THE ABC PERSPECTIVE. Changing Consumer Habits: The Global Revolution

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1 THE ABC PERSPECTIVE Volume 28, No. 2 April 2017 Changing Consumer Habits: The Global Revolution Global consumer purchasing habits have been changing significantly over the past several years. This revolution in retailing is primarily a result of technological advancement, but also due to the early adoption habits of the millennial consumer (born between ), now the largest generation in western history surpassing the previous baby boomer population bulge. Generally, the millennials are well-educated, technologically savvy, excellent multi-taskers, deeply connected to social media, transparent and liberal risk-takers. Of particular interest is the fact that millennials are relatively impatient and want instant gratification and recognition. Their early adoption habits, aided by major technological advancements including e-commerce growth, mobile technology, and automation, have transformed traditional, old-style retailing. Furthermore, the millennial generation is exceedingly demanding. They want their goods and services now. They demand free and fast shipping which has evolved from being a perk to mandatory expectation today. Clearly, what has resulted is consumption on demand. One of the prime beneficiaries of these new trends is Amazon.com. Amazon via Amazon Prime, through a low annual fee of $99, was quick to recognize these changing consumer habits and has become, by far, the dominant global retailer. Approximately 25% of all U.S. households are subscribers to Amazon Prime with one market researcher predicting membership growth to 50% of American households by Other companies with great brands which have successfully built strong online businesses include Netflix, Facebook, and Electronic Arts. Moreover, the producers of electronic devices utilized to access the internet are flourishing, in particular, Apple Inc. Both software and semiconductor companies whose products make up the architecture of the online world are also realizing considerable success. Finally, another great beneficiary of these trends includes credit card companies such as MasterCard and Visa which are benefitting from increasing online business and the significant growth of cashless transactions. Although millennials were the early adopters of the changing consumer habits, baby boomers are now following their children and grandchildren. Consequently, these new purchasing characteristics have precipitated a global consumer revolution whereby bricks and mortar store outlets and conventional shopping have been replaced by direct and timely deliveries via internet connections. This development is now sparking the closure of many retail stores and has increased mall vacancies. Presently, with these momentous trends taking place and continued technological advances, global purchasing habits will continue to evolve. Well-positioned and forward-looking corporations stand to benefit greatly from these changes.

2 TM Economic Perspectives The Global Economies: Defying the Pessimists The global economies have taken a number of unforeseen and negative hits over the past year. Yet, in spite of this overall uncertainty, the European, UK, and North American economies have defied the most pessimistic views with their substantial resilience. Although we anticipate an upward bias to U.S. and global interest rates, we continue to believe that increases will be gradual and measured. Notwithstanding our optimism with regard to international economic growth, we expect inflation to remain subdued, albeit creeping higher. Overall, with steady employment