Toronto District School Board Continuing Education. Investment Planning. Winter 2018, Week 2. Instructor Gail Bebee

Transcription

1 Toronto District School Board Continuing Education Investment Planning Winter 2018, Week 2 Instructor Gail Bebee gbebee@gailbebee.com

2 What was the most important thing you learned from last week s lecture?

3 Week 1 Take Aways 1. Reduce debt often best investment 2. You need a financial plan 3. Asset classes=building blocks of investing - cash, bonds, stocks 4. Diversification! 5. Cash - High interest savings account 6. GIC ladder lowers interest rate risk

4 CDIC Deposit Insurance List of CDIC members Protects up to $100,000 per depositor per insured category per bank 7 categories incl. deposits in one name, deposit in more than one name, RRSP, RRIF, TFSA Estimated coverage calculator

5 Today s Topics Fixed Income Equities/Stocks

6 Fixed Income Loans Borrower pays regular interest for specific time Returns vary with features Low to moderate risk

7 Types of Fixed Income Bonds Mortgages Senior loans

8 Bonds Government or company raises capital by borrowing Usually semi-annually interest payments

9 Why Invest in Bonds? Safety, priority claim on issuer s assets in bankruptcy Diversification Low volatility Regular stream of income

10 Bonds Sold in $1000 multiples Terms 1 to 30 years + Principal amount you paid Face value or par value amount owed bondholder at maturity

11 Bond Quotes Description Maturity Date Coupon, % Price/ $100 Semi-ann. Yield, % Credit Rating Government of Canada Bell Canada March 1, 2023 March 22, AAA BBB, Baa2, BBB+ *DBRS, Moody s, S&P Jan. 19, 2018 Canadian Fixed Income.ca

12 Bond Terms Maturity date when principal repaid Coupon interest rate when issued Approx. semi-annual yield interest rate at current bond price Approx. Price/$100 CAD - current bond price/$100 of par value

13 Bond Credit Rating DBRS/Moody/S&P - credit rating from major rating agencies: Dominion Bond Rating Service Moody s Investor Services Standard and Poors Important selection factor

14

15 The higher the interest rate vs. other bonds, the riskier the bond

16 Choosing Bonds Credit quality Issuer - government or corporate Sector and geography Maturity date - short, intermediate, long bonds Interest rate

17 Bond Pricing Priced at $100 at issue Buy & sell bonds until maturity Price varies with maturity, current interest rates, credit rating etc. To sell, existing bonds must give same return as new issues.

18

19 Bond Price 1 Interest Rate When interest rates rise, existing bond prices fall When interest rates fall, existing bond prices rise

20 Bond Price Change (%) when Interest Rate Changes How Interest Rate Changes Affect the Price of Bonds

21 Bond Pricing Example Joe buys $100,000 bond Coupon 3%, semi-annual interest, matures in 2 years After 1-year Joe wants to sell Going interest rate is now 3.5%

22 What price can Joe expect to get? New bond issues pay 3.5% Joe s bond price plus interest payments must provide 3.5% return

23 Online bond calculator Face value $100,000 Coupon rate 3%, compound semi-annually Market rate 3.5% Months to maturity 12

24 Market Price - Joe s Bond $99,509 $ (price per $100 face value) This price plus interest payments give buyer 3.5% total return Joe must sell bond below cost

25

26 Zero Coupon or Stripped Bonds Sold at discount to face value At maturity pay back face value Profit is difference Best for RRSPs due to taxation

27 Real Return Bonds Return rate adjusted for inflation/deflation Based on Consumer Price Index Government-issued

28 High Yield or Junk Bonds Below investment grade High yield = high risk Corporate issuers Buy via fund

29 Debentures Unsecured bond - no claim on assets if issuer fails Higher risk/higher reward Credit rating critical Repayment at maturity might be company shares, not cash

30 Ways to Invest in Bonds

31 Direct Bond Purchase Brokerage account Not an open market - choice & price depend on broker Institutional investors get best new issues. Retail investors get leftovers At maturity principal returned

32 Bond ETFs & Mutual Funds Good diversification Regular distributions based on interest from bonds in fund Low fees critical for best returns

33 Downside of Bond Funds Never mature No guarantee return of principal Fund price & distributions vary with interest rates

34 Downside of Bond Funds II If interest rates rise, fund prices falls bonds in fund worth less New bonds added pay higher rates Depending on when you sell, could get less than original investment

35 Bond Mutual Funds Portfolio manager actively picks & trades bonds (most) Low fee & decent returns: RBC Bond PH&N Total Return Bond TD Canadian Bond Index Mawer Canadian Bond

36 Bond Exchange-Traded Funds Seek returns benchmark bond index - own bonds in index BMO Aggregate Bond Index ETF (ZAG) ishares Core High Quality Canadian Bond Index ETF (XQB) Vanguard Canadian Aggregate Bond Index ETF (VAB)

37 For More Info on Bonds Is direct investing in bonds for you? Chapter 12 of No Hype-The Straight Goods on Investing Your Money In a rising interest rate world, should you own bonds or bond funds?

