Mike, Author at MOOSE MARKETS

Buy List Stock for May 2024: Telus (T.TO / TU)

A buy list stock of mine since March 2023, Telus is still in my top five Canadian picks for growth. As future growth in the wireless industry is limited, Telus has diversified its business to find new growth vectors. The company is acting wisely in the face of the current headwinds by reducing its capital expenditures (CAPEX) and increasing its cash from operations. It hasn’t received a lot of love from the market in the last two years, and likely won’t in 2024, but I believe that will change eventually; in the meantime, investors enjoy consistent mid-single-digit dividend increases every year.

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Telus Business Model

TELUS Corporation is a Canada-based telecommunications company. The Company provides a wide range of technology solutions, including mobile and fixed voice and data telecommunications services and products, healthcare software and technology solutions, and digitally led customer experiences.

Data services include internet protocol, television, hosting, managed information technology and cloud-based services, software, data management and data analytics-driven smart-food chain technologies, and home and business security. It operates through two segments.

The technology solutions segment includes network revenues and equipment sales arising from mobile technologies, data revenues, some healthcare software and technology solutions, voice, and other telecommunications services revenues.
The International segment is comprised of digital customer experience and digital-enablement transformation solutions, including artificial intelligence (AI) and content management solutions.

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Telus Investment Thesis

Telus has grown its revenues, earnings, and dividend payouts very consistently. Very strong in the wireless industry, the company is now tackling other growth vectors such as internet and television services. Telus has the best customer service in the wireless industry as shown by its low customer loss rate. It uses its core business to cross-sell its wireline services. The company is particularly strong in Western Canada. Telus is well-positioned to surf the 5G technology tailwind.

Finally, Telus looks to original and profitable ways to diversify its business. Telus Health, Telus Agriculture, and Telus International (tech & games, finance, eCommerce, and artificial intelligence) (TIXT.TO) are small, but emerging divisions that should lead to more growth going forward. In 2022, Telus acquired Lifeworks for $2.3B to boost its health business segment.

In 2023, CAPEX slowed down ($2.6B) and was mostly financed by free cash flow ($2B). This explains why the company keeps its generous dividend growth streak alive. For 2024, the company expects lower CAPEX and stronger operating cash flow. We like that mix!

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Telus Last Quarter and Recent Activities

Starting in 2023, the macroeconomic landscape has made it a challenging time for the telecommunications industry and Telus is no exception—years of fueling growth through cheap debt ended with rising interest rates.

Telus recently reported lackluster results for Q1’24. Consolidated revenue was down 0.6% and adjusted EPS was down 3.7% compared to Q1’23. Revenue for wireless/wireline revenue was up 0.4%, but down in for Telus Health (-0.7%), Agriculture (-0.24%), and International (-.98%).

Cash flow from operations of $950M increased 25% from Q1’23, but free cash flow was down 26% to $396M, due in part to interest charges going up to $394M from $320M.

Telus is keeping its CAPEX stable, a wise move during this difficult time. It reaffirmed its 2024 full-year guidance that it will have sufficient cash flow to pay dividends.

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Potential Risks for Telus

Competition is increasing among the Big 3 in the wireless market; Rogers and Shaw merged, and a new player is arriving on the scene, with Quebecor acquiring Freedom Mobile. Margins could be under pressure in the future. Also, the federal government wants more competition for the “Big 3” and is likely to open the door to new competitors down the road.

As the wireless market becomes fully mature, Telus will need other growth vectors. TV & internet won’t be enough to prevent Telus from becoming another Verizon (VZ) ten years from now. We’re not convinced by the acquisition of Lifeworks, specifically its cost. We will see how Telus integrates the business into its Health division.

Finally, Telus’ debt has increased substantially, from $12B in 2015 to $27B in 2024. Higher rates might affect future profitability, especially if they persist. Everyone expects tate cuts in 2024, but so far, the Bank of Canada keeps delaying them due to inflation. The headwinds facing the company explain its stock performance as of late.

Telus Dividend Growth Perspective

This Canadian Aristocrat is by far the industry’s best dividend payer. Telus has a high cash payout ratio as it puts more cash into investments and capital expenditures. Capital expenditures are regularly taking away significant amounts of cash due to their massive investment in broadband infrastructure and network enhancement.

