Monday’s markets were ugly especially considering that the declines come on top of all the other recent declines.
The S&P 500 was down 2.1% and Toronto was down 1.6%. And it is certainly very possible that the declines will continue. The best near-term hope for a reprieve is if the FED would signal on Wednesday a slower pace of interest rate hikes. Any reduction in trade tensions would also help. As much as I am no fan of Trump, the increased pressures of the various investigations he is facing are creating uncertainty and weighing on markets.
This is a time that tests the nerve and resolve of equity investors. We should perhaps remember that the “deal” was that equity investors can expect (but are not guaranteed) a higher long-term return versus say GIC investors but face higher volatility and risk. It would be unrealistic to expect that the risks would never periodically materialise in even hopefully temporary losses. Investors are “supposed” to consider their risk appetites and financial ability to absorb risk before deciding on what proportion of their investments to put into equities. But naturally we may regret our level of equity exposure when stock markets decline.
Markets will recover to new highs again but no one can say for sure how low they go or how long they take to recover.
Meanwhile, wise old Warren Buffet who was patiently sitting on over $100 billion in cash at Berkshire Hathaway is almost certainly smiling and slowly buying into bargains as his legendary patience pays off once again. Berkshire will be losing market value on its huge stock portfolio but Buffett will still view the market decline as positive since Berkshire is a net buyer of stocks for the indefinite future. He will also be buying back Berkshire shares, I am sure.
Given the declines in the markets today, most of the stocks on our list were down.
The December U.S. home builder sentiment came out and was the lowest in over three years. But at 56 it also remained positive (50 is considered neutral). Toll Brothers was down 0.6% today which was lower than the overall market declines although that is not much to brag about.
The Boston Pizza Royalty Units are down to $14.45 yielding 9.5%. The units pay $1.38 annually. I have said that with the payout ratio at around 104% there is a risk of a distribution cut. But I can’t see any mathematical reason for the cut to take the payout much below about $ 1.32 which would restore the payout to 100% where they are comfortable. Or maybe they would take it down to $1.26 to provide some cushion. But I also think they will try to simply maintain the distribution. So I have trouble imagining a scenario where buying these units at the recent price is not a good investment. But anything is possible and if BP were to start shrinking the number of restaurants then the distribution would trend down. I added somewhat to my position today.
Also, BP was buying back a few shares at 8100 per day. They only bought 1100 on Friday and reported that today. But in less than 3 weeks they are already 85% completed buying the small amount of shares that they announced they would buy. I think the signal is clear that they saw the shares as under-valued but they only had a small amount of “room” left on the line of credit that they have in place for share repurchases. There had been no recent insider buyer but the CEO grabbed 400 shares on Friday to hold 5050 which was reported today. He likely holds options as well.
And also regarding BP, Statistics Canada reported October sales at Food Service and Drinking places. On the one hand it looked negative with a 0.8% decline nationally, seasonally adjusted, for full service restaurants versus September. But it’s year over year changes that are more relevant and these were up 3.0% nationally for full service. Ontario was 3.6% and Alberta 1.4% and B.C. 6.0% and these are the biggest locations for BP. But these provincial figures were for all establishments not just full service which are likely lower. In any case not a bad year over year result. BP may lag these industry figures however due to locations in the energy path and also because what matters is same-store sales and same-store will be lower than overall given the number of restaurants in Canada is likely a bit higher year over year.
P.S after posting this I see BP has announced the next distribution will be 11.5 cents which is unchanged. part of the press release reads: “The distribution will be paid on January 31, 2019 to unitholders of record at the close of business on December 31, 2018. The Fund periodically reviews distribution levels based on its policy of stable and sustainable distribution flow to unitholders.” They could be planning a small distribution cut in 2019. But certainly nothing in the press release here hints at that.
Checking some other insider trading:
A CWB insider who had bought 1000 shares on Tuesday added another 500 on Thursday at $26.30 (just reported today). It’s small but a positive indicator.
In other developments Couche-Tard reported a relatively small asset swap today with CrossAmerica. This is actually a related party and overall the transaction does not appear to be a significant thing. It must be slightly positive however or else they would not have done it.