Conglomerates are now few and far between

Conglomerates often get a bad rap for being a jack of all trades. But for investors seeking diversification, these multi-sector stocks can be just the ticket. That’s the word from Edward Gardiner, a regular contributor to Investor’s Digest of Canada and author of the book It Pays to Read the Boring Stuff: What the Ordinary Investor Needs to Know. And he says that rather than go out and buy a range of stocks, an investor who wants a broadly-based portfolio can instead buy a conglomerate. The trouble is, true multi-sector stocks are now few and far between.

What do conservative investors often seek? Diversification — across asset classes, markets and geography. One way to diversify is to buy a broadly-based mutual fund. Another way, of course, is to build a portfolio of different stocks.

But the main problem with buying a mutual fund is management fees, which can chew up your return, while the main problem with the second approach is building a portfolio big enough to offer adequate diversification.

This, though, can be made easier by buying individual companies that are themselves well-diversified. When such companies operate in completely different industries, they’re called conglomerates.

Two conglomerates that grew organically

There used to be many such outfits. Labatt Brewing Co. and Canadian Pacific Railway Co. (TSX─CP) are just two that come to mind.

Both grew organically. Labatt’s, for example, started selling leftover mash from its brewing vats as cattle fodder and then expanded into dairy operations and, from there, into other food products. Over the years, Labatt’s paid out healthy dividends, including the occasional extra dividend.

For its part, Canadian Pacific was given land grants along its right of way which, in turn, morphed into mining and sawmilling. CP also expanded into hotels, ships, planes, trucks and telecommunications. It, too, was a solid blue chip, paying healthy dividends year after year.

Of course, Labatt’s is long gone, having been gulped down by Belgium’s Interbrew in 1995. It’s now owned by Anheuser-Busch InBev (NYSE─BUD). Because the Belgians paid a hefty price, Labatt’s stockholders walked away happy.

Canadian Pacific, by contrast, fell victim to self-styled shareholder activists, who believed the company was worth more broken up than it was as one big conglomerate. And in the short run these folks were probably right. But over the long run, the carpetbaggers likely sold the various pieces and moved on to other targets.

Before they left, they booted out CP’s old management team, replacing CEO Fred Green with Hunter Harrison, retired CEO of Canadian National Railway Co. (TSX─CNR). Mr. Harrison has undoubtedly improved Canadian Pacific’s performance. So, I assume CP’s shareholders are happy.

But I have no idea if they’re equally happy with the shares they may still own in the company’s various bits and pieces. In any event, although Canadian Pacific is still a good investment, it’s no longer a conglomerate.

Of course, not all attempts to become conglomerates have turned out so well.

BCE Inc. is diversified, but not a true conglomerate

Take Ma Bell, a.k.a. BCE Inc. (TSX─BCE). In the 1970s, it tried diversifying into finance by buying a trust company, only to sell it at a loss a few years later. Then, BCE tried buying TransCanada Pipelines, now TransCanada Corp. (TSX─TRP). That attempt fizzled as well.

Eventually Ma Bell doubled down on telecom, gobbling up those parts of Telesat and Teleglobe it didn’t already own. And although BCE made money on Telesat, it lost heavily on Teleglobe.

Ma Bell also expanded into content, buying the CTV television network — an acquisition that so far seems to be working.

Admittedly, BCE may not be a true multi-sector stock, since all its bits and pieces fall into the communications category. But there, the company does seem to be reasonably diversified.
So, BCE at least merits consideration for inclusion in a portfolio that’s conservative, but at the same time, diversified.

Brookfield truly a global conglomerate

One company that would certainly fit anyone’s definition of a conglomerate is Toronto-based Brookfield Asset Management Inc. (TSX─BAM.A).

Not only is Brookfield into real estate, but it owns hydroelectric power stations, toll roads in South America, a railway in Australia and gas pipelines all over the place.

More important, its shares have done extremely well. In addition, at 11.9, its price-to-earnings ratio is attractive. True, its dividend yield is only 1.3 per cent. But that’s entirely acceptable, given that the dividends have grown 5.1 per cent a year over the past half-decade.

The bottom line? Brookfield’s execs not only have an excellent track record, but they seem to know what they’re doing.

TransCanada and Teck are reasonably well diversified

TransCanada, which started out operating a Canadian pipeline, now operates lines all over Canada, the U.S. and Mexico. It has also expanded into power generation with nuclear, solar and gas-fired plants in various parts of Canada and the U.S.

Although its P/E, at 23.5, might seem a little high, its dividend yield, now 3.7 per cent, is excellent, as is its five-year dividend growth rate of 4.9 per cent annually.

Admittedly, one could quibble over whether TransCanada is truly a multi-sector conglomerate. But it’s certainly well diversified and, as such, is a likely candidate for a conservative investment portfolio.

Another Canadian commodities play that’s also diversified is Vancouver-based Teck Resources Inc. (TSX─TCK.B). Not only does Teck mine coal, but it also digs up both copper and zinc, along with smaller amounts of other metals.

Teck, which was caught off guard by the market meltdown of 2008-’09, was forced to do a major restructuring. But it seemed well on the road to recovery before the latest slowdown began.

Still, Teck is once again suffering as shown by its recent dividend cut. But the company should nonetheless be able to ride out the latest economic storm.

If you own shares in Teck, hold on to them. But if you’re thinking of buying them, you probably have a window of a few months before the price starts going up.

Obviously, Teck isn’t a true conglomerate because it operates only in the mining sector. But if you want mining stocks in your portfolio, it’s probably easier to buy one company like Teck that turns out several products, than buying several different companies that turn out only one product apiece.

As you might have guessed by now, I’ve always been a fan of conglomerates. In fact, one of the first companies I bought in the 1970s was Labatt Brewing. I made a lot of money from Labatt over the years. So, I was a bit sad to see it go, although the offer Interbrew made for Labatt certainly helped ease the pain!

I’ve also made a good profit from Brookfield — and, I expect to make more in the future.

As a retail investor, I’m disappointed there aren’t more conglomerates. Not only do I believe they offer synergies, but they give small investors a level of diversification that they might find hard to achieve on their own.

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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