Investing Lessons From The Comfortably Retired

During a recent visit with my uncle Roland at his expensive gated retirement community, he introduced me to a group of his neighbours, many of whom had returned from their Florida winter homes and appeared tanned and fit. They seemed very comfortably retired, although none admitted to having gold-plated pensions. Instead, all credited their wealth to long-term holdings in the stock market. Were there any investing lessons these retirees could offer?

“Don’t gamble,” said one gentleman. “Take all your savings and buy some good stock and hold it till it goes up, then sell it. If it doesn’t go up, don’t buy it.”

That quotation, from American humourist Will Rogers (1879-1935), prompted another to cite Mark Twain: “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.”

All kidding aside, all said their comfortable retirement had been achieved by gradually buying stakes in large, dividend paying companies, holding for the long-term and ignoring day-to-day price fluctuations. Most said they owned all five Canadian banks and a few giant U.S. corporations. When I asked the group if there were any less well-known stocks that had been particularly successful and still seemed attractive, opinions differed widely. Some scoffed and rolled their eyes at the other’s selections, and at one point, the discussion became heated.

The group came up with more than a dozen investment ideas, which I sifted through using the BMO Investorline Advanced Stock Screener. The following three companies all pay a dividend of at least 1% and have demonstrated steady share price growth, with gains of at least 10% in the past year, 20% over the past three years and 30% since 2014. Similarly, all three have reported five-year growth in revenue, profit, earnings per share and assets of at least 5%. Finally, the three have posted average returns on common and total equity, together with returns on capital and assets, of at least 5% over the past five years. Of course, these are merely ideas and should not be acted upon without further investigation. Past performance is no predictor of future performance.

Open Text Corp. (OTEX/TSX, NASDAQ)

Open Text started in 1991 as a University of Waterloo search-engine project. The company’s software began shipping in September of that year with customers including university libraries, the Oxford University Press and the Canadian Pharmaceutical Association. Since then Open Text has expanded dramatically, adding dozens of new clients, thousands of employees, and acquiring smaller software makers. The company is part of the enterprise information management (EIM) market, which licenses software that helps corporate and government clients handle tasks such as scheduling, collaboration and content management.

Customers in the United States accounted for U.S. $1.43 billion or about 50% of the company’s U.S. $2.82 billion in total revenue last year, with clients in Europe, the Middle East and Africa representing U.S. $920 million or about 33%, Asia-Pacific about U.S.$280 million or 10%, and Canadian customers representing U.S.$150 million or 5.3%. The company’s “total growth strategy” blends organic growth and acquisitions. Open Text has spent U.S. $4.5 billion since 2014 on acquiring smaller companies and has made 13 acquisitions over the past five years, the company’s recent investor presentation says.

As of 2018, the company employed 13,000, with 3,700 employees in the United States, 1,800 in Canada, 2,500 in Europe, the Middle East and Africa, and 4,800 in the Asia-Pacific region.

Fully 44% of Open Text’s revenue comes from licensing its software, 29% from cloud services and subscriptions, and 27% from customer support and professional services.

Open Text’s share price has climbed slowly and steadily over the past five years, and at a recent $55, it has a market capitalization (shares times share price) of $14.7 billion. At this price, the stock trades at 13.8 times forward earnings per share, 2.9 times book value per share, 3.8 times sales per share and 12.9 times cash flow per share, the Morningstar.ca site says.

The stock’s beta, or measure of the volatility of its price compared to the index, with the index having a value of 1.0, is just 0.624, the TMX’s site says.

Open Text has paid a dividend since 2013 and has increased it every year since. The most recent 15% increase brings the annual dividend to U.S. 70 cents per share, yielding about 1.7%. The dividends are usually in U.S. funds, which means they are subject to a 15% Canadian non-resident tax. Shareholders received an extra share for each two shares they held when the stock was split in 2014 and 2017. An investment of $10,000 made in 2014 would be worth about $21,600 now, resulting in a five-year return of about 116%, the company’s site says.