Such investments are crucial in this business, and, for a good while, Telus filled the cash flow gap with financing. At the same time, Telus continued to increase its dividend twice a year, exhibiting strong confidence from management. In 2023, Telus increased its dividend twice for a total increase of 7% for the year.

However, with the higher cost of debt and other macroeconomic challenges, Telus has wisely reduced its capital expenditures. This decision has already helped increase its operating cash flow, contributing to the dividend’s safety. Investors can still expect the dividend to increase, but I suspect the dividend growth will slow down in 2025 while the company faces the current headwinds and because of its lower free cash flow.

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Final Thoughts on this Buy List Stock

The story for Telus in 2024 is about three important metrics: cash from operations, capital expenditure (CAPEX), and free cash flow. I want to see the first one go up, the second one go down, and the last one to cover the dividend payments. I have Telus in my portfolio. Over the next few quarters, I will keep an eye on these metrics.

Right now, Telus is struggling a bit and not performing as well as I’d like. I still see a lot of potential in its diversified business areas, Telus Health, Telus Agriculture, and Telus International. These should eventually generate growth for the company. For a patient investor who’s in it for the long haul, Telus could be a great opportunity and that’s why it’s a buy list stock of mine.

Should you Use Profit Protection Measures?

Profit protection measures are ways in which investors sell their shares to safeguard existing profits, or to limit potential losses. How do investors do that? While protecting profits and limiting losses sounds like a wise thing to do, is it?

Profit protection is also known as profit preservation or risk management. Two ways of implementing profit protection are to set a profit cap at which you sell holdings and to use stop-sell orders.

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Profit cap rule

Some investors adopt rules for selling shares. For example, if they’re up 50% on a stock, they sell it. They are putting a cap on their profits, perhaps sometimes thinking that they got lucky and just want to run with a bag of money.

If you’re an active trader and you keep on buying and selling all the time, maybe this type of rule can be part of your strategy.

I prefer to let my winners run so I don’t set rules like this to protect my profit. Over the past 20 years, I found that it’s worth holding on to your great picks—those companies that you were so right about buying. Letting them run 5, 10, 15 years, can create so much profit…300%, 400% sometimes even over 1000%!

Since my focus is on dividend growth, I have 90-95% of my portfolio invested in dividend-growing companies, which I plan on holding for a long time.

Stop-sell orders

Another mechanism investors use for profit protection is to set up stop-sell orders. Imagine you bought shares at $50, and they are now trading at $100. Perhaps you’re thinking “Wow! I’m making a 100% return on this one. That’s crazy. But I don’t want to sell it because, well, what if it keeps going up? On the other hand, if it starts falling, I don’t want to lose all that profit.”

You could put in a stop-sell order that is triggered at $75.00; if the stock goes down to this price, your order becomes active or open, shares are sold, and you cashed in on some of the profit.

My use of profit protection

I don’t adopt profit protection measures very often. As I said earlier, 90-95% of my portfolio are dividend growers that I want to hold for a long time without capping my profit. I believe that if my portfolio’s sector allocation is in good shape, that my holdings are well diversified across industries, that I picked the best of class, and I monitor their results and trends every quarter, I am protected.

However, for the remaining 5-10% of my portfolio, I like the occasional speculative plays, especially when there’s a lot of volatility in the market like in 2020 for example, where I could see opportunities. I never exceed 10% of my portfolio in speculative plays and limit them to three or four positions. With these speculative plays, I do sometimes use stop-sell orders to protect my profit.

Something else that I do that relates to profit protection is to trim winning positions that are weighing too much in my portfolio.

My limit for any single position in my portfolio is 10%; that’s an arbitrary limit. Yes, I like to let my winners run, but I don’t want to wake up one day having 25% of all my investments in a single stock, even if it is a winner. After all, you can never be 100% about any stock, and certainly not about any company being able to thrive forever; competition changes, the economy changes, and consumer behavior changes.

For these reasons, I decided that I didn’t want to lose more than that 10% exposure on a specific stock and that whenever that 10% was exceeded, I would sell part of it automatically to bring the position back below or at my limit.

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Is profit protection worth doing?

I think the value of profit protection has a lot to do with your strategy. If you’re an active trader or an investor who makes a lot of speculative plays, then yes, profit protection can play a role in your strategy.

