John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
A lot of investors hate volatility. Robert Gill can't get enough of it.
"Without a doubt it makes what I do much easier," says the vice-president and portfolio manager with Oakville, Ont.-based Lincluden Investment Management.
The value investing firm, which manages about $3.5-billion for institutions and private clients, looks for high-quality stocks trading at attractive prices. The more volatility there is, the greater the opportunity to pick up companies at bargain valuations.
"We like to be patient, kind of wait in the weeds and do our homework. When we see the volatility, we like to pounce," Mr. Gill says. With stock markets suffering a string of sell-offs in recent months, Lincluden has been adding to many of its positions.
A company has to meet several tests before Lincluden will consider it. For example, it must have: a strong balance sheet to limit financial risk; a competitive advantage, or economic "moat," that gives the company staying power; and a price-to-earnings multiple that is attractive when measured against similar companies, the market in general and the stock's own historical valuation range.
Management is another key consideration. Lincluden looks for a team that deploys capital effectively and has a strong track record of increasing free cash flow and, when appropriate, rewarding shareholders with steadily rising dividends.
Here are four dividend growth stocks that Mr. Gill likes currently. Remember to do your own due diligence before investing in any security.
Home Capital Group (HCG – TSX)
Price: $31.28, down $1.04
Yield: 2.8 per cent
Shares of Home Capital plunged in the summer after the alternative lender severed ties with 45 brokers who had falsified clients’ income information on mortgage applications.
Housing bears viewed it as a sign that Canada’s residential real estate market was heading for a U.S.-style collapse. But Mr. Gill says the stock’s pullback was a “tremendous overreaction” and created a “historic buying opportunity.”
Home Capital works with about 4,000 mortgage brokers in all, so the bad apples represented a little more than 1 per cent of the total, he says.
What’s more, the company has a solid balance sheet and recently launched a buyback of up to 5 per cent of its heavily-shorted shares. News of the buyback sent the stock higher last week, prompting many short sellers to purchase the shares and cover their positions in a so-called “short squeeze.”
Another plus: Home Capital raises its dividend regularly and “I would look for another dividend increase from the firm given their very high capital levels,” he says.
Canadian Imperial Bank of Commerce (CM – TSX)
Price: $94.24, down $1.17
Yield: 4.7 per cent
Canadian banks are out of favour with international investors, largely because of the downturn in energy. But the banks are a good value after the recent pullback, Mr. Gill says.
He likes CIBC, in particular, because its price-to-earnings multiple of about 10 (based on 2015 estimates) is the lowest in the group, and its Tier 1 common equity ratio (a measure of financial stability) is among the highest in the industry.
Further, CIBC has one of the highest yields among the Big Five and its loan exposure to the energy patch is minimal, insulating the bank somewhat from the economic downturn in Western Canada. As for management, CIBC’s chief executive officer Victor Dodig “is a steady hand on the rudder and an impressive leader,” he says. “He realizes that CIBC has had a bumpy ride in the past and is putting this behind the bank and looking forward to a smooth and steady future.”
Canadian National Railway (CNR – TSX)
Price: $74.67, down $2.04
Yield: 1.7 per cent
Weakness in commodity markets has put the brakes on rail stocks, but that’s created an opportunity to buy them at attractive valuations, Mr. Gill says. “CN Rail is about as blue chip a company as you can get in Canada,” he says. For starters, it has a huge moat: Shipping by rail is significantly cheaper than moving goods by transport truck, and CN Rail’s extensive network of track also gives it a competitive advantage.
Despite the slump in commodities, “CNR has been able to generate impressive profitability over the course of the business cycle, and continues to have pricing power which translates into earnings growth,” Mr Gill says. The stock trades at a reasonable 16 times estimated 2016 earnings, and while the yield is modest, the company has been increasing its dividend annually. Last January’s increase of 25 per cent was the biggest in the company’s history.
Intact Financial (IFC – TSX)
Price: $93.80, down 75¢
Yield: 2.3 per cent
Intact Financial – whose brands include Intact, Belairdirect, Grey Power and Jevco – is Canada’s largest provider of auto, home and business insurance.
With more than six million customers across the country, Intact “generates impressive returns on capital and equity due to better underwriting. The company has also been able to achieve scale through acquisitions, which has resulted in cost savings,” Mr. Gill says.
The company has a strong balance sheet and solid management with a proven track record of profitable growth.
In addition, the “potential for more acquisitions provides some upside that may not be priced into the stock,” Mr. Gill says.
Thanks to its strong free cash flow generation, Intact has raised its dividend at annualized rate of more than 9 per cent over the past five years.