Recycling Capital in my Portfolio

Recycling Capital in my Portfolio

I sold Descartes Systems Group Inc (DSG on the TSX) last week. It was a hard thing to do as it had been a very good stock for me over the years, and I still believed in the management team and the fundamentals of the underlying company. But it had gotten really pricey (price to cash flow ratio of 38.4…The stock has always gotten a premium valuation from the market due largely to its recurring revenue model based on it’s sticky relationship with its customers. It didn’t pay a dividend.

Now that I’m 65 I have to start looking down the road when I turn 71…that’s when I have to withdraw between 5 and 6 percent from my RRSP which will turn into a RRIF at that time. So I’m putting an emphasis on dividend paying stocks, especially ones that pay a rising dividend. My thinking is to try to have my dividend income cover the amount the Government wants me to take out of my RRIF without touching my principle.

I in turn, bought Whitecap Resources Inc (WCP on the TSX). It has a price to cash flow ratio of 2.9 (dirt cheap). It’s an oil company with long life assets and low decline rates. And despite its growth orientation, it pays a nice dividend of 6.36 %. The company’s profile is as follows…

Whitecap Resources Inc focuses on the acquisition, development, optimization, and production of crude oil and natural gas in western Canada. The company acquires assets with discovered petroleum initially in place and low current recovery factors. Light oil is the primary by-product of Whitecap's Canadian assets. To extract petroleum products from its resources, the company uses horizontal drilling, in addition to multistage

fracturing technology. Crude oil is the leading revenue generator out of the basket of energy products sold by Whitecap.

The management team seem to be good allocators of capital making opportunistic acquisitions with a focus on growing the asset base of the company. I often poke around Brookfield Asset Management’s website and noticed one of their closed end funds...Brookfield Select Opportunities Fund (BSO.UN on the TSX) holds this company in their investment portfolio…Brookfield are known for their value orientated approach while insisting on quality at the same time. I should also mention that the management team at Whitecap has been recently buying stock in their own company...I guess they think its cheap too.

It has been a savage bear market in the energy sector but I feel the low is in and now is the time to once again test the energy waters. Remember the Speculator’s Edge…Demand Supply and Supply Demand.