While I do occasionally use stop-sell orders for my limited speculative plays, I don’t systematically implement profit protection measures. I prefer to protect my portfolio by trimming overweight positions rather than cashing in all my profit.

In the end, though, it still comes down to selling at a profit to protect against the impact of a potential loss by limiting a portion of the profit you make on a winning stock.

Quarterly Review of Your Stocks Made Easy

Quarterly review of your stocks made easy! That’s what I aim to do in this post. Reviewing your holdings’ quarterly results and your reasons for holding each stock to begin with are essential. It makes you confident that you have a resilient portfolio that suits your needs and that protects your retirement.

Finding the information

You’ll find most of the information you need in the companies’ quarterly results press releases. You can also look at their quarterly reports, management discussion and analysis (MD&A), and filing documents. Go to each company’s website, in the Investor Relations section. Dividend Stocks Rock members get links to the press releases in their quarterly reports and see trends for many metrics on stock cards.

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Trends and anomalies

Graphs showing an emerging trend of growth for revenue and EPS. — The trend is your friend

Reviewing results isn’t simply checking that sales and profits grew compared to last year. You must also look at the trends, i.e. the evolution of revenue, profit, dividend, etc., over time to see whether the company consistently succeeds. The trend is your friend. Also, when results show something unusual, going against the trend, investigate.

For example, you see a sharp drop in sales for a company that has increased its sales every quarter over five years. Do you panic and sell the stock? No, you investigate to see if it’s a temporary setback. Maybe the company had to shut down production when a storm damaged its facility or a ship stuck in the Suez Canal led to a shortage of raw materials.

Revenue growth

In the most recent quarterly results, look for the company’s revenue or sales. Revenue includes money made from sales and other sources, such as investment income.

1 – Compare the revenue number with the comparable period, also called the year-ago period. This is the same period of the year but a year ago. If you’re looking at Q2 revenue, compare it with Q2 revenue from a year ago.

2 – Has the revenue grown, is it flat with last year’s, or has it decreased? By how much in percentage?

Generally, 1% isn’t much, single-digit growth or decline is moderate, while double-digit growth (10% and more) is solid. Of course, that varies across industries and companies; 10% growth in a quarter for a company will disappoint if it had been growing its sales by 20% every quarter for two years.

3 – Look at the company’s quarterly revenue trend over five years. Does the trend show growth over five years? It is steady growth or accelerating? Is the trend showing a decline?

Is the most recent revenue figure within the trend or is it unusually good or bad? If it’s unusual, investigate the cause. The press release often explains exceptional conditions or one-time events that caused an anomaly.

Profit Growth

You also compare the company’s profit with that of the prior-year period. The profit is called net income or net earnings. The easiest metric to use for profits is the Earnings per Share (EPS) metric. EPS is a metric that divides the company profits by the number of shares.

One-time or unusually large expenses, for example, a lawsuit settlement or a product recall, affect EPS. Companies often provide another metric called the Adjusted EPS (or normalized) that excludes such unusual items to provide a value that is more comparable to that from the prior-year period.

1 – Observe whether the EPS (or Adjusted EPS) has grown, is flat, or has decreased, and by how much in percentage.

2 – Look at the EPS trend over five years. Is the company growing its profits, is it stagnating, or in decline? Is EPS growth or decline steady or accelerating?

Accelerating growth hints at a thriving company that executes well while an accelerating decline is a problem.

3 – Are the most recent EPS within the trend or unusual? For unusual EPS, investigate.

If there was a sharp sales drop, EPS falling is not surprising. If EPS falls more than sales or falls while sales increase, perhaps the company costs have risen due to inflation, shortages, etc. Maybe the company lowered its prices to customers to drive up sales, reducing profit margins at the same time.

For some industries with large amounts of depreciation, such as utilities and REITs, EPS can be misleading. Other metrics such as distributable cash flow (DCF) per share or funds from operations (FFO) per share are more appropriate.

Dividend Growth and Safety

Compare the most recent dividend amount paid or announced with the dividend paid in the previous sequential quarter, i.e., when looking at the Q3 dividend, compare it to Q2 rather than Q3 of the previous year.

1 – Has the dividend increased? Is it the same? Was it cut? I usually don’t hold on to companies that cut their dividends.

