This month makes for some interesting choices for us when it comes to choosing a stock. After assigning the scores to the stocks we follow (all those listed on the S&P 100 plus a few other Canadian dividend champs), there was a three-way tie for first place but we aren’t comfortable recommending any of the three – all for different reasons. The three top choices were: Home Capital Group (TSE: HCG), Alaris Royalty Corp. (TSE: AD) and Target Corp. (NYSE: TGT).
Here’s what we like and dislike about each one. Home Capital is trading 35% below their 52-week high so that’s a very attractive discount. They are in the consumer finance sector, providing mortgage lending, credit cards, line of credit lending, etc. It currently yields 4.2% with a long history of increasing dividend payments. As dividend investors, those are things we REALLY like. They have a P/E of 7 and EPS of 3.71 – both good-looking numbers. So what’s the problem? Their 10 year price history shows very slow growth with decreasing prices since August, 2014. That might not be good for a company with a market cap of only 1.6B. Also somewhat concerning is there has been some considerable insider selling of pretty sizeable blocks of stock.
Alaris Royalty Corp is trading at a discount of 28% below their 52-week high which is a solid discount and they pay a stable dividend of over 7%. Wow! The company has been increasing that dividend for at least the last 10 years despite a lack-lustre price performance history over the same period. From a purely dividend investing perspective this is a very attractive stock to own as in the worst case you’ll enjoy a return of over 7% a year. Again, this company is small with a market cap of under a billion dollars (about 800 million) so there is a little more risk. Also, remember that past performance is not a guarantee of future yield so that dividend is not a guarantee but it seems like a pretty good bet. We should also point out that the current price is 25% above the 52-week low which might suggest a recovery is underway.
We recommended Target for each of the last two months and we still think this stock is worth a look. See our last two posts if you’d like to know why we like it. So why not recommend it for a third month in a row? Simple. The stock price has declined in each of the last two months. Generally, we like to purchase a stock when it is showing signs of recovery. While we did suggest Target last month on a lower price from the month before, we felt it was a good enough opportunity to overlook the decrease in price. Three months in a row is more than we’re comfortable recommending to people. Would we suggest this stock to a friend asking for advice? You bet we would! It’s worth reminding readers that a price decrease means a dividend yield increase so the yield of 4.3% on last month’s price has increased to 4.5% on this month’s price.
Well, there you have three stocks worth considering. Now it’s time for our official recommendation which is Canadian Imperial Bank of Commerce (TSE: CM). Canadian banks are very stable and CIBC is sporting a P/E of 9.77 with EPS of 11.77. That’s right – their earnings per share are greater than the price to earnings ratio. That’s not something you see everyday and indicates a stock that is very well-priced. The stock is trading at only 4.8% off it’s 52-week high but as Warren Buffet always says: “It’s better to buy a great company at a fair price than a fair company at a great price.” We happen to think this is a great company at a better than fair price so it’s our pick for the month. When in doubt, stick with what you know!