Success makes a lot of Canadians nervous and cranky. Even after a year when virtually the entire economy was firing on all cylinders, investors still had plenty of gripes: Air Canada, Nortel, the banks, greedy executives, the high dollar, high fuel prices, the high cost of real estate, tax policy, the U.S., China and so on, and so on. While those headaches also presented investing opportunities, stock markets took a beating this spring. Apparently, last year's robust profits didn't count for much for very long.
It's hard to imagine a better year for investors than 2003. Toronto's S&P/TSX Composite Index climbed by 24.3%--compared with a total decline of 26% over the previous two years--while all 14 of the exchange's sub-indexes climbed. A quick glance at the perennial leaders in our Top 1000 rankings--the big banks, oil-and-gas companies, utilities and life insurers--shows that many posted whopping double- or even triple-digit profit increases.
Are investors in those companies cheering the CEOs? For many top executives, the answer is the sound of one hand clapping--if that. Take the banks. Overall, their shares have posted an average annual return of 19% during the past decade. Last year, the Royal Bank of Canada became the first Canadian bank to crack the $3-billion profit barrier, putting it at No. 2 in The Top 1000. Yet in a conference call with analysts after the bank released its fiscal 2003 results, CEO Gord Nixon had to fend off questions about the tiny $2-million profit at the bank's U.S. retail unit, RBC Centura.
John Hunkin, the beleaguered boss of CIBC, can only envy Nixon. CIBC's profit more than tripled to $2.1 billion in 2003. Of course, the jump was that big because the results were so bad the year before, in large part due to the failure of Hunkin's ambitious push into the United States. At CIBC's annual meeting in Winnipeg this February, Hunkin apologized and mused out loud, "You've got to ask yourself whether you're the right person for the job." Even Jimmy Carter used to sound more confident.
One sector where investors cheered loudly for the second year in a row was oil and gas. EnCana tripled its earnings and finished No. 1 in The Top 1000 with a profit of $2.4 billion (U.S.). This spring, with oil prices approaching their all-time peak of $41 (U.S.) a barrel, investors were hoping for more of the same. The fact that the industry's fortunes tend to rise and fall with prices--and that the high prices of the 1970s in many ways set the stage for the brutal North American recession and oil industry collapse in the 1980s--doesn't seem to worry too many pundits or analysts. Maybe it should.
On the other hand, many of Canada's corporate stalwarts are dependent on resource prices, and the price of nickel, copper, zinc and other commodities soared to their highest levels in years in 2003. Much of that was fuelled by China's endless appetite for raw materials, not to mention its minimal regard for the environment. That demand pushed the TSX's key mining and metals index up 76.3%; some of the biggest moves up The Top 1000 include Inco, Fording Canadian Coal Trust and Noranda.
The boom in resources resulted in another banner year for income trusts. Companies that convert themselves into trusts pay out the lion's share of their cash flow to investors, and do so very tax-efficiently. Our listing of the 50 biggest income trusts (page 93) shows how popular these vehicles are among cash-gushing resource companies and utilities. New public offerings of income trusts accounted for $3.8 billion of the $4.6 billion in IPOs underwritten last year. Many of those new trusts were created in technology and media products, the biggest being the $935-million Yellow Pages Income Fund.
On a less upbeat note, the total value of trust IPOs was 24% lower than the year before. Two high-profile trusts--Atlas Cold Storage and the Legacy Hotels REIT--suspended distributions to their unitholders, prompting trust critics to warn that the bubble was about to burst. "You think, 'Why do they keep using that stupid word [bubble]'" says Leslie Lundquist, who oversees the Bissett Income Fund, which is heavily invested in trusts. "Can't we get a bit of balance here?" Indeed, the S&P/TSX Capped Income Trust Index climbed 24% last year.
While much of corporate Canada was on a roll, there were some spectacular casualties. Dropping farthest down our Top 1000 list were Quebecor Inc., Biovail and Royal Group Technologies. How to put this delicately--there has been an ego factor in the boss's office at some of these firms. The same goes for other perennial bottom-dwellers such as Air Canada and Hollinger Inc.
Perhaps more than any other investors, shareholders in Royal Group Technologies have a right to be pig-biting mad. The share price of the building products giant, based north of Toronto, has declined from more than $40 five years ago to about $15 recently--this amid one of the biggest construction booms in decades. Last November, Vic De Zen announced that he was stepping down as CEO, but would remain as chairman. "After 23 years, it's hard for me to say I'm going to retire." Perhaps, but shareholders were no doubt relieved.