2 – If there wasn’t a dividend increase, look at the dividends paid over the last 12 months; was there an increase in the last year? A yearly dividend is a minimum for a dividend growth investor.

3 – How much was the dividend increase in percentage? Does it at least match inflation? Companies that don’t consistently match or exceed inflation don’t protect your income in the future.

4 – Look at the dividend trend over five years. Is there yearly growth? Is growth accelerating, steady, or slowing down? Often, dividend growth that slows down is the first sign of a dividend cut in the future.

5 – Look at the company’s payout ratio. This ratio identifies how much of the profits the company pays out in dividends. We all want generous dividends, but if a company pays more than it earns, that’s not sustainable. Compare the latest payout ratio with the payout ratio trend over five years to see whether it is normal for this company, higher or lower. You might also want to look at the cash payout ratio; for some industries, you should look at other payout ratios that are more appropriate.

6 – Look at the company’s cash from operations amount and see the five-year trend. Companies that generate increasing amounts of cash from operations are in a good position to keep paying and increasing their dividends.

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Company’s future

Now that you know how a company performed and how it’s evolving, look at what’s in store for that company in the future. Will it be able to keep growing for years to come? Are there risks heading its way? Some things to look for include:

Mergers and acquisitions that bring challenges but also growth opportunities.
Company getting rid of non-productive assets or brands to improve their future results.
Announcements about new products, expansion in new markets or business areas.
Capital expenditures (CAPEX) invested in infrastructure; is it likely to bring revenue growth?
The company’s outlook for the full year, or the new year.

Buy List Stock for April 2024: Hammond Power Solutions (HPS.A.TO)

New to my buy list for April 2024 is Hammond Power Solutions (HPS.A.TO). This pick is a speculative play. While Hammond Power is a small-cap company it might be the underdog investors didn’t see coming. It’s an interesting play with a good dividend if one is not afraid of market fluctuations. Hammond is still experiencing significant growth.

See also our U.S. buy list stock pick for this month.

Get great stock ideas from our Rock Stars list.

Hammond Power Solutions Business Model

Hammond Power Solutions Inc. is a manufacturer of dry-type transformers in North America. It engineers and manufactures a range of standard and custom transformers that are exported in electrical equipment and systems. It enables electrification through its range of dry-type transformers, power quality products, and related magnetics. Its standard and custom-designed products are essential and ubiquitous in electrical distribution networks through a range of end-user applications.

The company’s products include power transformers, furnace transformers, converter transformers, unitized substations, control & automation products, low voltage distribution products, medium voltage distribution products, and others. It supports industries, such as oil and gas, mining, steel, waste and water treatment, commercial construction, data centers, and wind power generation. It has manufacturing plants in Canada, the United States, Mexico, and India and sells its products around the globe.

HPS.A.TO Investment Thesis

Hammond Power is a small-cap company with a market cap of approximately $950M that competes against many giants in the industrial field. The company enjoys a solid reputation for the quality and reliability of its. HPS tried to expand its success internationally but had to close its Italian division and continues to struggle in India. However, after closing its Italian business, the company focused on what’s working for it in North America.

The company is now well-positioned in Mexico and exhibits growth potential in both Mexico and the U.S., which now represent more than 50% of its total revenue. Hammond continues to witness significant growth in its custom business in the energy, mining, silica chip manufacturing, and data center markets.

HPS.A.TO Last Quarter and Recent Activities

Hammond Power Solutions 2023 results showed robust growth across all geographies and channels. Its most recent quarterly results were strong, again, with revenue up 30% and EPS up 10%. The quarter ended with record shipments of $187M globally. This was a new record top line, which helped the company reach its margin and profit targets.

U.S. and Mexico sales were helped by a stronger U.S. dollar relative to the Canadian dollar compared to 2022. HPS saw substantial sales growth in the OEM channel in the U.S. in support of data centers, warehousing, industrial manufacturing, mining, electric vehicle charging, renewable energy, and oil and gas production. The company will continue to invest in increasing its capacity for 2025. This is looking good!

