Giving Cash Back To Shareholders is Nice... When You Can Afford It

Over the past few weeks, I've been looking at various stocks trying to find my very first Warren Buffett-style value investing stock pick. One of my main considerations was Hasbro, Inc. Hasbro has a lot of brand power under their belts: Monopoly, Battleship, Boggle, Pictionary, Risk, Scrabble, Trivial Pursuit, Transformers, Nerf, not to mention more targeted brands such as Magic: The Gathering and Dungeons and Dragons. I went to Zellers the other day and took a stroll through the toy section. Many of the toys were made by Hasbro, meaning that Hasbro has a lot of retail store shelf space at stores like Wal-Mart, Zellers, Toys R Us, and so on. Hasbro has also been diversifying their brands toward movie production, such as Transformers and G.I. Joe. Upon examining the management, I found that the CEO of Hasbro personally heads the Corporate Social Responsibility Committee, a task that could easily have been delegated to a sub-manager. To me, that shows that the CEO actually cares about what goes on at those committee meetings.

When considering Hasbro's financials, I found a lot that matched a checklist I've built, based on reading how value investors like Warren Buffett pick stocks. Hasbro has low capital expenditure, consistent profit margins, return on assets in the 9-10% range, growth in net income and growth in what Buffett calls "owner earnings". Owner earnings, or free cash flow, are equal to the company's net income, plus depreciation/amortization, minus capital expenditures. Since depreciation/amortization are a non-cash expense, the cost is added back in to the equation, and offsetting depreciation/amortization is taken into account by subtracting capital expenditures. The result is the amount of cash that the company can decide to re-invest in the business, use to acquire other companies, or pay out to shareholders in the form of dividends or share repurchases.

Something Buffett likes to see in a stock is good treatment of shareholders. At the time of this writing, Hasbro currently has a dividend yield of just over 4%, which is pretty good. They also have an on-going share repurchase program. Since 2008, Hasbro has repurchased about 10.6 million shares. The result has been a steady increase in earnings per share. After valuing Hasbro's future cash flows with a modest 5% growth per year, I came up with a valuation of the company that is higher than its current share price, offering a margin of safety around 25%. If I were to assume a higher growth rate, that margin of safety would be larger, but I don't want to over-estimate. In any case, I had all but convinced myself that this stock would be a good buy, according to the value investing principles I have been learning about. The only reason I haven't purchased this stock yet is that I'm still waiting on transferring my RRSP account over to a self-directed account that I can use to buy individual stocks. Perhaps this was a blessing in disguise.

Buffett says that when you find a good investment, you should place a sizeable chunk of cash on it. Since I would be placing a sizeable chunk of cash on Hasbro, I want to be sure that I'm right about its prospects. After all, the whole strategy of focus investing is simply to just buy good companies, and avoid bad ones. I wanted to make sure I wasn't buying a bad one. It seemed strange to me that shareholders were being so lavishly rewarded year after year with dividend payouts and share repurchases, when news pieces on Hasbro had such a modest or grim outlook. I whipped up a quick spreadsheet, and here is what I found:

Data taken from Google Finance

From what I see in the spreadsheet, Hasbro has been paying out more than 100% of its owner earnings to shareholders! At the same time, it has been borrowing hundreds of millions each year. It looks to me like this is unsustainable. Cash should only be paid out to shareholders if it can't be better used elsewhere to grow the company and add value for shareholders. From what I can tell, at least some of the cash being borrowed and/or paid out to shareholders could probably be better used by re-investing in the business. This realization has led me to reconsider my plans to purchase shares in Hasbro for the time being.

Edit: I did some follow-up research on this topic, and wrote a blog post summarizing my findings.

Success #3: Back To Business

Well, this blog of mine seems to have been feeling kind of neglected lately. It's because of many reasons, some of which are that I started blogging about finance on my work's internal blog not viewable by the public, I've been very busy with university, and I haven't had many funds available for investing.

Since I only started learning about personal finance about a year and a half ago, my views on how to invest have been constantly changing. In addition, I've been reading some books on value investing, as well as economics. Since it was my birthday in August and I changed from age 22 to age 23, I figured it was time to update my blog title. Not only that, I felt that a theme change would be fitting for my renewal in this blog's interest.

So what can you expect in the future on this blog? I'll be blogging about economics, as well as personal finance and investing. I'm decidedly a big believer in income investing and value investing, and I've learned much about how money is created, what central banks are, and some views on how those should play a role in the economy as a whole. I'll add a new "economics" label for posts so that there is a new category, as well as an "opinion" label. I hope you enjoy Starting Started at 22's revival!

