Butting Out of RothmansAugust 7, 2008 11:02 pm Uncategorized
Last week it was announced that Philip Morris was acquiring Canadian cigarette-maker Rothmans for $30 a share. My relationship with the stock began 8 years ago at a split-adjusted price of $12. Since then it has satisfied my addiction to dividends and even inspired a column in 2003. The time to surrender the shares is approaching, so it seems entirely appropriate to reflect on the relationship that was.
Throughout my investing career, I’ve always been attracted to the safe bets. If this were dating, I’d go for the cute girl who made solid choices, held a decent job, and came from a stable family. For example, over the years I’ve experienced money crushes on Riocan CEO Ed Sonshine, the entire board of TransCanada, and the Reitman family, to name a few. Nice and nerdy. However, Rothmans was like the crazy girlfriend that everyone warned you about. Sure, she had a disturbing past and a lot of miles on the odometer. However, I too had skeletons in the closet, serving as Zeddy Bear through my first-year at university. Surely this balanced the ledger.
Despite her past, she brought a fair amount to the table. For instance, she was smart (dividends), committed (special dividends) and to be completely honest, was killer in the sack (rising dividends). Make up your own joke about the 2 for 1 stock split. All of this said, people warned you about her and several questioned your moral standards. Still, you defended her and tried to justify your choices in a column that, in retrospect, was 61% truth and 39% bullshit. In other words, you’d talked yourself into the relationship, even though you knew, one day, all hell could break loose. For example, you always had to worry about some angry people from her past showing up (class action lawsuits) or the cops smashing down your door (RCMP investigations of smuggling). But you considered the pros and the cons, calculated the inputs and the outputs, and decided to go with it and let the relationship run its course. So what happened with the people from her past? They came without yelling; they came without nags; they came without packages, boxes or bags. Meanwhile, the great conversation and sex continued, month after month, quarter after quarter. But ultimately, you knew it wasn’t going to last forever. In the end, her parents came by offering a position in the family business down south (Philip Morris buying the shares they didn’t already own). Seeing that I was a good sport and helped their daughter over the years, they decided to send me some coin ($30 a share in beautiful, glorious, life-giving cash). So when the deal closes, we’ll say our goodbyes, exchange a mischievous grin, and go our separate ways. No apologies and certainly no regrets. Life is good. However, it’s going to be difficult finding someone to take her place. I don’t think Sun Life is up to the challenge.
Saxon takeover leads to more fist pumps
Shortly after the Rothmans announcement came word that IGM Financial had agreed to acquire Saxon Financial for $287 million or $21 a share. This represented a 65% premium over the previous day’s close and led to several fist pumps at the Market Shack. By several I mean 5. I’ve held Saxon since the IPO ($16.50) and while I’ve enjoyed the rising dividends and solid management team, the collapsing stock price was painful and the shares recently sunk to a low of $11.55. The fundamentals remained solid and so I never considered selling, although I was experiencing nausea, heartburn, and blurred vision. The takeover announcement cured all of that and allowed me to hear the birds singing, experience the sun rising, and enjoy the freshness of a recently harvested peach. Looking at the big picture, Rothmans and Saxon represent over 5% of my portfolio and that means a whack of cash is headed this way. As we know, cash wants to work 24 hours a day…so I have some decisions to make.
In other news, “It’s on sale…no it’s not…yes it is…oh let’s just go home.”
The Bay has always been one-stop shopping for those who enjoy confusing sales promotions and beleaguered employees. On a recent trip to Canada’s oldest department store, the Market Gal and I had to request price checks on several items because we couldn’t tell which products were on sale. In the middle of a price check, one customer at another cash was upset because the item she had selected and thought was on sale wasn’t on sale. She left the item at the cash and walked out of the store. How many times does this happen at the Bay each day? Per-store, I’d put the over/under at 50, with the smart money playing the over. Here’s a question: Why risk the disappointment? If you think an item is on-sale, grab the item, head to another department and tell the clerk that your item is on sale. If they’re in view of the sales sign, that’s even better. Given that so many of their sales require a manual adjustment at the cash (a la 1974) and no clerk can possibly keep track of the 562 exceptions, rules and promotions, this often works. Not that we’ve tried this strategy before…ummm…let’s just move on. After learning that one of the items directly under a “30% off” sign wasn’t on sale, the Market Gal said, “that’s why they’ve had 3 owners in 5 years.”