Graphs showing Hammond Power Solutions (HPS.A.TO)'s stock price, revenue, EPS, and dividend over 10 years — Monster growth for Hammond Power Solutions (HPS.A.TO)

Potential Risks for Hammond Power Solutions

The pandemic had an impact on HPS as revenues decreased due to the deferment of electrical projects, business interruptions, and overall lower levels of economic activity. However, HPS proved its resilient business model, with orders rebounding and HPS skyrocketing.

We advise you to tread carefully with small caps that are growing too quickly. HPS’ expansion success in North America couldn’t be replicated in India or Italy. After closing its business in Italy, future expansion projects may not spark investors’ enthusiasm. Also, a part of the company’s revenue is tied to the oil & gas and mining industries, both of which are highly cyclical. HPS is also subject to currency fluctuations due to its exposure to the U.S. and Mexican markets. With such a small capitalization, an investment in this company can fluctuate frequently.

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HPS.A.TO Dividend Growth Perspective

HPS finally resumed its dividend growth policy in 2022 with a generous increase. The dividend went from $0.085/share to $0.10/share (+17.6% increase!) and then to $0.125 (+25%!) in early 2023. However, remember that the company chose to cut its distribution following the financial crisis of 2009, with more cuts in 2011-2012. The dividend remained stable for several years before the recent increases.

Unfortunately, the dividend growth policy will follow industrial economic cycles. In the meantime, you can enjoy the ride! Speaking of which, management increased HPS’s dividend by another 20% in September 2023.

Final Thoughts on Hammond Power Solutions (HPS.A.TO)

Hammond Power Solutions has shown amazing growth for the last two years. With a recession possibly around the corner, its customers in cyclical industries might not do very well themselves. Is HPS resilient enough to keep that growth going or will headwinds slow it down? Only time will tell.

Obviously, you don’t bet the house on this, but it could be a very lucrative investment, as long as you can live with significant volatility.

Interpreting a Weak Dividend Triangle – Part 2

Worried about holdings that show a weak dividend triangle? Revenue and EPS are falling, dividend growth is slowing down, or worse absent. What do you do? Last week we explored how to analyze falling revenue in a weak dividend triangle. Now we look at interpreting weak EPS and dividend growth.

In last week’s article, we explained the importance of putting metrics fluctuations in context and that the trend is your friend, meaning you must look at the evolution of metrics over time to understand what’s going on. Missed it? Read it here.

When earnings per share (EPS) are down

Earnings going down means the company is making less profit, not something that you like to see. Again, however, you must put that in context.

First, understand where that number comes from. EPS is based on accounting principles. Consequently, major events like impairments, one-time charges for an expansion and acquisition, and amortization impact the EPS even though these events aren’t necessarily bad things. Seeing the EPS go down raises a flag regardless, and it must be investigated. Reviewing the trend in Adjusted EPS (also called non-GAAP) can help here because one-time charges and amortization are not included.

Companies that make a lot of investments in assets or infrastructure have a lot of amortizations, and their EPS fluctuation often causes confusion.

Example: Brookfield Corporation (BN.TO / BN)

Recently, at the same time Brookfield Corporation (BN)’s EPS was going down, it announced a generous dividend increase. A business whose profit is plummeting is raising its dividend. “I’m losing my job I think I’ll buy a car.” It doesn’t make sense.

Since BN makes a lot of investments, it’s better off to look at funds from operation (FFO) and FFO/share rather than EPS. The FFO/share is at homemade metric and is not always easy to find. Financial websites show the adjusted EPS or EPS; digging into the quarterly statements and investor presentations will give you the correct picture. For Brookfield, they showed a company that’s growing and thriving, but EPS isn’t showing that profit yet.

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Example: TD Bank (TD.TO /TD)

Another example from last year was TD Bank which had lots of one-time fees in its financial statements.

Fees for TD’s decision to abort the acquisition of First Horizon, a prudent move in light of many U.S. regional banks having problems with their balance sheets, and some of them going bankrupt in 2023.
The FDIC, which ensures deposits in the US, requested a special assessment of all banks in the U.S. As TD does a lot of business there, it spent $100M for FDIC assessment, passing the stress test and proving it’s well capitalized and has a robust balance sheet
Due to the economy, all banks had to raise their provisions for credit losses.

Combining these three unrelated factors hurt the EPS, whose trend doesn’t look sharp right now.

