pension plan

The arrival of new wireless providers has put pressure on Canada’s three main telecommunications companies (BCE, Telus and Rogers). To remain competitive, all three are offering subscribers better long-term deals. They are also making big investments in new wireless and high-speed Internet technologies. However, these moves are also dampening their profits. Still, demand for wireless services continues to rise, and we feel BCE’s broad geographic reach puts it in the best position to profit from that trend. The improving economy should also push up ad sales at its TV stations and other media businesses. Moreover, the company recently went through a significant restructuring. That will increase its long-term profits and give it more cash for dividends....

Softchoice Corp., $12.43, symbol SO on Toronto (Shares outstanding: 19.8 million; Market cap: $246.1 million; www.softchoice.com), resells other companies’ software (around 60% of sales) and hardware (40% of sales) to organizations of all sizes. It has more than 40 offices in the U.S. and Canada. Softchoice is the fifth-largest reseller of Microsoft software in the U.S. and the largest in Canada. Of the 200,000 software titles it sells, 33% are made by Microsoft. The company also resells hardware, including computers, servers and networking equipment, from IBM, Hewlett-Packard, Cisco and other device makers. Softchoice’s competitors include Dell Inc. and CDW Corp. The company also manages software licenses for clients ranging from small companies with as few as 25 computers to large banks with over 70,000. Canadian customers include Bank of Montreal, TD Bank, Rogers Communications and Canadian Tire....

CANADIAN PACIFIC RAILWAY LTD. $69 (Toronto symbol CP; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 169.7 million; Market cap: $11.7 billion; Price-to-sales ratio: 2.3; Dividend yield: 1.7%; TSINetwork Rating: Above Average; www.cpr.ca) transports freight between Montreal and Vancouver, and connects with hubs in the U.S. Midwest and Northeast. It gets 25% of its revenue from the U.S.

CP’s revenue rose 16.7%, from $4.6 billion in 2006 to $5.3 billion in 2008, as rising Asian trade pushed up freight volumes. CP’s $1.5-billion purchase of Dakota, Minnesota & Eastern Railroad (DM&E) October 2008 brought in more revenue. DM&E operates a 4,000-kilometre rail network in eight midwestern states.

The recession cut CP’s revenue by 17.7% in 2009 to $4.4 billion. However, revenue rose 13.2%, to $5.0 billion, in 2010. Even with its weather-related problems in the first half of 2011, revenue for the full year probably rose to $5.2 billion.

...

We’ve chosen Canadian Pacific Railway as our “Stock of the Year” for 2012. Railways are highly cyclical. CP’s stock got as low as $30 in mid-2004, then shot up to briefly peak at $90 in mid-2007. It then fell to a low of $33 by March 2009, as the recession cut deeply into freight volumes. The stock more than doubled to $68 by February 2011 as the economy recovered. However, avalanches in B.C. and spring floods in the Prairies hurt CP’s volumes and earnings in 2011. The stock fell as low as $46 in September. It then began to rise in October, as the economic outlook and the stock market both improved. The company now has a new plan for dealing with bad weather and raising its efficiency. The recent involvement of a prominent American hedge fund may speed up CP’s earnings growth, and spur further gains in its stock price....

BCE INC., $40.74, Toronto symbol BCE, is teaming up with Rogers Communications Inc. (Toronto symbol RCI.B) to buy 75% of Maple Leaf Sports and Entertainment (MLSE). This is the private company that owns several professional sports teams, including the Toronto Maple Leafs (hockey), Toronto Raptors (basketball) and Toronto FC (soccer). MLSE also owns the Air Canada Centre arena in downtown Toronto, as well as specialty TV channels such as Leafs TV. BCE, in combination with the trust fund that manages its employees’ pension plan, will pay a total of $533 million for 37.5% of MLSE. Rogers will also acquire 37.5%. A private investor will own the remaining 25%. The deal should close in mid-2012. Unlike most sports teams, MLSE is profitable. This investment will also guarantee BCE access to live games and other high-demand content for its TV channels, radio stations and web sites....

