Ryan Bushell is portfolio manager at Leon Frazer & Associates. His focus is large cap Canadian dividend stocks.
Crescent Point Energy (CPG TSX)
A disciplined dividend model, CPG hedges aggressively to protect cash flow to pay the dividend. Its sustainability ratio (CAPEX+Dividends/Cash Flow) is rapidly approaching 100 per cent, down from much higher levels in years past. The company continues to do acquisitions and realizes additional value due to better operational techniques. CPG has a 6-per-cent+ dividend yield in a world where 10-year bonds yield 2.3 per cent. And it no longer has a large premium cash flow multiple relative to the group.
Sun Life Financial (SLF TSX)
Sun Life's Canadian business mix is the best of the lifecos (Whole life, Group Retirement Services) and its MFS division is doing very well in the U.S. Lower capital expenditures could result in dividend increases as soon as 2015. Also noteworthy: positive exposure to rising interest rates and the flow of funds from banks to lifecos.
TransCanada Corp. (TRP TSX)
This is no longer just a Keystone XL story (Keystone XL represents ~$5-billion of over ~$38-billion in potential energy infrastructure projects they have been contracted for including ~$12.5-billion of LNG projects in B.C. alone). Energy infrastructure represents a large multi-decade investment opportunity. Once projects are built, free cash flow increases to pay increasing dividends down the road. The cold winter this year showed how critical TRP’s mainline and power generation assets were in the north east.
Past Picks: June 3, 2013Potash Corp. (POT TSX)
PAST COMMENTARY: Potash Corp is the newest holding in most of our portfolios. The dividend has increased 5 fold with a recent increase in May to $1.40 (U.S.) which represents a current yield of over 3.3 per cent at current prices. Potash Corp. has an impressive free cash flow profile going forward as the low cost producer, even at current depressed potash prices. Capital expenditures are expected to decrease significantly beginning in 2014. This should support continued growth in the dividend for years to come.
Then: $42.81; Now: $38.76 -9.46%; Total return: -5.74%
Baytex Energy (BTE TSX)
PAST COMMENTARY: Baytex Energy is a well-managed Canadian heavy oil producer. Recent volatility in heavy oil prices combined with a management shake up last summer has created a rare buying opportunity for a company that usually receives a premium valuation. Baytex has consistently increased its dividend following conversion to a corporation in 2009 (83-per-cent increase in 4 years) before pausing this year to accommodate poor Canadian heavy oil prices this year. The dividend continues to be well supported, even at the current 6.7-per-cent yield, and the company has exposure to an improved Canadian heavy oil outlook going forward.
Then: $38.80; Now: $46.14 +18.92%; Total return: +26.57%
Rogers Communications (RCI.B TSX)
PAST COMMENTARY: Rogers’ shares had a great run before consolidating recently following an announcement that Wind Mobile may be recapitalized and emerge as a stronger wireless competitor. While this may end up coming true it would not necessarily be a negative for Rogers as it would go toward maintaining the status quo on the regulatory front. Rogers continues to execute a number of important strategic deals to position itself for the future, the most recent being the network sharing agreement with Videotron. Longer term, Rogers has ideally located exposure to the growing world of communications technology including the exciting new opportunity in machine to machine wireless data growth. Free cash flow and dividend growth remain strong.
Then: $46.77; Now: $44.54 -4.77%; Total return: -0.95%
Total return average: +6.63%
Market outlook:We continue to think interest rates should move higher eventually, but for now it appears further consolidation is needed before the Government of Canada 10–year bond yield will break out of a three decade plus downward channel. Falling bond yields continue to make our portfolio dividend yield of 3.9 per cent look very attractive, especially when compared to the Government of Canada 10-year bond at 2.3 per cent. We have had some questions on the interest rate sensitivity of our portfolio but we remain steadfast that interest rates have a long way to rise before they compete with dividend yields. We believe that some of our favourite companies could see a multiple revision higher in the coming years as funds flow from bonds to equities. Our thesis is that investor demand will push dividend paying shares higher driven by an aging demographic that requires a combination of income to fund current expenses, and moderate capital growth to satisfy a growing time horizon. Looking at charts of BCE, BMO, ENB and TRP it would appear we may be on to something.
IA Clarington Canadian Conservative Equity Fund. (Incepted in 1950)
Performance as at May 31, 2014
3 Year Annualized
* Index: S&P/TSX Total Return
** Returns are net of fees and include reinvested dividends
Top 5 holdings:
- Canadian National Railway (CNQ TSX)
- Bank of Montreal (BMO TSX)
- BCE Inc. (BCE TSX)
- Scotiabank (BNS TSX)
- Cenovus Energy (CVE TSX)