Ryan BushellMargaret Mulligan
Ryan Bushell is portfolio manager at Leon Frazer and Associates. His focus is Canadian large-cap dividend stocks.
Top Picks:
Sun Life (SLF-TSX)
With 10-year Government of Canada bond yields making fresh all-time lows at ~1.5 per cent it would seem that this might be a decent time to accumulate life insurers as one of the only ways to gain positive exposure to rising interest rates. Additionally Sun Life has a strong Canadian franchise that will allow them to benefit from the increased demand for financial products and services resulting from shifting demographics. The shares have sold off recently, likely in sympathy to the recent downdraft in benchmark bond yields, and look reasonably attractive with a 3.8-per-cent dividend yield.
AltaGas Ltd. (ALA-TSX)
AltaGas has been somewhat unfairly caught up in the oil price selloff recently with the shares dropping more than 25 per cent since August. In reality, more than 60 per cent of their current business is power generation and distribution so this company is more of a utility than most investors understand. While the P/E multiple and the cloudy outlook for future LNG projects may give some investors pause, the dividend yield is approaching 4.5 per cent, and their payout ratio is less than 50 per cent, low relative to their peers on a Funds From Operations (FFO) basis. The company is guiding to low double-digit dividend growth in the coming years which we find credible given their payout ratio and the mix of their businesses. Even if LNG/LPG growth projects stall, there would be more distributable cash flow from the existing business due to reduced capital expenditures. We also like that the chairman and CEO, David Cornhill, has a significant ownership stake in the company as a top 10 shareholder.
Cenovus Energy (CVE-TSX)
We continue to recommend Cenovus as the best long-term opportunity in the Canadian oil and gas sector. Cenovus has best-in-class assets, a deep inventory of future projects, the lowest amount of debt relative to their peers, and a dividend that compensates shareholders to be patient. The shares have held in fairly well on the most recent bout of downside so caution is warranted if the price of oil continues to slide, however for the long-term it would seem that this would be a good time to start building a position or average into the shares for those already holding a position.
Past Picks: January 15, 2014
Thomson Reuters (TRI-TSX)
Then: $40.91; Now: $47.72 +16.64%; Total return: +20.97%
Baytex Energy (BTE-TSX)
Then: $40.05; Now: $18.82 -53.01%; Total return: -49.81%
Cenovus Energy (CVE-TSX)
Then: $29.59; Now: $24.64 -16.73%; Total return: -13.51%
Total return average: -14.12%
Market outlook:
The S&P TSX composite index traded in a wide range in 2014. After reaching a high of 15,625 in August the Canadian benchmark plunged over 12 per cent peak-to-trough before recovering in the final two weeks of the year. Despite the volatility the S&P TSX composite Total Return Index put up another solid year in 2014, up 10.6 per cent, including a -1.5-per-cent return in the fourth quarter. The S&P 500 Total Return Index continued its recent string of outperformance returning 13.7 per cent in 2014 which equates to a 24.3-per-cent return in Canadian dollars. It is important to keep these outsized recent returns in context. The U.S. market has done well in the last 5 years but did not do well at all in the previous 5. Over the past 10 years the markets are dead even. It is important to stay the course and not buy into any market at peak enthusiasm, especially if that involves switching out of an undervalued market or asset class to do so. It is also key to focus on the sustainability of the individual companies in the portfolio realizing that the headline risks of the market don't apply to every individual company in the same way, if at all.
Looking ahead to 2015 we are cautious with regard to our oil and gas holdings but quite positive on the remainder of the portfolio. We will be watching for oil prices to stabilize before rebalancing funds into that sector. Our weighting in oil and gas producers has dropped relative to our target, leaving ample room to dollar cost average positions and increase portfolio income. With all the pain in the oil patch it is easy to overlook the fact that 80 per cent+ of portfolio is invested outside of oil and gas producers and stands to benefit, perhaps significantly, from the additional stimulus of lower oil prices. The drop in retail gasoline prices is putting between roughly $1,000 in the average North American family's pocket on an annual basis. This equates to a significant stimulus program rivalling the payroll tax cut in the Unites States or the GST cut in Canada in recent years. The far reaching positive effects of an oil price drop in this magnitude are global and while one part of the portfolio is suffering, the majority of our holdings stand to benefit in some way.