For the company’s third quarter ended 31 March 2019, Open Text reported earnings of U.S. 64 cents per share, up 18.5% from the same quarter a year ago, on revenue of U.S. $719 million, up 5% from the same quarter of 2018.

MTY Food Group Inc.

Founded in Montreal in 1979, MTY has a stable of 75 restaurant brands, including quick-service restaurants such as Country Style, Timothy’s Coffee, Cultures, Mr. Sub, Manchu Wok, Mmmuffins, and Planet Smoothie, and family/casual dining spaces such as Baton Rouge. The company has 5,941 operating locations, almost all of which are run by franchisees. Geographically, the company has about 46% of its locations in the United States, 45% in Canada and 9% in other countries.

MTY shares spiked up to more than $70 in November 2018 and again in January 2019 but have since settled near the $60 level. The shares are not volatile, however, with a beta of just 0.563, says the TMX site. At $60, the company has a market capitalization of about $1.5 billion and trades at 22.2 times trailing earnings, 17.5 times forward earnings, 2.4 times book value per share, 4.1 times sales per share and 14.1 times cash flow per share, the Morningstar.ca site says.

MTY has paid a dividend since 2014 and except for 2017, when dividends were held at 46 cents per share, has increased the dividend since then. The current indicated annual dividend of 66 cents yields 1.1%. An investment of $10,000 made five years ago would be worth $20,173 today, says CFRA, part of S&P Global Market Intelligence.

In the first quarter of its 2019 fiscal year, ended 28 February 2019, MTY reported system sales of $687.8 million, up 27% over the first quarter of 2018. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $28.4 million, up 47% compared to the first quarter of the previous year. Net income was $14.7 million or 59 cents per share. As of 28 February 2019, the company had $40.4 million in cash against long-term debt of $284.6 million.

TFI International Inc.(TFII/TSX)

Drive on any highway in Canada, the United States or Mexico and it won’t be long before you see a tractor-trailer or container that belongs to TFI. The company has more than 80 companies operating in four segments: Package and Courier (PC), Less than Truckload (LTL), Truckload (TL) and Logistics and Last Mile (LL). Motorists will recognize some of their names: Clarke Transport, Canadian Freightways, Laidlaw Carriers and dozens of others. The company’s PC unit is its fastest growing segment. The unit’s operating companies include Canpar Express, ICS Courier, Loomis Express and TForce Integrated Solutions. Like MTY, TFI’s growth has been fuelled primarily through acquisitions.

TFI shares traded above $45 through July to October 2018 before slumping with the rest of the market in December. The stock’s beta, as shown on the TMX site, is 1.4, which means its shares are 40% more volatile than the S&P/TSX Composite. At a current level of $41.60, the stock trades at about 10.6 times forward earnings per share, 12 times trailing earnings and 2.4 times book value per share, but just 0.7 times sales per share, the Morningstar.ca site says.

The indicated annual dividend of 82 cents per share yields about 2%. The company’s site says it will distribute about 20% to 25% of its free cash flow to shareholders, allowing it to operate and make acquisitions while providing an adequate return to shareholders.

In the first quarter ended 31 March 2019, TFI enjoyed record results, with operating income of $106.3 million, up 41% over the same quarter a year ago. Revenue was $1.23 billion, up 3% over the same quarter of 2018. Net income of $65.1 million or 74 cents per share was up nicely over the 53 cents per share recorded in the first quarter a year ago. The company made three acquisitions during the quarter.

While unanimously endorsing the three companies mentioned here, our group of comfortably retired seniors admitted to making some investment mistakes along the way. Their views can be summed up in another quotation from Will Rogers.

“Good judgement comes from experience, and a lot of that comes from bad judgement.”

Richard Morrison, CIM, is a former editor and investment columnist at the Financial Post. richarddmorrison@yahoo.ca