Graph of TD's dividend triangle that shows weakening EPS but steady dividend growth — TD EPS fell, but dividend growth is still there

Yet TD kept increasing its dividend last year and will continue in 2024 why? While the one-time events hurt the business, going forward, we’ll forget all about those as the business will thrive.

What about dividend growth slowing down?

Slowing dividend growth is usually the result of the rest of the dividend triangle; it’s rare to see a company with a high single-digit to double-digit growth for revenue and earnings whose dividend growth is slowing down.

If you see a dividend increase slowing to 3% and then 1% after being at 6% over 3-4 years, chances are both revenue and earnings were slowing down before that. It is prudent management to slow dividend growth rather than bleeding a balance sheet to death just to pay shareholders, but it’s also a red flag.

Find stocks with a strong dividend triangle from our Rock Stars list, updated monthly!

Can the payout ratio help to assess dividend growth health?

Yes, definitely. When the dividend triangle is weakening and the dividend growth is slowing down, the payout ratio is probably rising. Now we’re looking at the Sell button on our dashboard. However, it’s important to look at the appropriate payout ratio. There’s the classic payout ratio based on earnings. As I said earlier, earnings are based on accounting principles, not on cash flow. You should be mindful of that.

The cash payout ratio is an interesting metric. It’s based on free cash flow, so it does not consider the company taking on more debt to finance capital expenditures. For a capital-intensive business, the cash payout ratio is not perfect either. Instead, use the funds from operation FFO payout ratio. You could also simply compare the company’s dividend per share with the amount of Distributable Cash Flow (DCF) per share to see if there is room there for future dividend growth. See The Different Payout Ratios – A Quick Tour for more details about them.

Again, context is essential. That said, a weak dividend triangle and a payout ratio getting higher starts to scare me a bit more and bring me closer to selling, but I’ll do more research.

What other metrics can help understand a weak triangle?

When I’ve established that I’m concerned about a stock’s triangle, I start by looking at the cash from operations metric, because cash is closely linked to the ability to pay a dividend.

I also look at the long-term debt trend. If the debt keeps rising, and the payout ratio is above 100%, the company is leveraging its future; it better succeed in bringing profit and cash flow to the table and later because if not, it’s literally financing its dividend.

Growing debt can be understandable when there are large projects to fuel growth; the company is financing its projects and using its cash from operations to pay dividends. However, this situation cannot be sustained for a long time. It can last for a few years, but at some point, the company must stop adding debt and pay some of it down.

What’s next?

If after looking at these two sets of metrics (the three dividend triangle metrics, and the payout ratio and debt), I feel it might be fine to keep the stock, I do more qualitative research. The goal is to understand more about what’s wrong with the business model. Is it the economy hurting the business? Competitors? Can management resolve the problem? Has management said it was addressing the problem during the earnings conference call? If they just ignore the problem, that’s another source of concern.

For how many quarters should we tolerate a downtrend?

It’s not so much about a set number of quarters, but rather the reason why the metrics are slowing down. If it’s due to an economic cycle, like a recession that causes many companies in the consumer discretionary to have even two years of bad results or poor growth. Knowing that it’s normal in a recession, I would not sell after one year. However, if it’s because the business is losing market share and not finding ways to improve over several quarters, then it would be getting close to my sell list.

Interpreting a Weak Dividend Triangle – Part 1

Do you have holdings showing a weak dividend triangle? Revenue or EPS is stagnating or falling, dividend growth is slowing down, or worse there is no dividend growth. Do you sell right away? Not so fast. First, interpret the weak dividend triangle to know what’s really happening and make the correct decision.

What’s the dividend triangle again?

The dividend triangle is a tool I’ve been working with for over ten years, successfully and it forms the basis of my investment process. The dividend triangle includes three metrics: revenue, earnings per share (EPS), and dividend.

The key to my investment strategy is to find companies that are capable of growing their revenue, either organically or by acquisition, but that constantly find ways to grow their sales. As investors, we want to invest in thriving companies. A company that found a way to grow its sales year after year is the first thing I look for.
Next on my list that, as an investor, I want to see in a company is more and more profit. Earnings per share track that. Every year, I want to see a company with more sales and higher earnings per share.
After finding this magical Unicorn—well, truthfully, many companies show strong revenue and earnings growth—the next factor I want is for the company to reward its shareholders with yearly dividend increases.