growth, improving consumer and business activity, relatively low interest rates and expanding corporate earnings, positive common stock performance should continue for at least the next 6-12 months. Investment Perspectives Dividend Yielding Canadian Stocks: Relatively Attractive Although some common stock valuations might be a little stretched since the late 2016 price rally, we believe that certain common shares are relatively attractive. Of particular interest to us are a number of high-yielding Canadian utility and pipeline companies. With appealing dividend yields of 4-5%, steady earnings growth and periodic dividend increases, these securities are excellent portfolio stabilizers. Moreover, compared to short-term paper and mid-term bonds these shares offer an attractive investment alternative to low yielding fixed-income securities. Combining liquidity, enhanced yields and, in a number of cases, significant U.S. business operations, these selections also offer relative safety, North American diversification and could possibly become interesting corporate merger candidates. Portfolio Perspectives Diversified and Defensively Invested All five ABC portfolios are virtually fully invested with a significant number of Canadian and American dividend paying common stocks. In Canada we primarily favour high yielding utility and pipeline shares whereas our U.S. holdings include larger capitalization technology, financial services, consumer discretionary, and health care companies. We are fully hedged on our U.S. / Canadian currency exposure and believe that our diversified equity selections offer relative safety, attractive dividends and growth opportunities. Page 2

3 CASH % 1.23% MATERIALS % 1.84% Cash - CAD 0.61% Franco-Nevada Corp. 0.94% Cash - USD 0.62% Silver Wheaton Corp. 0.90% CONSUMER DISCRETIONARY % 15.22% FINANCIAL SERVICES % 17.49% Brunswick Corp. US 2.38% Bank of America Corp. US 2.47% Nike Inc. US 2.04% Canadian Imperial Bank of Commerce 1.06% Six Flags Entertainment Corp. US 2.01% East West Bancorp Inc. US 2.58% Starbucks Corp. US 1.23% MasterCard Inc., Class A US 2.90% Stingray Digital Group Inc. 2.81% Prudential Financial Inc. US 2.43% The Home Depot Inc. US 2.71% Royal Bank of Canada 1.34% Uni-Select Inc. 2.04% Visa Inc., Class A US 2.77% Wells Fargo & Co. US 1.94% HEALTH CARE % 9.66% Aetna Inc. US 2.48% REAL ESTATE % 1.85% Amgen Inc. US 1.79% Brookfield Property Partners L.P. 1.85% Becton, Dickinson and Co. US 2.85% Johnson & Johnson US 2.54% ENERGY % 8.39% Inter Pipeline Ltd. 2.00% UTILITY % 8.92% Keyera Corp. 1.55% Algonquin Power & Utilities Corp. 2.86% Suncor Energy Inc. 2.33% AltaGas Ltd., subscription receipts 2.34% TransCanada Corp. 2.51% Brookfield Renewable Partners L.P. 1.05% Fortis Inc. 2.67% TECHNOLOGY % 12.16% Apple Inc. US 2.94% CONSUMER STAPLES % 11.07% Broadcom Ltd. US 4.10% CVS Health Corp. US 1.86% Microsoft Corp. US 3.20% Loblaw Companies Ltd. 3.25% NVIDIA Corp. US 1.92% Metro Inc. 1.56% PepsiCo Inc. US 1.81% INDUSTRIAL PRODUCTS % 12.17% The Kraft Heinz Co. US 2.59% CCL Industries Inc., Class B 3.41% Exco Technologies Ltd. 3.55% General Electric Co. US 1.22% Honeywell International Inc. US 2.19% Waste Management Inc. US 1.80% Page 3

