It’s no coincidence that the companies we revile as consumers tend to be cash cows for those who own them.
Gasoline suppliers, for example, often draw the ire of motorists, but the industry’s ability to gouge customers even as energy prices plummet is enough to make the blood boil.
In the last half of 2015, the price of crude oil plunged by nearly 40 per cent. Yet, over the same period average gasoline prices at Canadian pumps fell by just 12 per cent, according to energy market monitor En-Pro International.
Turns out the big North American refiners have been using the oil glut to pump up their margins. “They benefit because they are able to buy cheap oil and turn it into more valuable end products,” says John Stephenson, president and chief executive officer of Stephenson and Co. Capital Management.
But instead of cursing them, Mr. Stephenson has been packing them into his portfolio. Retail investors can do the same, putting these stocks into their tax-free savings accounts (TFSAs) and registered retired savings plans (RRSPs), where the dividends they produce can be reinvested in more stock or accumulated in cash.
As the energy industry suffered its biggest losses in more than a decade, shares in major refiners including Tesoro Petroleum Corp., Phillips 66, Marathon Oil and Valero Energy Corp. posted double digit returns in the last half of 2015.
With crude oil expected to remain cheap for a long time and no extra refinery capacity on the horizon, Mr. Stephenson says refinery stocks can provide some financial relief to angry motorists. “It’s very comforting because it’s one area that is the profit centre of the global oil-and-gas chain,” he says.
Refinery stocks are ideal for the average retail investor because they tend to perform well even when oil prices are high, he says. “They will benefit throughout the cycle. As oil prices go up there will be less of a benefit, but the expectation is that oil prices will remain low for the next six or seven months and then move higher. This is still something you can invest in for the long term.”
As a bonus, major refiners pay dividend yields of between 2 per cent and 3 per cent, and Mr. Stephenson expects those bigger margins to find their way to shareholders through dividend increases. “They’re reasonably good dividend growers,” he says.
Another industry that ranks high on the Canadian consumer gripe list – and just as high with many investors – are banks. The domestic banking sector is dominated by a handful of financial institutions that occupy the main intersections of most Canadian cities.
“It’s an oligopoly. You have five or six banks that play relatively nice with each other,” says Andy Nasr, senior portfolio manager at Middlefield Capital Corp.
But while the choice for consumers is mostly limited to Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Toronto-Dominion Bank and Canadian Imperial Bank of Commerce, Mr. Nasr says having fewer players in the game is good for investors.
“The limited competition in the banks is a good thing in many respects. It really mitigated a lot of the risk the U.S. banks saw in the  global financial crisis. It makes it easier for regulators to have oversight,” he says.
Mr. Nasr suggests all long-term investors hold at least one of the big Canadian banks in their portfolios, and with an average drop of about 10 per cent in their stock prices last year, they are a bargain.
From an investment perspective, there is little difference among the big five banks, he says. But there are “subtle nuances.” For example, TD Bank and Bank of Montreal have a strong presence in the United States, and Scotiabank does a lot of business in Latin America.
All five generate the bulk of their revenue within Canada, and such similarities are reflected in their long-term stock prices. “Over a 10-year time horizon I’d be surprised if there was more than a 5- or 10-per-cent variance with the stock returns,” he says.
Mr. Nasr also points out that the lack of competition allows the big banks to pay generous and consistent dividends. “It’s really hard for Canadian investors to find good, sustainable 4- or 5-per-cent yields. You can do that now.”
The situation is similar with Canada’s telecommunications oligopoly.
The biggest players – BCE Inc., Telus Corp. and Rogers Communications Inc. – pay dividend yields in the 4- to 5-per-cent range. Mr. Nasr considers them good long-term investments, but he says those generous dividends have prompted investors to drive up the stock prices, leaving less room for capital gains.
He also has concerns about the household trend of “cutting the cord,” or forgoing traditional transmission of media, and streaming content through broadband Internet connections instead. Still, he says the big telcos have been aggressive in acquiring new technology before smaller competitors are able to pose much of a threat to revenue.
These companies can also fall back on their provision of broadband Internet services. “When you look across the Canadian telco sector there’s a broadband hedge. Even if cable revenues decline they should be able to offset that by charging more for broadband,” Mr. Nasr says.
A more recent threat to the Canadian telecommunications industry, he says, is consumer demand for more choice. The big three have managed to preserve market share despite repeated attempts by the government regulator – the Canadian Radio-television and Telecommunications Commission – to introduce a fourth major national telecom provider.
“The oligopoly issue does raise competitive concerns in the telco sector, and you’re seeing the CRTC chime in on that,” Mr. Nasr says.Report Typo/Error
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