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Fairfax buys back $1-billion of shares after CPPIB, OMERS investment – The Globe and Mail

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Fairfax Financial Holdings Ltd. bought back US$1-billion of its own stock at a premium price on Christmas Eve, after selling a stake in a subsidiary for US$900-million to institutional investors OMERS and the Canada Pension Plan Investment Board.

A global property and casualty (P&C) insurance company, Fairfax announced plans in November to buy back up to 8.7 percent of its own stock at a price of between US$425 and US$500 for each subordinated voting share. At the same time, Fairfax said it sold a 9.9 percent stake in its Stamford, Conn-based division Odyssey Group Holdings Inc. to CPPIB and OMERS, two of Canada’s largest pension fund managers.

Fairfax is the latest in a string of Canadian financial services companies to launch significant share buybacks, as regulators ease capital restrictions imposed during the pandemic and allow banks and insurers to deploy their cash as they see fit.

Toronto-based Fairfax set the purchase price on its buyback last Friday using a “modified Dutch auction”, which allows shareholders to select the price they are willing to tender their stock. The auction was “modestly oversubscribed,” according to a report by analyst Phil Hardie at Scotiabank.

Fairfax ended up acquiring two million shares at US$500 each, the top end of its pre-set range. That day, Fairfax shares closed at US$464.02 on the New York Stock Exchange, so the buyback played out at an 8 per cent premium to where the company’s stock was trading at the time.

The decision to sell a stake in a subsidiary and use the capital to buy back shares “provided an elegant solution to enhancing book value per share in the near term while also supporting future growth,” said Mr. Hardie.

The CPPIB and OMERS investment valued Odyssey at 1.7 times its book value. In contrast, the buyback saw Fairfax repurchase its own shares at a 10 per cent discount to the company’s reported book value, which is US$561.88 per share. Mr. Hardie said: “The Odyssey deal highlights the significant gap between Fairfax’s stock price and the estimated intrinsic value of the company and its holdings.”

Fairfax, controlled by entrepreneur Prem Watsa, also raised capital in October by selling a 14 per cent interest in London-based reinsurance subsidiary Brit Ltd. to OMERS for US$375-million.

Historically, Fairfax has used the cash generated from its operating companies and investments to grow through acquisitions, rather than to pay for share buybacks. In recent years, the company expanded in India and Africa.

The property, casualty and reinsurance industries are consolidating around their largest players, which include Fairfax. “With P&C business becoming more risky and complex, capital requirements and need for reinsurance will rise,” said Swiss Re, the world’s largest reinsurer in a recent report. The Zurich-based company said: “Property will be the fastest growing segment, with global premiums forecast to increase by 5.3 percent annually to 2040. Climate risks will be a main driver of the growth in property.”

Fairfax is expected to continue snapping up smaller rivals. In a report last week, analyst Mark Dwelle at RBC Capital Markets said: “The company has well over $1 billion of holding company cash and has the operating flexibility to pursue a variety of near term and long-term growth initiatives and acquisitions.”

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Toronto index set for biggest weekly drop since early December

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Canada’s main stock index fell on Friday as weaker crude oil prices weighed on energy stocks, putting the benchmark index on course for its biggest weekly drop since early December.

At 9:35 a.m. ET (14:35 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was down 141.11 points, or 0.67%, at 20,917.07. It hit a more than two-week low in the previous session.

The index has lost 2.4% so far this week, hurt by higher bond yields as expectations build that central banks will hike interest rates over the coming months to tame unruly inflation.

The healthcare and technology sectors have dominated the weekly losses, dropping 7.4% and 4.5%, respectively.

On Friday, the energy sector led the declines with a fall of 1.9% as an unexpected rise in U.S. crude and fuel inventories profit-booking pressured crude oil prices.[O/R]

The financials sector slipped 0.8%, while the industrials sector fell 0.5%.

The materials sector, which includes precious and base metals miners and fertilizer companies, lost 0.4% on weaker copper prices. [MET/L]

On the economic front, data showed Canadian retail sales rose 0.7% to C$58.08 billion ($46.40 billion) in November on higher sales at gasoline stations, and building materials and gardening equipment and supplies dealers.

“Canadian retail sales for November grew less than expected, while new house price inflation plateaued at a high level, another sign of stagflation in the North American economy,” said Colin Cieszynski, chief market strategist at SIA Wealth Management.

HIGHLIGHTS

The TSX posted one new 52-week highs and 10 new lows.

Across all Canadian issues there were two new 52-week highs and 55 new lows, with total volume of 32.05 million shares.

 

(Reporting by Amal S in Bengaluru; Editing by Aditya Soni)

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CAPP expects oil and gas investment to rise 22 per cent this year to $32.8 billion – Energeticcity.ca

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But CAPP president Tim McMillan pointed out that in spite of the fact that oil prices are at seven-year highs and companies are recording record cash flows, capital investment remains well below what it was during the industry’s boom years. In 2014, for example, capital investment in the Canadian oilpatch hit an all-time record high of $81 billion, capturing 10 per cent of total global upstream natural gas and oil investment.

“Today we’re at $32 billion, and we’re only capturing about six per cent of global investment,” McMillan said. “We’ve lost ground to other oil and gas producers, which I think is problematic for a lot of reasons . . . and it leaves billions of dollars of investment that is going somewhere else, and not to Canada.”

Investment in conventional oil and natural gas is forecast at $21.2 billion in 2022, according to CAPP, while growth in oilsands investment is expected to increase 33 per cent to $11.6 billion this year.

