December 1, 2014 Comments

Monday was another ugly day for the Canadian stock market. Toronto was down 0.8% and the S&P 500 was down 0.7%.

The last I had looked the Canadian dollar was up about three quarters of a cent which reduces the value of American stocks when measured in Canadian dollars.

Notable losers included CN rail down 5.1% (apparently on fears there will be less crude oil being transported). Stantec was down 3.4%. Both of these stocks trade actively in the U.S. as well as Canada. My unscientific observation is that U.S. markets are often a lot faster to push a stock down on bad news. It may be that a higher percentage of market participants in the U.S. are trading on pure momentum and when they see a dip they push prices down fast as many people head for the exits and the only way to find buyers is at lower prices. The fact that these two trade in the U.S. may be part of the reason for such a rapid drop.

I considered buying some Stantec today but I don’t have much cash left in my accounts. Stantec’s earnings come from all over Canada and the U.S. and I don’t think are all that tightly linked to the Canadian energy “patch” or to energy in general.

I may sell more of my rate reset preferred shares to raise some cash. But I hate to sell unless I can get somewhat more than I paid.

Meanwhile seeing a new offering for a 4.5% five year rate reset preferred share from Husky (I got the notice from TD Direct) I put in for 500 shares of that. That was before I noticed Stantec was down.

Another decliner was Canadian Western Bank down 3.9%. I added to my position today. I believe it is due to report earnings in the next week or two.

Liquor Stores N.A. has announced that it is selling 3.4 million shares at a gross price of $14.65. (and presumably somewhat less than that net of fees_. The process will be used “initially top repay outstanding indebtedness under its credit facility, thereby freeing up borrowing capacity that may be redrawn and applied, as required, to fund, among other things, working capital, acquisitions, construction and/or renovations of new or existing stores and information system upgrades.”

The current share count is 23 million, so this is a hefty 15% increase in the share count.

This is a high dividend entity. It is constantly paying out cash and now it is selling shares to raise cash. I struggle with how that makes sense mathematically.

I realize that REITs do this and I hope to do some analysis to understand why it makes sense for REITs.

If a REIT or a Liquor Store chain is paying a dividend from the profit or at least cash flows on existing buildings and stores and then uses newly raised cash to build new buildings or new stores, maybe that makes sense (Although I am not really convinced of that).

But in the case of Liquor Stores N.A. it has been paying our more than it earns lately. As a consequence , its debt has increased. On the face of it, it appears to have been borrowing to maintain the dividend. It has done some investing in stores, but lately not more than its depreciation expense.

I do think it is a good thing for the company to sell shares. The sale will strengthen the balance sheet and I think they are getting a good price for the shares. If the company is getting a good deal selling the shares at $14.65 (less costs) are the share buyers getting a good deal?

Maybe this will all work out and Liquor Stores N.A. will resume its former growth. But I am just not convinced.

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