4 CASH % 4.13% CONSUMER DISCRETIONARY % 18.94% Cash - CAD 1.96% Amazon.com Inc. US 2.97% Cash - USD 2.17% Aritzia Inc. 0.76% DHX Media Ltd., Class B 1.24% HEALTH CARE % 9.79% Electronic Arts Inc. US 1.56% Aetna Inc. US 2.25% Netflix Inc. US 1.53% Amgen Inc. US 1.62% Nike Inc. US 2.79% Becton, Dickinson and Co. US 2.76% O'Reilly Automotive Inc. US 1.29% Boston Scientific Corp. US 2.15% Stingray Digital Group Inc. 2.32% Regeneron Pharmaceuticals Inc. US 1.01% The Home Depot Inc. US 2.71% Uni-Select Inc. 1.77% CONSUMER STAPLES % 8.40% CVS Health Corp. US 2.00% ENERGY % 8.52% Loblaw Companies Ltd. 3.07% Enbridge Inc. 2.31% The Coca-Cola Co. US 1.37% Inter Pipeline Ltd. 1.40% The Kraft Heinz Co. US 1.96% Suncor Energy Inc. 2.47% TransCanada Corp. 2.34% INDUSTRIAL PRODUCTS % 8.41% CCL Industries Inc., Class B 2.45% MATERIALS % 5.13% Exco Technologies Ltd. 4.82% Barrick Gold Corp. 1.55% Honeywell International Inc. US 1.14% Franco-Nevada Corp. 1.15% Polaris Materials Corp. 1.34% FINANCIAL SERVICES % 14.52% Silver Wheaton Corp. 1.09% Bank of America Corp. US 2.29% Canadian Imperial Bank of Commerce 0.96% REAL ESTATE % 1.70% East West Bancorp Inc. US 2.80% Brookfield Property Partners L.P. 1.70% MasterCard Inc., Class A US 3.04% Morgan Stanley US 2.08% TECHNOLOGY % 15.18% Royal Bank of Canada 1.53% Alphabet Inc., Class A US 2.40% Visa Inc., Class A US 1.82% Apple Inc. US 3.05% Facebook Inc. US 1.62% UTILITY % 5.28% Microsoft Corp. US 3.20% AltaGas Ltd., subscription receipts 2.53% Salesforce.com Inc. US 1.62% Brookfield Renewable Partners L.P. 1.14% Skyworks Solutions Inc. US 3.29% Emera Inc. 1.61% Page 4

5 CASH % 0.94% HEALTH CARE % 7.27% Cash - CAD 0.84% Allergan plc US 1.16% Cash - USD 0.10% Anthem Inc. US 2.48% Boston Scientific Corp. US 2.05% CONSUMER STAPLES % 8.43% Regeneron Pharmaceuticals Inc. US 1.58% Costco Wholesale Corp. US 1.18% CVS Health Corp. US 1.48% MATERIALS % 2.28% PepsiCo Inc. US 2.25% Barrick Gold Corp. 1.15% The Kraft Heinz Co. US 2.13% Franco-Nevada Corp. 1.13% The Kroger Co. US 1.39% UTILITY % 6.72% INDUSTRIAL PRODUCTS % 7.41% Algonquin Power & Utilities Corp. 2.43% General Electric Co. US 2.24% AltaGas Ltd., subscription receipts 2.46% Honeywell International Inc. US 1.98% Emera Inc. 1.83% The Boeing Co. US 3.19% FINANCIAL SERVICES % 20.01% CONSUMER DISCRETIONARY % 20.01% First Republic Bank US 3.02% Amazon.com Inc. US 3.18% Goldman Sachs Group US 1.26% AutoZone Inc. US 0.89% MasterCard Inc., Class A US 3.06% Electronic Arts Inc. US 2.07% Prudential Financial Inc. US 2.74% Netflix Inc. US 1.50% SVB Financial Group US 3.37% Nike Inc. US 2.95% The Toronto-Dominion Bank 1.29% O'Reilly Automotive Inc. US 3.01% Visa Inc., Class A US 3.21% Six Flags Entertainment Corp. US 2.17% Wells Fargo & Co. US 2.06% Starbucks Corp. US 1.28% The Home Depot Inc. US 2.96% TECHNOLOGY % 19.01% Alphabet Inc., Class A US 2.67% ENERGY % 6.18% Apple Inc. US 3.52% Enbridge Inc. 2.17% Broadcom Ltd. US 4.37% Suncor Energy Inc. 2.12% Facebook Inc. US 1.72% TransCanada Corp. 1.89% Microsoft Corp. US 3.59% NVIDIA Corp. US 1.93% REAL ESTATE % 1.74% Salesforce.com Inc. US 1.21% Brookfield Property Partners L.P. 1.74% Page 5

6 CASH % 0.78% DEFENCE % 0 Cash - CAD 0.72% Raytheon Co. US 1.97% Cash - USD 0.06% CONSUMER DISCRETIONARY % 25.61% CONSUMER STAPLES % 7.52% Amazon.com Inc. US 3.52% CVS Health Corp. US 1.16% AutoZone Inc. US 1.44% Loblaw Companies Ltd. 3.09% Brunswick Corp. US 4.14% Mondelez International Inc. US 1.89% Dave & Buster's Entertainment Inc. US 3.81% The Coca-Coca Co. US 1.38% Electronic Arts Inc. US 2.66% Netflix Inc. US 1.34% FINANCIAL SERVICES % 14.24% Nike Inc. US 1.90% BB&T Corp. US 1.90% Stingray Digital Group Inc. 2.36% MasterCard Inc., Class A US 2.52% The Home Depot Inc. US 2.42% Morgan Stanley US 2.43% Uni-Select Inc. 2.02% SVB Financial Group US 2.64% The Toronto-Dominion Bank 1.35% TECHNOLOGY % 14.31% Visa Inc., Class A US 3.40% Alphabet Inc., Class A US 2.05% Apple Inc. US 3.54% HEALTH CARE % 13.09% Facebook Inc. US 3.22% Anthem Inc. US 3.37% Salesforce.com Inc. US 1.75% Becton, Dickinson and Co. US 3.12% Skyworks Solutions Inc. US 3.75% Boston Scientific Corp. US 3.52% Celgene Corp. US 3.08% UTILITY % 6.63% Algonquin Power & Utilities Corp. 2.72% INDUSTRIAL PRODUCTS % 5.01% AltaGas Ltd., subscription receipts 2.28% CCL Industries Inc., Class B 2.99% Emera Inc. 1.63% Exco Technologies Ltd. 2.02% ENERGY % 7.70% MATERIALS % 3.14% Inter Pipeline Ltd. 1.80% Goldcorp Inc. 1.73% Petrowest Corp. 1.54% Silver Wheaton Corp. 1.41% Suncor Energy Inc. 2.19% TransCanada Corp. 2.17% Page 6

