Why Buy Canadian Stocks?
Best Canadian Dividend Paying Stock #2
Tim Hortons (THI)
Tired of trying to keep up with the whipsaws and volatility in the major U.S. indexes this May? Consider looking north. The TSX Composite Index, a broad measure of the Canadian stock market, has been outperforming the NYSE Composite since late January, as you can see in the chart below. The Canadian Index is up 6.6% year-to-date, compared to 2.0% for the NYSE Composite, mostly because it has kept losses smaller during periods of weakness.
This largely reflects the Canadian market's lack of high-flying tech and momentum stocks like the ones that have led the corrections in the U.S. Instead, Canada's market is overweighted in resource stocks, which have mostly been doing well recently. In addition, Canada's stocks are also more likely to be dividend payers, which have been keeping their pullbacks small.
There's an old saying: "When the U.S. sneezes, Canada catches pneumonia." But while the economies of the U.S. and Canada are certainly intertwined, recently Canada seems to have the stronger immune system. In 2008, when the U.S. financial system collapsed, Canada's more conservative, less leveraged financial system suddenly looked like a friendly port in a very bad storm. While the U.S. stock market, with its tech stocks and hot IPOs, will almost always grow faster during the good times, Canada will usually feel less pain during the bad ones.
Today, as the U.S. market surges and retreats faster than waves on a beach, Canada's reliable dividend payers and natural resources companies look pretty appealing.
So it's a great time to introduce the second stock in my Best Canadian Stocks to Buy Now series (click here for the first). Today's dividend all star from up north is Canada's largest fast-food chain, as well as a veritable icon of Canadian-ness (it's named after a hockey player.)
If you're Canadian, you already know I'm talking about coffee-and-donuts chain Tim Hortons (THI). What you may not know is that, in addition to being a great place to pick up a "double double" (Canadian for coffee with two sugars and two cream), Tim Hortons is also a great dividend payer.
The company has paid dividends since 2006, and has increased the dividend each year since 2007. Most impressive, they've increased the dividend by an average of 24.5% every year! That's a best-in-class dividend growth rate and earns Tim Hortons an IRIS Dividend Growth Rating of 9.1 (IRIS is my proprietary system for rating dividend stocks, click here for more information on how you can get access to IRIS ratings).
Tim Hortons also has a healthy payout ratio of 34% and has generated positive free cash flow for the past three years.
My colleague Roy Ward, Chief Analyst of the Cabot Benjamin Graham Value Investor, also likes Tim Hortons' value characteristics. Earlier this month he wrote:
"The company is aggressively opening new restaurants in North America as evidenced by the launching of 174 new restaurants in the last six months. New menu items and store upgrades are bolstering sales and earnings.
"The company reported excellent first-quarter results despite severe weather problems. Sales increased 1% and EPS advanced 9% during the 12 months ended 3/31/14. Sales growth will rise 11% and EPS will climb 17% to 3.24 during the next 12 months ending 3/31/15. My increased growth forecast is based on the opening of many new stores, newly renovated stores and new menu items. The dividend yields 2.2% and the balance sheet is strong.
"Canadian companies are selected by using price to sales (P/S), price to earnings (P/E), price to book value (P/BV) or price to earnings growth (PEG) ratios. THI sells at 19.2 times current EPS. Shares are low risk. I expect THI to reach its Min Sell Price of 68.56 within one year."
Roy's valuation methodology has never steered me wrong before, and my system agrees with his analysis of THI's earnings and dividend strength. So for medium- to long-term investors interested in an undervalued company that pays you a growing income stream, Tim Hortons (THI) is my favorite Canadian dividend payer to buy now. THI is traded on both the TSX and the NYSE, so you can buy in whichever country makes the most sense for you.
To receive further updates on Tim Hortons and additional stocks recommended by Roy, click here.
Chloe Lutts Jensen
Chief Analyst of Cabot Dividend Investor