RESEARCH IN MOTION LTD., $17.08, Toronto symbol RIM, fell 9% on Friday after it said it would write down its inventory of unsold BlackBerry PlayBook tablet computers. RIM recently cut the price of the PlayBook by 60% to spur sales. The writedown will cut RIM’s after-tax earnings in its 2012 third quarter, which ended November 26, 2011, by $360 million (all amounts except share price in U.S. dollars). RIM earned $329 million, or $0.63 a share, in the second quarter of fiscal 2012. The company shipped 14.1 million BlackBerry smartphones in the third quarter, which was in line with its forecast of 13.5 to 14.5 million. It also shipped 150,000 PlayBooks....

Right now, the U.S. credit-rating industry is dominated by three firms: Standard & Poor’s (which is owned by McGraw-Hill, below), Moody’s and Fitch. However, Standard & Poor’s recent downgrade of U.S. Treasury bonds has drawn new attention to the entire industry. This increased scrutiny makes it more likely that regulators will open up the industry to more competition. Regulators could also force these firms to disclose how they make their decisions. Even with these challenges, we feel credit-rating providers like the three we analyze below will continue to play a vital role in the global economy. Moreover, the recent stock-market turmoil is prompting many investors to turn to bonds. That should continue to fuel demand for bond ratings, in particular. MCGRAW-HILL COMPANIES INC. $41 (New York symbol MHP; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 301.3 million; Market cap: $12.4 billion; Price-to-sales ratio: 1.8; Dividend yield: 2.4%; TSINetwork Rating: Average; www.mcgraw-hill.com) gets 60% of its revenue from its Standard & Poor’s division, which provides financial information, including credit ratings on bonds. It gets 25% from publishing school textbooks. The remaining 15% comes from its media operations, which publish magazines and own nine television stations....

When investors see a day like Thursday, with a drop of more than 500 points in the Dow Jones Industrials, they can’t help but wonder if we face a replay of the 2007-2009 market plunge. However, though today’s situation could turn out badly, that’s not inevitable. It’s much different from a few years ago. The 2007-2009 drop was mostly about the collapse of the housing boom and everything that went with it. Today there is no boom that could deflate and bring down the economy. Today’s problem grows out of government attempts at ‘fixing’ the economy in recent years. These fixes, which were mostly unsuccessful, bloated government spending and created huge debts. Today’s main market worry is how the U.S. federal government will attempt to fix its budget deficit and bring its debt down to a manageable level. To top things off, the Obama administration has also brought in big changes in health care, union and environmental rules and so on. Some of these changes face court challenges and political opposition. But some are sure to survive and go into effect. Others are sure to follow....

TORONTO-DOMINION BANK $82 (Toronto symbol TD; Conservative Growth Portfolio, Finance sector; Shares outstanding: 883.1 million; Market cap: $72.4 billion; Price-to-sales ratio: 2.8; Dividend yield: 3.2%; TSINetwork Rating: Above Average; www.td.com) has agreed to sell its 13.46% stake in Maple Leaf Sports & Entertainment (MLSE) to the Ontario Teachers’ Pension Plan. MLSE owns professional sports teams (Toronto Maple Leafs, Toronto Raptors and Toronto FC) plus the Air Canada Centre arena in downtown Toronto. The bank did not disclose the price, but it likely made a substantial return on this investment. TD Bank is a buy.

YUM! BRANDS INC. $48 (New York symbol YUM; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 468.6 million; Market cap: $22.5 billion; Price-to-sales ratio: 2.0; Dividend yield: 2.1%; TSINetwork Rating: Average; www.yum.com) plans to sell its A&W (hamburgers) and Long John Silver’s (seafood) restaurant chains. Together, these businesses account for about 1% of Yum’s sales. Selling these operations would let Yum focus on its three remaining chains: KFC (fried chicken), Pizza Hut and Taco Bell (Mexican food). These brands are easier to expand internationally than A&W and Long John Silver’s, which mainly operate in the U.S. The company feels its international operations will supply 75% of its earnings in 2015, up from 65% in 2010. Yum Brands is a buy....