Douglas Kee, Chief investment officer for Leon Frazer & Associates.Market Call
Douglas Kee is chief investment officer at Leon Frazer & Associates. His focus is on Canadian dividend-paying stocks.
Top Picks:
Pembina Pipeline (PPL.TO)
Pembina is a diversified energy infrastructure company with $1.7-billion of capex projects coming on stream in 2015 and an additional $6.0-billion of committed capital projects by 2018. About 70 per cent of its current cash flow is fee for service or take or pay and will rise to 80 per cent by 2018. The shares yield 4.4 per cent and management's goal is to consistently raise dividends by 3 per cent to 5 per cent per annum. Fourth-quarter earnings are likely to be weak due to lower frac spreads and could provide a buying opportunity.
Royal Bank (RY.TO)
Royal Bank is Canada's largest bank and has a competitive advantage due to the scale of its operations and its distribution. Its domestic retail business provides stability and cash flow which can be utilized in faster growing operations in wealth management, insurance, and capital markets. First-quarter earnings came in ahead of Street expectations due to strong retail and capital markets results. The current yield is 3.9 per cent; the company increased its dividend by 3 per cent and we would expect an additional hike by year end.
Cenovus Energy (CVE.TO)
Cenovus is one of Canada's leading SAGD oil sands producers with growing production from low-cost assets in Christina Lake and Foster Creek. The company has cut capex by 30 per cent to $1.9-billion and could potentially cut by an additional $500-million if oil prices remain low. CVE has a 40 per cent debt to capital ratio that is manageable given its recently completed $1.5-billion equity issue, a new DRIP program and the potential to sell royalty assets. The stock currently yields 4.8 per cent and management is committed to maintaining the dividend if possible.
Past Picks: May 7, 2014
Rogers Communication (RCI.B.TO)
Then: $44.17; Now: $44.67; +1.13% Total return: +4.30%
Fortis (FTS.TO)
Then: $32.46; Now: $38.91; +19.87% Total return: +24.41%
Cenovus Energy (CVE.TO)
Then: $31.73; Now: $21.76; -31.42% Total return: -29.42%
Total return average: -0.24%
Market outlook:
Our expectation is that the S&P/TSX composite will trade in a range from 13,000 to 15,500 this year. The downside risk results from interest rate risk (interest sensitives) and sustained commodity (oil) price weakness. Earnings growth will be challenged due to low commodity prices and the effect on related industries. Our portfolios remain fully invested to generate income growth. So far 2015 dividend increases are in-line with expectations but cuts within the energy sector have moderated overall dividend growth versus the past five years.