7 CASH % 0.77% CONSUMER DISCRETIONARY % 17.53% Cash - CAD 0.61% Amazon.com Inc. US 2.55% Cash - USD 0.16% Dave & Buster's Entertainment Inc. US 2.24% Electronic Arts Inc. US 1.42% UTILITY % 7.40% Netflix Inc. US 1.50% Algonquin Power & Utilities Corp. 2.78% Nike Inc. US 0.94% AltaGas Ltd., subscription receipts 2.26% O'Reilly Automotive Inc. US 1.83% Fortis Inc. 2.36% Six Flags Entertainment Corp. US 3.36% The Home Depot Inc. US 1.79% CONSUMER STAPLES % 6.38% Uni-Select Inc. 1.90% CVS Health Corp. US 1.08% Loblaw Companies Ltd. 2.59% MATERIALS % 4.60% The Coca-Cola Co. US 1.30% Barrick Gold Corp. 1.36% Walgreens Boots Alliance Inc. US 1.41% Polaris Materials Corp. 1.39% Silver Wheaton Corp. 1.85% INDUSTRIAL PRODUCTS % 9.03% CCL Industries Inc., Class B 2.37% HEALTH CARE % 12.63% Exco Technologies Ltd. 3.86% Aetna Inc. US 2.35% The Boeing Co. US 2.80% Amgen Inc. US 1.86% Becton, Dickinson and Co. US 2.76% TECHNOLOGY % 18.16% Boston Scientific Corp. US 2.81% Adobe Systems Inc. US 3.71% Celgene Corp. US 1.27% Alphabet Inc., Class A US 1.92% Regeneron Pharmaceuticals Inc. US 1.58% Apple Inc. US 3.28% Broadcom Ltd. US 4.18% REAL ESTATE % 1.82% Facebook Inc. US 1.61% Brookfield Property Partners L.P. 1.82% Salesforce.com Inc. US 1.40% SAP SE ADR US 2.06% FINANCIAL SERVICES % 13.23% Bank of America Corp. US 2.50% ENERGY % 8.45% East West Bancorp Inc. US 2.63% Keyera Corp. 2.05% First Republic Bank US 2.12% Petrowest Corp. 1.73% MasterCard Inc., Class A US 3.09% Suncor Energy Inc. 2.25% Royal Bank of Canada 1.36% TransCanada Corp. 2.42% Visa Inc., Class A US 1.53% Page 7

8 TM Three Favoured ABC Common Stock Holdings Alta Gas Ltd.: is an energy infrastructure company which operates in multiple segments including gas processing and transportation, power generation, and regulated gas distribution to homes and businesses. The company provides safe, stable cash flows supported by high quality assets and long-term contracts. AltaGas is currently in the process of acquiring WGL, an American energy infrastructure company. WGL operates in similar sectors to AltaGas, with their largest division being their natural gas regulated utility serving the Washington D.C., Maryland, and Virginia markets. This acquisition is a good strategic fit as it will be accretive to cash flow, improves scale, diversifies operations geographically and provides growth opportunities. Furthermore, management anticipates dividend growth of 8-10% through With a yield of 6.7% and a strong natural gas supply outlook, we see AltaGas as an attractive investment. Dave & Buster s Entertainment Inc.: is a North American operator of over 85 entertainment complexes offering adult and family entertainment as well as food, beverages, and a full bar service. The company s impressive growth rate is being fueled by management s reorganization of the business, their aggressive expansion plan, and the millennials liberal spending habits towards experiences. We believe that Dave & Buster s 24.0x forward P/E is more than justified given that its 2018 revenue and earnings forecast is estimated to increase by 15-20%. The company also produces strong free cash flow, which is being used for expansion, debt repayment, and its share buyback program. It is our opinion that Dave & Buster's impressive performance