38 Mortgages

39 Mortgages Loan to property buyer Property is collateral (usually) Monthly repayment schedule Higher risk - default, fall property value

40

41 Investing in Mortgages Mortgage mutual funds Private mortgages - real estate lawyers, mortgage brokers Private mortgage companies - higher risk: poor credit, construction financing Stocks e.g. Firm Capital (FC-TSX)

42 Equities/Stocks Company raises capital by selling ownership stake $$ to expand, reduce debt Original owner monetize business Share - unit of ownership

43 Stock Market or Stock Exchange Place where shares are bought and sold traded e.g. TSX, NYSE Giant auction Stock prices fluctuate

44 Why Invest in Stocks? Diversification Better long term returns than fixed income Positive return rate after inflation vs. negative for fixed income when interest rates low

45 Common Shares Usually voting rights on major company matters Non-voting, multiple vote shares original owners retain control Canadian Tire Empire Co. (Sobey s)

46 Preferred Shares Dividends paid before common stock owners Non-voting Bond-like

47 Dividends Part profits paid to shareholders Declared by board of directors Usually quarterly - cash or shares A good thing for investors

48 Financial Ratios Ratios used to analyse stocks Can help decision-making There are many! Good source for ratios

49 Dividend Yield Popular financial ratio = div. amount x 100 share price High yield could mean trouble, falling share price

50 P/E Price over Earnings Ratio P/E = current share price earnings per share (EPS) Price of one dollar of earnings Growth rate P/E

51 Trailing P/E Uses EPS reported past year Forward or projected P/E Uses stock analyst EPS estimates

52

53 Quarterly & Annual Reports Must be produced by publicly traded companies Good overview of past year s/quarter s operations See company s website or SEDAR

54 The important stuff is in Management Discussion and Analysis Financial Statements notes to MD&A

55 Auditor s Report Opinion on how company s books reflect financial position

56 Balance Sheet Financial position Assets and liabilities

57 Goodwill on balance sheet Intangible asset provides competitive advantage e.g. strong brand, reputation, patents, broadcast licenses

58 Statement of Income Statement of earnings, Statement of operations Sets out income, expenses and net profits

59 Statement of Cash Flows Where money comes from and how it is spent

60 Shareholder s Equity Total assets minus total liabilities Increases if shareholders are making money

61 Picking Stocks Many approaches Warren Buffett Dogs of the Dow Stock screeners Etc.

62 Gail s Ten Steps to Selecting Winning Stocks

63 1. Where does stock trade? Canadian, U.S. exchanges? 2. What does the company do? 3. Does company have a future?

64 4. Is management effective? Website, Management information circular, Google search Return on Equity (ROE) ROE= net income x 100 shareholders equity compare to industry average

65 Effective management?

66 5. Are revenues and profits growing? See Statement of Income 6. Are revenue sources ongoing, growing? See Statement of Cash Flows

67 7. Are dividends paid? Growing? Positive indicator Require profits, business discipline Sustainable payout?

68 8. Reasonable debt? See Balance Sheet Debt/Equity Ratio = Total debt Book value shareholders equity <0.5 for industrial stocks < 1.5 for utility stocks

69 Interest coverage = Earnings before interest and taxes Total interest charges >3 for industrials, >2 utilities Cash flow/total debt > 0.2 industrials, > 0.30 utilities

70 9. Does stock fit your portfolio? 10. Decide when to buy

71 Case Study Corus Entertainment Canadian media & content co. Television 60 channels/stations e.g. Global, Food Network, HGTV Radio - 39 stations, e.g. Q107 Studios, digital content Content Nelvana, creator Babar

72 Company website Corus Entertainment

73 Recent Developments Bought Shaw Media Jan., 2016 for $2.65 billion transformational New revenue sources, BUT more debt & share dilution Poor Q1, 2018 results stock down 17%

74 Corus 2017 Annual Report Management s Discussion and Analysis - p. 23 Independent auditor s report p. 58 Consolidated Financial Statements start p. 59

75 Consolidated Financial Statements Balance sheet (statement of financial position) - p. 59 Statement of income p. 60 Shareholders equity p. 61 Statement of cash flows p.62

76 Reading a stock quote

77

78

79

80 Why Corus price dropping? 2015 CRTC announced cable channel pick and pay Viewing habits change Ad revenue down Stock-specific risk Diversification essential

81 More Info on Stocks Chapter 13 of No Hype - The Straight Goods on Investing Your Money Nine factors to consider when screening stocks by Gail Bebee Investor Education Fund

82 Next Week Other types of equities - preferred shares, ADRs, IPOs, income trusts Other asset classes - real estate, currencies, commodities Currency hedging Financial products - funds