session by Aaron Dun. Dun says that they have rules for investing. First, you should always invest for value. Secondly, you should be patient and allow an investment to grow. Thirdly, you should always invest with your mind, not your emotions. Rule number 4 is that you should diversify. The last rule is that you maintain reasonable and achievable expectations.

He says you have to invest in real profits and real cash flow. Dun admits that it is tricky to determine the actual value of a company, but that KeyStone believes that an underpriced company has a much lower risk than an overpriced company. He also says that having an advisor is not substitute for individual thought. He says that successful investment is not correlated to IQ. He emphasized that we must keep our emotions under control.

Dun said that if people are fearful, it is the best time to buy. All markets move up and down and we should not get unset about this. He also said that success is time in the market, not timing the market. He also gave an example of a recent past good pick of KeyStone. This company was Hammond Power Solutions Inc (TSX-HPS.A). This stock was at $.65 when they recommended it in 2002 and it was up to $13 in 2007. (I sort of wonder about this pick, or his mention of this stock, as it is not a dividend paying stock.)

Dun said that Warren Buffet earned an average of 23% in total return a year. He said that the average Canadian investor earns about 6 to 8% on average in total returns per year over the long term. However, with their advice, a conservation investor would earn 10% in total returns a year. A moderate investor could earning in the range of 12 to 15% per year and an aggressive investor could year more than 15% a year. He said that the total returns from their recommendations would give an investor, on average a 45% return each year. (Please note that all investment letters promise such things.)

Dun says that dividend paying stock outperform non-dividend paying stock. He also said that dividend paying stocks are less risky than non-dividend paying stock. Also, dividend paying stock can give you a return, even in a depressed market. He says that the stock they recommend have very attractive yields as well as strong capital appreciation. However, he said that some dividend paying stock can be highly speculative and they do not suggest investment in such stocks.

He said that the companies that they recommend would have strong free cash flow, as this would lead to increasing dividends. They like companies that a strong competitive advantage, with a health balance sheet and a reasonable payout ratio. They like companies that have an attractive valuation and are cheap relative to earnings. They also want a company with a proven management team. Dun pointed out that they do not like companies that are highly leveraged.

The sort of portfolio that this company recommends would be in three parts. You would have a core portfolio of ETFs that would be 30 to 80% of your total portfolio. Then you would have a number of satellite portfolios. One satellite would be a portfolio of 6 to 10 small cap companies. Another satellite portfolio would be 6 to 10 dividend paying stocks. A possible satellite portfolio would be one with ETFs on emerging markets. A 4th possible satellite portfolio would be ETFs on specific market sections.

The last think Dun did was to recommend a book. This was “The Intelligent Investor” by Benjamin Graham. On my website, you can find out how to order this book on Amazon if you care to purchase it. See Graham.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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