Making sense of the markets this week: December 14

Photo by Adam Nowakowski on Unsplash

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

What’s coming down the pipeline for Canadian investors?

Canadian pipeline companies move oil and gas around North America. They don’t carry the risk of having to find and extract the oil and gas, and their revenues are based on regulated and very long-term contracts. So, many investors see the pipelines as a lower risk way to play the energy sector, while receiving very generous and growing dividends.

On the subject of those growing dividends, many Enbridge shareholders (myself included) wondered aloud if the company would deliver another 10% dividend increase. There was also speculation that Enbridge would not deliver a dividend increase, and that they might even cut the dividend. After all, the recent dividend yield (if you bought shares this week) was in the area of 8%. That high yield can be a warning sign that the company is stretching the boundaries of its ability to pay that juicy dividend.

On Monday, Dec. 7, Enbridge announced that they would increase the dividend by 3.09%.

Also this week, Pembina Pipeline announced that they would keep their dividend at the same level. That dividend yield has been above 7% in recent days and weeks.

And Canada’s second largest pipeline operator, TC Energy, announced they will raise money by way of a $1-billion ATM program. No that’s not an automated teller machine for corporations. Or is it? ATM means that they will issue new shares “at the money”—TC Energy will create and release new shares and will accept the price of what the market is offering that day. More often, companies will release new shares (typically to fund growth prospects) by way of a bought deal, where the price for the new shares is agreed-upon with large financial institutions.

The ATM approach is becoming more popular, as it allows for flexibility in the number of shares issued and the timing of the share creation.

I am also a longtime shareholder in TC Energy, and that ATM project will dilute my ownership in the company. I now have to share those earnings with $1-billion worth of new shareholders. The dividend will not be affected, as those are paid per share. TC Energy delivered good news in April with a dividend increase of 8%. That increase was on schedule as TC raises their dividend once a year, with the April payment. Keyera has also maintained its dividend in 2020. They operate pipelines in addition to a few other energy-related services.

The bad-news player in Canada has been Interpipeline, which slashed its dividend payment by more than 70% in March of 2020.

While I am a big fan of the shift to greener energy creation, investors might keep in mind that we still have to keep the lights on. Any green shift might take longer than many suspect. And there will be pent-up demand for travel in North America and around the globe once we get to the other side of the pandemic. The energy sector has been beat up, but there might be better days ahead, even for traditional Canadian oil and gas producers.

Tesla CEO explains valuation to his employees

In an email to 48,000 employees, Elon Musk nicely framed how fiscal prudence is a must, and also offered a deft insight into valuations of growth companies such as Tesla.

Musk’s message was quoted in Inc.…

“When looking at our actual profitability, it is very low at around 1 percent for the past year. Investors are giving us a lot of credit for future profits, but if, at any point, they conclude that’s not going to happen, our stock will immediately get crushed like a soufflé under a sledgehammer!”

Yup. Tesla is the poster child for high-flying stocks that are priced on future growth prospects. Their earnings yield is quite low, as Musk points out. That is a common theme and reality—growth stocks and the U.S. markets are very expensive. Last week we reported that Tesla will be added to the S&P 500 on Dec. 21, pulling immediately into the top 10. That will add more of that combination of incredible growth and less profitability for the S&P 500.

Will the sledgehammer come down on Tesla and those high-flying U.S. tech stocks one day? If we get back to “more normal” in 2021, earnings might begin to matter.

The Canadian stock market is fighting back

This is a very interesting chart, courtesy of S&P Global. With COVID-19 vaccines on the way, even the most downtrodden sectors of the market are bouncing back.

The chart below plots the percentage of recovery markets and sectors markets have achieved, relative to their respective pre-pandemic peaks.

Those that have since surpassed their previous 2020 highs show as 100% recovered, such as the S&P 500. We see China and the U.S. leading the way, while Europe, the UK and Latin America still have some work to do.

The chart suggests the Canadian market is within striking distance of posting new highs. That said, with further gains this week, and with dividend reinvestment, I see that the Canadian market has reached a new (total returns) high. Uh, congrats?

The Canadian financials (XFN) have added on 20% in quick order since late October, thanks to positive vaccine announcements. The capped energy index (XEG) that is composed of oil and gas stocks is up over 30% in that period. Pipelines have delivered impressive price gains as well. Canadian tech (XIT) continues to drive the index, up 15% over the last month.

Canadian stocks are certainly fighting back and benefitting more than U.S. stocks since the positive vaccine news. Over the last month, in price terms, Canadian stocks are up almost 7% compared to U.S. stocks at 3.7%.

We’ve moved from O Canada to Go Canada.

Canadian consumer confidence reaches pandemic high

And on that hopeful news front, Canadians are feeling better about their prospects. Consumer confidence is at a post pandemic high.

From BNN Bloomberg Canada…

“Consumer confidence in Canada rose to its highest level in eight months amid optimism positive vaccine developments will sustain an economic recovery. While the index is still below its long-term average, the gain in sentiment likely reflects hope of a quick global rollout of vaccines, with a massive mobilization set to get underway this week.”

You can’t keep a good index down

The Nasdaq 100 index is concentrated in many of the stocks that have been the main drivers of U.S. market success in 2020, and over the last decade. As you might guess from the name, the index holds 100 stocks. It’s designed to embrace disruption and to be very forward-thinking. For the holdings list and index methodology you can have a look at this post.

From that link…

“With category-defining companies at the forefront of innovation—Apple, Microsoft, Alphabet, Intel, Facebook, Amgen, Starbucks, Tesla—the index defines today’s modern day industrials.”

The index has greatly outperformed the S&P 500 from the financial crisis of 2008–2009. Of course, past performance does not guarantee future returns.

In the past month or so, as successful vaccines have come into play, and with the hope of getting back to “normal,” or at least more normal, we hear of the theme that beaten-up value stocks will begin to rule. But his article outlines why the Nasdaq composite is soaring again.

Based on the opinions of several analysts, the article states that the drivers are positive semiconductor news, the surging wave of COVID-19 infections in North America and around the globe (we might be stuck in that work- and shop-from-home state for longer than we think), and the strong performance of those work from home stocks.

On Monday, Dec. 7, the index hit another record high (for the third day in a row). Into Wednesday, Dec. 8, the Nasdaq 100 was up over 39% in 2020.

However the world is changed by the pandemic, it’s likely that many of these companies will continue to lead the way. After all, they are future-friendly.

You’ll find Nasdaq 100 ETFs in Canadian and U.S.-dollar offerings on the BMO ETF page.

And there is the will to continue on with the new normal, including work from home. Thanks to Mat Litalien of stocktrades.ca for this tweet.

Here’s the link to that Pew Research Centre report referenced in the tweet.

As Bob Dylan sang, the times they are a-changin’.

And on the subject of change and Bob, heck, he sold the rights to his music this week, for $300 million.

It must be 2020.

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. On Twitter @67Dodge.

MORE ON INVESTING:

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

Twitter Website