should continue. Netflix Inc.: is an internet television network offering subscription services for media streaming and on-demand videos. Netflix has emerged as the dominant player in a young and growing industry due to their innovative business model, which capitalizes on important consumer trends. Netflix provides users with unlimited access to a massive library of on-demand content, featuring movies, television shows and documentaries. This content can be consumed at any time and on any device the consumer chooses. With its low $9.99/month subscription, Netflix has lured consumers towards its on-demand television service and away from traditional cable services. Additionally, Netflix produces its own original content, which includes popular shows such as Orange is the New Black, House of Cards, Stranger Things, and 13 Reasons Why. Most importantly, Netflix has been growing its user base both domestically and globally, as evidenced by its most recent quarters streaming revenue growth of over 40% year over year. Administrative Information There are units of the ABC North American Equity Fund & ABC Global Equity Fund available for purchase. Contact our office for more information. Purchase requests must reach our office by the last business day of the month and redemption requests (for our open funds) must reach our office no later than ten business days before the last business day of the month. Clients that are invested in our closed-end funds are able to redeem their reinvested distribution units on a monthly basis. Also, you can participate in the annual 10% redemption right if you provide the completed form by November 30 for a December 29 transaction date. If you need assistance with either of these options, please do not hesitate to contact our office. All cheques are to be made payable to RBC Investor Services. All client requests are to be directed to ABC Funds. We continue to request that clients assist in updating their Know Your Client forms. This information is a regulatory requirement to assess the suitability of our various ABC Funds to individual client s needs. RBCITS is the custodian of the ABC Funds and is responsible for providing account statements to all our clients. We ask that you retain these statements for your records as there may be additional costs for retrieving historical data. Please contact our office to inform us of any changes in mailing or addresses. If we do not have your current contact information, you may not receive the information we are sending out. This newsletter is published by I.A. Michael Investment Counsel Ltd. and the ABC Funds 18 King Street East, Suite 1010 Toronto, Ontario M5C 1C4 Telephone: (416) Toll Free: OPEN ABC Fax: (416) Web site: invest@abcfunds.com The information contained in this investment letter is not and under no circumstances is to be construed as a solicitation or recommendation to buy or sell securities, including, without limitation, any units of any of the ABC Funds. While the information contained in this newsletter has been drawn from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor in providing it does I.A. Michael Investment Counsel Ltd. assume any responsibility or liability. I.A. Michael Investment Counsel Ltd., its directors, officers, and other employees may, from time to time, have positions in securities mentioned in this letter. I.A. Michael Investment Counsel Ltd. is the manager and investment advisor of the ABC Funds, and as such, receives from the Funds certain management and investment advisory fees based on the net asset value of the Funds from time to time. Irwin Michael is the sole shareholder of I.A. Michael Investment Counsel Ltd.