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Saturday, March 15, 2003
Regardless of where you see the stock market going in the next while, there's an argument to be made for investing in the bedrock of Corporate Canada.
These are companies that have been around for decades and survived bad times before. Most pay a dividend, which is the calling card of the stable, well-run corporation of the 21st century.
Canada's biggest blue chips have actually done reasonably well so far in 2003, as measured by the performance of the Two-Minute Portfolio.
Conceived several years ago as a quick method for building a diversified portfolio of Canadian stocks, the Two-Minute Portfolio comprises the top stock by market capitalization in each of the major industry groups in the S&P/TSX composite index.
The Two-Minute Portfolio is down about 2.4 per cent so far this year, but that's a fair bit better than the broader market indexes.
Regular updates on the Two-Minute Portfolio's returns used to appear in this space from time to time, but I sort of let things slide last year. For a couple of reasons, now seems like a good time to reanimate the portfolio.
One reason is that dividend-paying blue chips offer a degree of reliability and stability that transcends the overall stock market. If you're looking for an avenue into the stock markets right now, this area is well worth looking at.
There's also a logistical reason for getting the Two-Minute Portfolio up and running again.
The usual procedure in the past has been to readjust the portfolio at the beginning of each year to reflect the largest stocks by market cap in each industry group. Last year, things were complicated by the fact that the 14 groups used in the old Toronto Stock Exchange 300 composite index were replaced in May with 10 new ones connected to the new S&P/TSX composite index.
The new stock groups are part of a standard classification system used by both Standard & Poor's and Morgan Stanley in their global stock indexes. All of this helps give the Two-Minute strategy a firm new footing for relaunch.
Here are the Two-Minute Portfolio stocks, symbols and respective stock groups, as of Jan. 1.
Consumer discretionary, Thomson Corp. (TOC); consumer staples, Loblaw Cos. Ltd. (L); energy, EnCana Corp. (ECA); financials, Royal Bank of Canada (RY); health care, Biovail Corp. (BVF); industrials, Canadian National Railway Co. (CNR); materials, Alcan Inc. (AL); information technology, Nortel Networks Corp. (NT); telecommunications services, BCE Inc. (BCE); utilities, TransCanada PipeLines Ltd. (TRP).
You'll notice that the mining and real estate sectors are under-represented here. For this reason, the Toronto Stock Exchange has S&P prominently track three stock subgroupings in addition to the 10 groups listed above.
Because they enhance diversification, let's add the market cap leaders in each of these three subgroups. They are: gold, Barrick Gold Corp. (ABX); diversified, metals and mining, Inco Ltd. (N); real estate, Brookfield Properties Corp. (BPO).
In keeping with the usual Two-Minute Portfolio protocol, a notional $2,000 investment was made in each of these 13 stocks at the opening price on Jan. 2, the first business day of the year.
As of the start of this week, the entire portfolio was down 3.8 per cent if you factor in a typical on-line brokerage commission of $27 a trade at a typical on-line broker. Without fees, the decline was 2.4 per cent.
You'll see how respectable these returns are when you measure them against the 4-per-cent decline in the S&P/TSX 60 index of blue chips over the same period and the 5-per-cent fall in the broader S&P/TSX composite.
Now, let's talk dividends. Biovail, Inco and Nortel don't pay a dividend, but the remaining 10 stocks pay out enough to give the whole Two-Minute Portfolio a dividend yield of 1.9 per cent.
In cash terms, the annual dividend payments in the portfolio would amount to $482.43. If the stock market meanders lower in the months ahead, this payout would cushion things somewhat.
The value of this sort of padding can be seen in the performance of some of the Two-Minute stocks over the past 12 months.
In fact, the only gainers were Royal Bank, up 6 per cent; EnCana, up 4.4 per cent; and TransCanada PipeLines, which gained 1.7 per cent.
Nortel — what else — was the worst performer as a result of a 68-per-cent decline, while Alcan fell 39.4 per cent and CN dropped 26 per cent.
Take a slightly longer-term view and you'll get a better idea of the stability the Two-Minute stocks offer. Over the past three bleak years for the markets, eight of the 13 were in the black.
The Two-Minute Portfolio itself has a more than respectable record in the past several years. From 1999 through 2001, it never failed to outperform the old TSE 300 composite index.
So far this year, the two-minute strategy looks to be on the same track.
rcarrick@globeandmail.ca
Click here to see how the portfolio is performing.
