As the former manager of the First Asset Canadian Dividend Opportunity Fund, John Stephenson knows the dividend landscape well.
Now, having recently left his former company, he’s about to put his stock-picking skills to the test as the chief executive officer of his own firm.
With stock markets at record highs and some pundits predicting that a correction is ahead, he chose an interesting time to do it.
Stephenson & Co. Capital Management is poised to launch its first fund, the North American Opportunity Fund, in the next few weeks.
Open to accredited investors, the hedge fund will use a combination of long and short strategies in a bid to manage risk. While it won’t specifically have a dividend focus, Mr. Stephenson will devote a chunk of the portfolio to Canadian and U.S. dividend stocks.
I invited him to discuss some of his favourite Canadian dividend companies, all of which he owns personally and is considering for his fund.
Yield: 1.4 per cent
With the jobs picture improving in the United States, the world’s biggest economy, “you want to be more in the cyclicals than the traditional defensives,” Mr. Stephenson says. Car sales have rebounded strongly from their lows following the financial crisis, and while Magna’s stock has already had a good run, he sees more upside for the parts maker given that global auto sales are expected to rise by about 4 per cent annually over the next few years. The company has a solid balance sheet and is trading at a reasonable valuation of about 6.7 times estimated 2015 EBITDAearnings before interest, taxes, depreciation and amortization. The yield is modest, but the dividend has been growing steadily.
Yield: 3.4 per cent
TD’s exposure to the United States, where unemployment is falling and the housing market is on the mend, is one of the main reasons he likes the stock. “You’re looking at a recovery in loan growth in the U.S. Particularly in the last few months, loan growth has been very strong,” he says. Another reason he likes the stock is the valuation: TD trades at less than 12 times estimated 2015 earnings, which is below the historical average of 13.5 times for the industry. There’s also plenty for dividend investors to like: TD has raised its dividend at an annualized pace of 12 per cent over the past three years, supported by growing earnings and a rising payout ratio, he says.
Yield: 2.36 per cent
Manulife cut its dividend in half during the financial crisis. But Mr. Stephenson thinks the company could begin raising it some time in the next few quarters, thanks in part to rising stock markets, which have boosted its earnings. “The environment overall is working much better for them,” he says. The company is also deriving a growing share of its revenue from Asia and now boasts strong regulatory capital levels. What’s more, Manulife trades at a discount to its peers on a price-to-book basis, making it a compelling pick, he says.
Yield: 4.9 per cent
“I am very bullish on oil,” Mr. Stephenson says. “If you look at any kind of long-range forecast … you see a world where oil demand is exceeding oil supply.” Whitecap is growing production by 5 to 7 per cent annually and he considers the dividend “very stable,” although given that the yield is already fairly high he doesn’t expect any dividend increases in the near future. The stock’s multiple of 5.6 times next year’s projected cash flow is “a very fair valuation and you have the opportunity for modest capital appreciation from here.”
Yield: 2.0 per cent
Canadian Tire’s shareholder-friendly moves include selling a portion of its financial services division and folding its property into a real estate investment trust. “I’ve been skeptical of this name for a while, but they’ve done a lot of things right,” Mr. Stephenson says. “You’ve gone from having a sleepy … business, to a business that is unlocking value here, there and everywhere.” The stock trades at an attractive valuation of about 14 times estimated 2014 earnings and the dividend has grown at an annualized rate of 17.5 per cent over the past three years.