Success #2: Rebalancing RRSP TD e-Series Mutual Funds for More Exposure

Last year, I recognized that my mutual fund fees were too high, and I switched my units over to the TD Canadian Index and TD Canadian Bond e-Series mutual funds. Since then, my investments have been doing well. However, I decided that since the S&P/TSX Index focuses a lot on financials, energy and mining, it might be a good idea to broaden my investment exposure. After all, true couch potato index investing states that one should invest in everything and diversify as much as possible. The S&P 500 (which the TD US Index e-Series fund tracks) has a pretty good balance across sectors that I wasn't exposed to with just the Canadian Index fund. I also decided to allocate a little bit of my portfolio to the TD International Index e-Series fund to get some exposure there as well.

Overall, I decided on the following balance between e-Series funds: 40% TD Canadian Bond, 30% TD Canadian Index, 20% TD US Index and 10% TD International Index. I did some reading on the experiences others had had with rebalancing their TD e-Series funds, and I came across a very useful spreadsheet: http://www.canadiancapitalist.com/sleepy-portfolio-rebalancing-spreadsheet/

If you Google search for switching fees regarding the TD e-Series funds, you will find many forum posts discussing the issue. I seem to have found an approximately equal amount of people that say the mutual fund units are First In, First Out (FIFO) and some say Last In, First Out (LIFO). With e-Series units, one cannot sell them before 90 days have passed since purchase without incurring a penalty fee for frequent trading. This includes units purchased through a Pre-authorized Purchase Plan (PPP). If the units are sold FIFO, that would mean that the most recently-bought units would be sold first. If the units are sold LIFO, the least recently-bought units would be sold first.

In my case, the units seem to have been sold LIFO, where the oldest units were sold first. I have made PPP purchases in the last 90 days, but the full dollar amounts that I transferred to the two new funds correspond exactly with their book values. I didn't see any kind of fee of 2% of the transfer balance.

Since I now have four different e-Series funds, I tried to figure out how I could contribute to them evenly, while keeping my RRSP contributions fairly low. I don't want to contribute too much to my RRSP since I'll have to start paying off my university student loans next year, and I still have one year of school left to do (tuition to pay, books to buy, etc.). Before, I contributed the minimum PPP amount ($25) to each of my two e-Series funds every month. Now however, I have 4 funds to contribute to. Even with the minimum PPP amount, I would be paying $100/month into my RRSP to contribute to each fund equally. This is more than I can handle, so I tried to see if there was an "every two months" option on the PPP form on TD EasyWeb's website. There wasn't, so I decided to call them and see if they could set something up for me. Unfortunately, whatever options are on the web form are the only PPP options. So I guess for now, I'll leave my two PPP transactions as is, and re-balance some of the units of those funds to the other two every 90 days or more.

Something strange I noticed about the e-Series funds is that I both sent an email and then an eService message to TD with regard to my PPP inquiry, and in both cases the reply was that "we are not trained in mutual funds, please call TD". I thought the point of e-Series funds was that they were to be managed online and online only. I really hope they don't try and revoke my e-Series agreement, but if they do, I'll point out how I tried twice to contact them through online means.

Success #1: Recogizing When Fees Are Too High

When I decided to open an RRSP mutual fund account, I had done some research on the different funds available from my bank. I had some in mind when I went in to open the account. I have a feeling that the representative I spoke with thought I had no idea what I was talking about when I told her I wanted to start investing. This was most likely because I still get asked if I'm over the age of 18, when really I'm 22. I don't do anything major like start an RRSP without knowing what I'm doing.

So when I went in to open the account, they didn't even ask me which fund I wanted to invest in, or give me choices. I filled out their quiz, and they said "Ok, here's what we're going to set you up with." I didn't really have a choice in the matter. Luckily, I realized that the bank would get 1.9% of the balance in my RRSP account every year. Later on when the balance is getting big, that's a lot of money to lose out of my retirement savings every year.

I discovered that my bank offers low-fee index funds, around 0.3% per year. This is a much more agreeable fee, so I applied for the funds by mail. Everything is switched over now, and my annual fees are much more under control now. I've decided that if I need to deal with the bank again, I'll do it in a more direct manner, or circumvent the representative altogether by doing things through mail or email. I'm glad I was able to recognize an unfavourable financial decision, and remedy it on my own.