Monday, 16 June 2014

Centenarian Companies in Canada - Surviving and Thriving, Mostly

We'd all like to live to be 100 years old. But more than that, we'd like to be healthy and vigorous. It's not easy to achieve for people and just as difficult for companies. We decided to have a look at Canadian publicly traded companies that have existed for at least a century to see how they are doing, whether they are merely surviving or doing well.

No casualties amongst 2010 centenarians - The first pleasing thing to note is that all twelve of the companies in our 2010 post Twelve Ultimate Buy and Hold Canadian Stocks are still around and doing quite well, thank you.

Dominant players on the TSX - Three of the centenarians, led by the Royal Bank (TSX: RY), followed by TD Bank (TSX: TD) and Scotiabank (TSX: BNS), are the three largest companies, measured by total market value of stock, in Canada.

Beyond the original twelve, we did more digging (in University of Western Ontario's Canadian Centennial Companies and the Globe's Report on Business Top 1000) and uncovered another dozen companies that have a continuous 100-year history, though at times quite eventful (we are thinking especially of the oldest one of all, the Hudson Bay Company, which went private for several years recently and has undergone plenty of restructuring).
(click on table to enlarge image)

The two dozen companies together are massive - they constitute only 10% of the number of companies but they make up 33% of the total value of the TSX Composite Index. As our comparison table shows, the centenarians' market cap almost all far exceed the average of $1.6 billion (based on the stats from the iShares ETF (TSX: XIC) that invests in the TSX Composite).

Banks and insurance companies in the majority - Almost half (11) of the companies are financial companies, including all of Canada's largest banks. There is only one or two representatives from other sectors - mining (Teck), forestry (Domtar, though it evolved from an industrial company), industrials (CPR and Russel Metals), energy (Imperial Oil and Enbridge, which was originally Consumers Gas), booze (Corby and Molson), telecommunications (BCE), consumer (HBC, North West Company and George Weston) and publishing (McGraw-Hill Ryerson).

Stock price stability - The majority of the centenarians' stock prices are quite stable, as the Beta (a measure of a stock's price volatility compared to the market average) figures below the market average of 1.0  in our table demonstrate. Of course, when the stock market experiences extreme stress, as during the 2008 financial crisis, then the stock price stability can change dramatically. The nature of the crisis will influence individual stock reactions too - during the financial crisis, bank stocks in Canada, despite the strength of Canada's banks unlike those of the USA, Europe and the UK, suffered a sharper drop than the overall TSX. The bank stocks' price recovery was faster than the TSX too, pushing up the Beta, as the chart from TMX Money below shows. Upward high volatility / Beta can be good - current CPR shareholders will attest to that.

Prosperous and healthy at the moment - The centenarian companies are still as blue chip as they come (cf  Earnings, Dividends and Return on Equity in our comparison table above) with solid consistent profits, healthy and rising dividends. Only HBC is losing money and only Manulife has a negative stock return over the past five years and only three companies have 5-year compound returns less than the TSX Composite/XIC.

All the companies pay dividends but the growth of dividends is one relatively weaker spot of the centenarians. One company - MFC - has had to cut dividends. Several others have not increased theirs at all over the past five years while others have not increased their distributions by as much as XIC's 6.4% annual rate.

One other apparent anomaly on dividends, North West Company's (TSX symbol: NWC) 2% drop in dividends is a result of its conversion from income trust to corporation in 2012, which forced it to change from distributing pre-tax income to after-tax dividends (and which would leave an investment in a taxable account no worse off due to the dividend tax credit). The corporate NWC has increased its dividend in 2013 and again in 2014, up a total of 17% over 2012.

Swings and roundabouts of company and shareholder returns - Extending the view of these companies' histories shows that some have done considerably better than others.

The chart below using BMO InvestorLine's graphing tools shows the price-only (i.e. excluding dividends) performance since 1984 of four of the centenarians - Royal Bank, BMO, Russel and Imperial Oil - against the TSX. The dark blue line of RY is way above the others, though at one point in 2007, IMO briefly topped it. Meanwhile Russel has doddered along, more or less returning nothing but dividends to shareholders who may have bought 30 years ago.

That doesn't look at all good for Russel ... but then consider the last ten years alone. Suddenly, Russel is the best performer of all, exceeding even Royal Bank. Stay in the game long enough and good things may happen. We might adapt the Star Trek motto, "Live long and prosper" to "Live long enough and you will prosper".

The mix of positive and negative analyst recommendations in our table suggests however that success is not assured. Indeed our list of centenarians is biased in that it includes only survivors and excludes those many companies that have fallen by the wayside.

Yogi Berra's delightful quote, "it ain't over till it's over", sums it up. Unlike people, whose bodies and minds eventually deteriorate but cannot be repaired or replaced, companies have the potential to bring in new people, hopefully to absorb and continue the best elements of the past while adapting to inevitable changes. A report in the Economist magazine suggests that longevity and prosperity are not accidentally associated. The centenarians provide an interesting starting list of companies to consider for a long term portfolio.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

1 comment:

Asset-Grinder said...

Great article. Love the history lesson about the stocks many Canadians such as myself.Great work on the blog as I have recommended it to new investors. Thanks