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Why these three metrics?

Since I focus mostly on dividend growers, I want to see constant and often increasing dividend growth. Good and constant revenue and EPS growth are preconditions to a growing and sustainable dividend. The combination of these three metrics often leads to companies that have positive cash flow, repetitive and predictable income, a robust balance sheet, and a business model that has plenty of growth vectors.

A company with a strong dividend triangle also comes with another bunch of great metrics. As an investor, that’s the type of business you want; a thriving business able to go through a recession without too many worries and that’ll honor its promise to increase its dividend year after year.

Learn more about the dividend triangle here.

What does a weak dividend triangle mean?

Look at Equinix’s dividend triangle. It’s easy to understand a positive dividend triangle, right? Revenue keeps growing as does the earnings per share. The dividend growth is steady and even increasing.

Three line graphs highlighting the strong dividend triangle for Equinix: trends of revenue growth, EPS growth, and dividend growth — Equinix (EQIX): a strong dividend triangle

How do we explain a weak one? What do we do when a good company’s dividend triangle is weakening? What if one metric goes down? After a bad quarter or even a few bad quarters, don’t instinctively click the Sell button. Just like our energy level and our weight, numbers fluctuate, it’s normal.

It’s all about interpreting these deteriorating numbers to see what’s happening and whether things will get better soon. As I like to say, the trend is your friend. You must look at the triangle metrics over time, 5 years is a good duration, to see whether the poor results are a hiccup or part of a downward trend over a long time.

Along with the trend, it’s important to put the results in context, i.e., understand what is going on with the company, or around the company, that is making one metric, or the entire triangle go down, or up for that matter. Monitoring your stocks every quarter will help you to quickly spot trends and put results in context.

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When revenue is going down

Whether revenue is fluctuating down or up, you can often find the context for the change in the quarterly results press release or the investors’ presentation. They usually explain the factors that affected the revenue positively and negatively. Revenue could be down for a pretty good reason in which case you shouldn’t worry too much. Here are some examples:

Currency fluctuation. Take Coca-Cola; it makes many sales outside of the U.S. and generates a lot of revenue in other currencies. Revenue reported in U.S. currency is affected by the exchange rate. A U.S. dollar getting stronger will affect its revenue downward. To see if there was revenue growth or not, it’s important to also look at the numbers on a currency-neutral basis, which is stated in the press release.
Cycle of innovation or product cycle. Look at Apple’s dividend triangle below. There’s no frenzy around iPhones, nor is the company launching many products. As a result, over the last five or six quarters, sales and earnings haven’t grown as fast as they used to. This is normal if you look at Apple’s history. It goes through product innovation cycles and occasionally there’s a pause in growth before starting another upcycle.

Three line graphs showing Apple's dividend triangle. Sales and EPS at a plateau for the last 2 years as per its innovation cycle — Apple’s sales and EPS reaching a plateau due to the company’s innovation cycle

Industry-wide cycle. We can think about basic materials and the energy sector for example. If you look at the 2015-2020 period versus 2021-2026, when we get there, we’ll have a completely different picture of the energy sector; the whole sector goes through cycles.
Sometimes it’s just the economy. Recent reports from Home Depot, Canadian Tire, and railroad companies reveal there are slowdowns. We cannot expect huge revenue or earnings per share growth for 2024, and possibly 2025. This isn’t limited to a specific company, but entire cyclical industries getting hit by consumers spending less.

Putting the revenue slowdown in context helps you to differentiate between a temporary cause, such as a cycle fluctuation or a negative currency impact, or a permanent situation. By permanent situation, I mean things that are specific to the company and not resolved by time alone, if at all. This could be a company losing market share as it cannot adapt to increased competition (think Blackberry), or a business that isn’t relevant anymore because it’s in a dying industry and fails to innovate or diversify; remember printed media and video stores?

What about falling EPS and slowing dividend growth?

Yes, the triangle isn’t just about revenue. EPS and dividends are also key metrics that can show signs of weakness. We’ll explore that in next week’s article, along with a few other metrics.

In the meantime, it’s important to understand that you must look at more than one metric to assess the state of a company’s performance, good or bad. Also, remember that putting things in context is a must and the trend is your friend!