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SPPs for 2003

The long-term, risk-averse investor should consider three factors when selecting stocks with a Share Purchase Plan (SPP). First, they should demand a low price. Second, earnings stability is desirable because most investors sleep better at night when they own stock of steady companies. Finally, investors should look for modest, but not necessarily spectacular, earnings growth. I used these criteria to come up with a list of interesting stocks in "SPPs for the Long Term", which was published in the March 2001 edition of Canadian MoneySaver. In this article, I take a look at the performance of my past SPP picks and provide a new list of interesting stocks. The five SPP stocks of 2001 were Imperial Oil (IMO), The Bank of Montreal (BMO), The Bank of Nova Scotia (BNS), Alberta Energy Corporation (AEC) and B.C. Gas (BCG). Table 1 shows that these five stocks have managed to handily outperform the market from February 15, 2001 to February 4, 2003 by gaining an average of 13.5% (not including dividends). It is worth noting that, Alberta Energy merged with Pan Canadian to become Encana (ECA) on April 5, 2002, and Encana does not provide a SPP at this time. All in all, these five stocks fared well during the market downturn of the last few years.

Table 1: Performance of select 2001 SPP stocks
Stock Price (02/15/01) Price (02/04/03) Capital Gain
BC Gas (BCG) $31.00 $39.60 27.74%
Imperial Oil (IMO) $37.10 $45.40 22.37%
Alberta Energy (AEC) > ECA** $45.0611 $51.00 13.18%
Bank of Nova Scotia (BNS) $45.95 $50.70 10.34%
Bank of Montreal (BMO)* $43.625 $40.88 -6.29%
Average 13.47%
S&P/TSX Composite -27.01%
Source: quote.yahoo.com, * Split two-for-one, ** 1 AEC = 1.472 ECA


According to last month's Canadian MoneySaver, there are twenty-two SPP companies available to Canadians. To narrow down the list, I start with price. Good relative value can be obtained by selecting stocks with high earnings yields (or earnings-to-price ratios). Conservative investors should look for stocks whose earnings yield is higher than the yield of long-term government bonds (near 5.48%). After all, stocks are riskier than bonds, and investors should rightly demand a premium for the extra risk. Currently seven of the twenty-two SPP companies have earnings yields below 5.48% and fail this test.

The next factor I consider is earnings stability. Here the annual earnings-per-share history of each company is examined and stocks that suffered from losses in any annual period are discarded. It turns out that of the fifteen remaining SPP stocks, twelve managed to earn money in each of the last nine years.

Modest growth is next on my list of stock-picking criteria. After all, a 5.48% bond returns about 38% over six years and any business worth its salt should be able to do better. Table 2 contains earnings-per-share figures for the surviving SPP stocks. My first step in calculating long-term growth is to average the first three years of earnings-per-share data and then the most recent three years of data. Growth is then found by dividing the recent average by the past average. This procedure helps to reduce the impact of an exceptional year on the results which are shown in Table 2. Unfortunately, only eight of the twelve remaining stocks achieved growth rates of more than 38%.

Source: profiles.wisi.com
Table2: Earnings-per-share of select SPP stocks
Symbol 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Recent Growth
IMO 0.62 0.89 1.49 1.83 1.26 1.35 3.40 3.16 3.19 3.19 225%
SU 0.17 0.28 0.35 0.43 0.51 0.43 0.40 0.79 0.82 1.64 1.64 209%
BNS 0.88 1.69 2.04 2.96 2.64 2.93 3.67 4.12 3.36 3.36 142%
ENB 0.55 1.15 1.45 1.58 1.66 1.91 2.54 2.91 2.09 2.09 140%
BCE 1.76 1.12 1.70 2.11 7.07 8.35 7.14 0.57 2.74 2.74 128%
BCG 1.43 0.97 1.16 2.53 1.27 1.85 2.12 2.84 2.21 2.45 111%
NA 1.01 1.12 1.26 1.76 1.86 1.69 2.24 2.54 2.78 1.57 103%
BMO 1.51 1.73 2.11 2.35 2.36 2.38 3.31 2.72 2.73 2.73 64%
TA 1.18 1.14 1.14 1.14 1.62 1.10 2.90 1.27 0.41 0.41 32%
FTS 2.56 2.46 2.53 2.36 2.38 2.12 2.24 2.72 3.35 3.76 30%
EMA 1.07 1.10 1.11 1.05 1.07 0.99 1.16 1.20 1.20 1.06 6%
DFS 1.41 2.33 1.98 2.12 2.12 2.04 3.16 2.47 0.35 2.27 -11%


The eight SPP stocks that pass all three tests are shown in Table 3. I've also provided each stock's price per share, earnings-per-share growth (from Table 2), earnings yield, and Standard & Poor's debt rating. All of these stocks have investment grade debt ratings and, as a result, are fairly safe.

Table 3: New SPPs for long-term investors (02/04/2003)
Stock Price Growth Earnings Yield Debt Rating
Imperial Oil (IMO) $45.40 225% 7.03% AAA
Suncor (SU) $25.92 209% 6.33% A-
Scotiabank (BNS) $50.70 142% 6.63% A+
Enbridge (ENB) $41.55 140% 8.69% A-
BCE Inc (BCE) $28.75 128% 9.53% A
BC Gas (BCG) $39.60 111% 6.13% BBB+
National Bank (NA) $32.00 103% 6.81% A
Bank of Montreal (BMO) $40.88 64% 6.68% AA-
Sources: profiles.wisi.com, quote.yahoo.com, www.standardandpoors.com


Unfortunately, a portfolio composed of eight stocks does not provide the investor with adequate diversification, but this problem can be overcome by moving beyond SPP eligible stocks. In my view, it is more important to select good long-term stocks than to stick with poor stocks just because they have a SPP.

Of this year's eight SPP stocks, I currently own BCE and National Bank. As a deep value investor, I view BCE as fairly valued and National Bank as a bit expensive. I am concerned about the possibility of rising interest rates and remember, all too clearly, National Bank's plunge below $20 in 1999. I'm similarly worried about the other banks, but most have done a good job of avoiding problem loans during the downturn. Mind you, all stocks have unique risks. Be sure to use my SPP list as a starting point and dig further to make sure that a particular stock is right for you. Although I'm hopeful that this approach will perform well, the continuation of its robust past performance can not be guaranteed.

First published in March 2003.

 
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