The Market Guy Mailbag
Robert P. asks:
“Could you elaborate on what you said about Scotiabank telling you that you are richer than you thought.”
Scotiabank’s current advertising slogan is “you’re richer than you think.” I’m guessing the message was co-opted by sub-prime lenders south of the border when pedaling the NINJA mortgages (No Income, No Job, No Assets). The outcome was as predictable as the Barenaked Ladies losing their Disney gig after singer Steven Page was busted for cocaine. The message from any responsible mortgage specialist should have been, “speak with a financial advisor and develop a plan so you can start saving for a down payment” or “consider finding a job first” or “actually, you’re poorer than you think.” Failing these, “get out of my office” would have done nicely.
Nicole Z. asks:
“I know you’re a fan of Kevin O’Leary and I was wondering if you’ve purchased shares in his new fund?”
Yes, I’m a fan of Kevin’s and enjoy his work on BNN’s Squeeze Play and CBC’s The Dragon’s Den. However, I haven’t had a chance to read the prospectus of the new O’Leary Global Equity Income Fund (OGE.UN on the TSX). I do know that it focuses on dividend-payers outside our borders and comes with an IPO yield of 5%. Given the departure of dividend payers such as Rothmans and Saxon, the global focus is intriguing. While we’re on the subject, I’m not sure how I feel about BNN affording Kevin so much broadcasting time to market his fund. On the one hand, this is what fund managers do everyday on Market Call. But on the other hand, these fund managers aren’t hosting BNN shows. I serve on a committee with a prof who teaches a class in business journalism. I’ll ask him to weigh in on the matter.
Dale N. writes:
“Glad you are back on the air – so to speak. I love your column. I disagree with almost everything you write. I believe strongly in the Warren Buffet philosophy of investing. Invest in what you know. Invest for the long term. I hold three stocks that I have had since shortly after they came on the market: CNQ, Talisman, and Niko Resources. Yes, the price of oil may dip a bit in the near future. Will it fall to $85? No. The trend is ever upward for oil and gas because of increasing demand and fears of a soon to be depleted resource. Gotta love it!”
Thanks for the kind words and for adding to the comments. Beyond the peak theory argument, I’ll always have oil in my portfolio because betting on energy represents a bet on crazy people and chaos…and both are plentiful. You can always count on religious fanatics stirring up trouble, nutbars blowing up pipelines, malevolent dictators making threats, hurricanes slamming into rigs, and the energy lobbyists getting what they want. And so it goes. In other words, we agree on the value of oil and gas in the portfolio. However, I’m not prepared to count on an “ever upward” trend. Can we count on China growing at a double-digit clip? What about the effects of a possible global recession? Will high prices change consumption patterns and consumer behaviour? How about technological advances in and out of the patch? Oil has moved from $150 to $118 in a month and natural gas has dropped from $13 to less than $9. Given my investing philosophy and risk tolerance, should I dramatically overweight such a volatile commodity? Full-marks if you can stomach the risk…but I can’t. And if his portfolio breakdown is any indication, neither can Warren Buffett.
In 1999, I began my MA thesis with the following:
“The Dow Jones Industrial Average, arguably the world’s most identifiable and quoted statistic, recently celebrated 15 years of largely uninterrupted advances. Having begun its ascent slightly below the 1000 level, this basket of prominent American companies recently traded above 11000.”
Fast-forward 9 years and where is the Dow trading? Just over 11400. Worth mentioning.
The Market Guy is an Instructor with the Department of Psychology at Carleton University. He’s not a professional advisor. He’s just a guy who loves investing and talking about the markets…so do your homework before making any investment decisions. Basing any financial decision on his column would be really, really stupid and would demonstrate that you need therapy (he teaches psych, so he’d know). Despite what he wrote a year ago, he recently purchased an Apple iPhone. The markets are always the apple of your eye over at email@example.com