De Zen's resignation didn't get much media play because it occurred on the same day that Conrad Black was ousted as CEO of Hollinger Inc. In his case, an irate New York institutional investor, Tweedy Browne & Co., and its attack-dog litigation lawyers have accomplished what Canadian shareholders and regulators failed to do: bring Black to heel.
Pumped up by U.S. shareholder activists and crusading regulators such as New York State Attorney-General Eliot Spitzer, Canadian shareholders are complaining publicly about imperious top executives. Before Magna International's annual meeting in May, six large institutional shareholders, including the Ontario Teachers' Pension Plan Board, announced that they would withhold their votes for its board of directors. The lightning rod: Magna chairman Frank Stronach, a fixture on our annual ranking of Canada's top-paid executives (page 84), and his $36.2 million (U.S.) in compensation for 2003. The criticism got Stronach all hot and bothered. "We can't have pension fund institutions running this country," he said. "If they don't like it, they should sell their shares."
Last but not least, we can't forget those long-suffering Nortel shareholders. At the end of April, the board fired CEO Frank Dunn and replaced him with retired U.S. Navy admiral Bill Owens. Based on the $732-million (U.S.) profit for 2003 that Nortel announced in January, it shoots up to No. 20 in our Top 1000 ranking after finishing dead last for two years in a row. But that jump wasn't real. Along with giving Dunn the axe, the company said it would restate its financial results for the fourth year in a row.
Despite last year's overall stock market gains, shareholders at Nortel and other laggards will be in a bad mood for some time to come.
5 top 1000 newcomers
2003
RANK.........................COMPANY
80............................Northbridge Financial
265...........................Borealis Retail REIT
266...........................Hockey Co. Holdings
339...........................Sleep Country Canada Income Fund
444...........................Yellow Pages Income Fund
5 that have left
2002
RANK.............................COMPANY
86................................Moore Wallace Inc.: Merged with Chicago printer R.R. Donnelley & Sons
165..............................Slocan Forest Products Ltd.: Bought by Vancouver-based Canfor Corp.
229..............................Assante Corp.: Sold by founder Martin Weinberg to CI Fund Management
244..............................Mosaic Group Inc.: Marketing services company went bankrupt
978..............................Corel Corp.
Biggest moves up The Top 1000
RANK...................COMPANY AND YEAR-END...........CHANGE IN PROFIT
2002...2003......................................................................($MIL)
20......1000....Nortel Networks Corp. (De03)*..............................(US)4,267
41.......986.....Telus Corp. (De03).....................................................561
19.......961.....Toronto-Dominion Bank (Oc03)....................................1,152
62.......998.....Inco Ltd. (De03)................................................(US)1,618
61.......982.....Trizec Canada (De03)...........................................(US) 244
35.......954.....Telus Communications (De03).........................................585
50......963......Westcoast Energy (De03).............................................343
55......956......Fording Canadian Coal Trust (De03).................................314
87......967......Rogers Wireless Comm. (De03)......................................229
117.....997......Allstream Inc. (De03)**.............................................1,897
*U.S. GAAP results released in January, 2004. Nortel says they will have to be restated.
**2003 profit figure is for nine months
Biggest moves down The Top 1000
RANK...................COMPANY AND YEAR-END...........CHANGE IN PROFIT
2002...2003......................................................................($MIL)
960......34...........Quebecor World (De03)..................................-311
995......70...........Domtar Inc. (De03).......................................-331
943......29...........Canada Life Financial (De03)............................-532
975......79...........Royal Group Technologies(Se03)........................-187
994.....104...........Potash Corp. of Saskatchewan (De03).................-180
954......74...........Biovail Corp. (De03)...............................(U.S.)-115
992.....132...........United Corps. (Ma03).....................................-192
955.....163...........Bell Canada International (De03).........................-78
990.....220...........ADF Group(Ja03).........................................-155
904.....146...........Alliance Atlantis Comm.(Ma03)..........................-66
Highest returns on common equity
RANK...................COMPANY AND YEAR-END...........ONE-YEAR RETURN %
1........................Groupe Bocenor (Fe03).................................172
2........................Printera Corp. (Se03)....................................163
3........................Gateway Casinos Income Fund........................149
4........................GMP Capital (Ja04).....................................123
5........................Ainsworth Lumber Co. (De03)........................112
Lowest returns on common equity
RANK...................COMPANY AND YEAR-END...........ONE-YEAR RETURN %
1.......................World Heart (De03)....................................-1,490
2.......................Camco Inc...(De03).....................................-372
3.......................Ivaco Inc. (Dec03).......................................-344
4.......................180 Connect (De03)......................................-277
5.......................Rand A Technology(De03)..............................-159