Alberta is expected to lead all provinces in overall oil and gas capital spending, with upstream investment expected to increase 24 per cent to $24.5 billion in 2022. Over 80 per cent of the industry’s new capital spending this year will be focused in Alberta, representing an additional $4.8 billion of investment into the province compared with 2021, according to CAPP. 

While the 2022 forecast numbers are good news for the Canadian economy, McMillan said, it’s a problem that companies aren’t willing to invest in this country’s industry at the level they once did. 

He said investors have been put off by Canada’s record of cancelled pipeline projects, regulatory hurdles and negative government policy signals, and many now see Canada as a “difficult place to invest.”

However, Rory Johnston, managing director and market economist at Toronto-based Price Street Inc., said laying the decline in the industry’s capital spending at the feet of the federal government is overly simplistic.

He added while current “rip-roaring, amazing” cash flows and a period of sustained high oil prices will certainly give some producers the appetite to invest this year, Johnston said, it will likely be on a project-by-project basis and certainly on a smaller scale than the major oilsands expansions of a decade ago.

“You have global macro trends across the entire industry that have begun to favour smaller, fast-cycle investment projects — and most oilsands projects are literally the polar opposite of that,” he said.

One reason capital spending isn’t likely to return to boom time levels is because companies have become much more cost-efficient after surviving a string of lean years. And that’s not a bad thing, Johnston said.

“The decade of capex boom out west was tremendously beneficial for Canada and Albertans, but it also caused tremendous cost inflation,” he said.

“While what we’re seeing right now is not as construction-heavy and not as employment-heavy —and those are two very, very large downsides — the upside is that you’re much more competitive in a much more competitive oil market,” Johnston said.

In a report released this week, the International Energy Agency (IEA) hiked its oil demand growth forecast for the coming year by 200,000 barrels a day, to 3.3 million barrels a day. 

According to the IEA, global oil demand will exceed pre-pandemic levels this year due to growing COVID-19 immunization rates and the fact that the new Omicron variant hasn’t proved severe enough to force a return to strict lockdown measures.

This report by The Canadian Press was first published Jan. 20, 2022.

Amanda Stephenson, The Canadian Press

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Cash-flow investing isn't just a strategy for your grandparents – Financial Post

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Cash-flow investing is increasingly attractive during times of increased market volatility

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The outlook on the Omnicron variant of COVID-19 on global markets is changing by the minute, but I am reminded of a tried-and-true approach that can provide investors with some peace of mind during uncertain market conditions: focusing on the value quality that cash flow adds as opposed to movements in the asset price.

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Cash-flow investing, in basic terms, means purchasing an asset that provides income at regular intervals versus one solely based on price appreciation. Whether it is monthly, quarterly, semi-annual, etc., you will receive regular cash distributions that can be reinvested or used to finance your lifestyle.

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Considered a relatively conservative approach to investing, acquiring cash-flow-producing assets can be attractive for a number of reasons.

First, the asset will provide value on a regular basis regardless of its current market price. A temporary drop in value can be viewed as positive for cash-flow investors because they can now use the distribution amount to buy more of the asset at a distressed price, hence increasing their future cash-flow amount.

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Secondly, dividends or proceeds from cash-flow investments can be used to fund lifestyle expenses in retirement without eating into your overall pot of capital.

This shift in focus from market price to value can help diversify investment portfolios and mitigate the impact of public market uncertainty. Ultimately, cash-flow investments provide flexibility to rebalance, protection against market volatility, and peace of mind that you’re earning sustainable income with less concern about the economic impact of current events.

For example, in February 2020, we switched our monthly cash-flow-producing assets from reinvest to pay out for many clients when public equity markets sharply reacted to COVID-19 uncertainty. This free cash flow allowed us to purchase dividend-paying equities at a large discount for the ensuing six months until they reached their pre-pandemic valuations.

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Dividend-paying equities are just one of several types of cash-flow investments.

Real estate : Cash flow is the result of proceeds from rent collected. The value of the property will likely appreciate over the long term, but the cash flow produced monthly or annually is relatively consistent. The goal here is for the income from the property to cover all your costs on the property and provide a steady profit.

Investing in a real estate fund can be an excellent source of passive income and provide steady long-term returns. Real estate funds can have a similar return to individual property ownership without the added stress of personally maintaining the property.

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Mortgage funds : Cash flow comes from regular loan interest repayments over the term of the loan. Loans are often secured by real property with a varying loan-to-value ratio.

Private assets : Assets such as private debt offer higher-yielding returns with significantly lower volatility than publicly traded securities. By their nature, private assets are not subject to the same whims of the crowd that the public markets are.

Dividend-paying stocks : Arguably the most volatile cash-flow-producing investment available to the average retail investor. The income from dividend-paying stocks can be less consistent than other cash-flow-generating assets. Also, your investment value can fluctuate depending on market events and the company’s performance. One strategy for mitigating some of the volatility is to invest in a fund focusing on long-term growth in a large number of dividend-paying stocks.

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Bonds or bond funds : Bonds, essentially the debt of companies or governments, can provide relatively low returns, but are generally viewed as safe investments depending on their rating. Again, a way to protect your bond investment and still see regular cash flow is to invest in a bond fund that provides diversification across the bond market.

As a whole, cash-flow investing helps protect investors in volatile markets while also taking advantage of temporary market troughs. This is one strategy I would recommend to all investors regardless of portfolio size. If there’s one thing I’ve learned over the past number of years, there’s never a wrong time to start.

James McCarthy, CIM, is a senior wealth associate/client relationship manager at Nicola Wealth. This article should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. All investments contain risk and may gain or lose value. Nicola Wealth is registered as a portfolio manager, exempt market dealer and investment fund manager with the required provincial securities commissions.

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