Ryan BushellMargaret Mulligan
Ryan Bushell is portfolio manager at Leon Frazer & Associates. His focus is on large cap Canadian dividend stocks.
Top Picks:
Bank of Nova Scotia (BNS TSX)
Bank of Nova Scotia has been the worst performer of the big six banks over the last 12 months as their international (Latin America) growth strategy has failed to impress. Averaging into Canadian bank stocks is a good idea for a significant weighting of a Canadian investor's portfolio and with Scotiabank's dividend yield now the second highest of the group (and a P/E ratio below 12) we feel that it is a good time to be accumulating BNS shares if you are underweight the company or bank shares in general. Longer term, we believe that their exposure to Latin America will prove beneficial, especially after years of building a reputation. Combine that with strong Canadian retail banking and wealth management businesses and we believe you are getting a top tier Canadian bank in the long term at a valuation that has drifted to the bottom among its peers. We also believe that the Tangerine acquisition was a smart way to grow in the mature Canadian market as the focus on the online "do it yourself" consumer matches demographic trends, but this is still in the early stages.
Freehold Royalties (FRU TSX)
Freehold Royalties is a company that used to be in the background of the oil and gas sector due to its premium valuation and stable business model, however attention has increased in the wake of the Prairie Sky IPO and subsequent secondary offering by Encana. Freehold's commodity price exposure is unhedged and thus the stock has come off dramatically in the past few weeks. The shares have a dividend yield over 7 per cent and while their modest growth business model does not deserve the same premium that Prairie Sky does, it does not deserve to trade at roughly half the valuation either. Our income-oriented clients have been well served owning this company and periods of commodity price weakness usually prove to be a good time to accumulate the shares.
Cenovus Energy (CVE TSX)
Cenovus' share price has struggled over the past few years as operational hiccups have shaken investor confidence. Throughout this period, Cenovus has steadily increased production and their dividend, which are up 100 per cent and 33 per cent, respectively, since the split from Encana in late 2009. We have recommended Cenovus several times and we continue to believe that the investment will pay off in the long run for investors. Cenovus's best-in-class assets and free-cash-flow yield combined with a steadily growing dividend is an investment we are willing to be patient with.
Past Picks: September 23, 2013
Potash Corp. (POT TSX)
Then: $33.03; Now: $37.66 +14.12%; Total return: +18.77%
Crescent Point Energy (CPG TSX)
Then: $38.79; Now: $39.25 +1.19%; Total return: +8.72%
Enbridge (ENB TSX)
Then: $43.22; Now: $52.38 +21.19%; Total return: +24.59%
Total return average: +17.36%
Market outlook:
We are not concerned about recent equity market weakness. In fact, a pull-back is always healthy and volatility creates opportunities. Fundamentals for North American economies and equity markets remain as strong as they have been since before the recession at the end of the last decade. Commodity prices have been particularly weak on the back of U.S. dollar strength and we believe this has created another opportunity to accumulate resource-oriented companies at attractive prices. Prevailing wisdom in the post-2008 world dictates that when the U.S. dollar is strong, commodities should be weak. U.S. dollar strength is seen as a flight to quality and out of riskier asset classes such as commodities, also known as the "risk off" trade. As the marginal buyers of commodities, developing markets are viewed as the most at risk when growth concerns arise. In reality, recent U.S. dollar strength is a result of political events in the U.K., continued economic weakness in Europe and loose monetary policy in Japan causing weakness in the pound, euro and yen respectively. It's worth noting that these three currencies make up the bulk of the basket the U.S. dollar is measured against, and the specific reasons for their respective weakness have little to do with fundamentals for commodity demand worldwide, including emerging markets. As stated earlier, the U.S. economy continues to lead the world out of the global recession.
Strong growth in the U.S., combined with continued growth in developing markets, paints at least a solid picture for commodity demand and the Canadian businesses working to satisfy that demand. Additionally, the weakness in commodity prices should further reduce global inflationary pressure and prolong accommodative monetary policy globally. In short, economic fundamentals and financial market forces are working in opposite directions creating a dislocation in commodity prices that we think will prove to be an opportunity longer term.
For those worried about the duration and the extent of the correction we would point to an article we posted on our blog on September 3 which happened to be the high for the market so far in 2014. The article, titled "Father Time and Gravity," made the case for further equity market strength in Canada due to our late-cycle performance history, continued pessimism following the 2008 financial crisis, and the lack of investment alternatives that offer a combination of growth and income. The final paragraph of the article reads: "Bottom line we have no idea when the next market correction will come, and cash returns do not compensate one to sit on the sidelines. We will remain invested knowing that we get paid a 3-4% yield to be invested regardless of the direction of the market, and also knowing that the fundamentals of the companies we own are solid and will sustain them well beyond the current market cycle." Our view has not changed, we believe the companies we have selected for clients remain rock solid, as evidenced by the fact that over 70 per cent have increased dividends so far in 2014. Ours is a simple recipe entering its 75th year: Focus on the dividend income, stay invested, let stand for long time periods and enjoy the performance in portions of 5 to 75 years. Stay tuned.