Five strong dividend stocks that aren’t bank stocks

Globe Investor Magazine Online, Nov. 21, 2007
BY ARON YEOMANSON

Finding a good Canadian dividend stock usually involves only a quick look to the financial sector. But with banks, investment funds and real estate hit by the credit crunch and those stocks on a downslide, investors may want to look elsewhere.

Here are five alternative dividend stocks outside the financial sector. All five have shown consistent dividend growth in the past few years and, more importantly, will allow you to steer clear of the immediate uncertainty hanging over the financial sector.

Shaw Communications Inc. (SJR.B-TSX)
Nov. 19 price: $23.85
Dividend: 72 cents
Yield: 3 per cent

Canada’s second-largest cable provider, Shaw Communications has steadily increased dividends over the last several quarters.

On Oct. 26, along with the release of strong fourth-quarter results, Shaw made a surprise 9-per-cent dividend increase, which followed an 18-per-cent increase the prior quarter. Over the past five years, the company has raised dividends on average by about 86 per cent annually, according to Bloomberg.

In an Oct. 29 report, TD Newcrest analyst Vince Valentini maintained his “buy” rating on Shaw and raised his price target to $30 from $28.50. He estimates Shaw’s dividend will be 85 cents by the end of 2008.

“Shaw’s willingness to drive strong free cash flow growth (34 per cent in 2007, and we forecast 38 per cent for 2008), and then distribute most of it to shareholders (about 70-75 per cent of after-tax EPS are being paid out as a dividend), is setting the company apart from its peers in the cable sector,” he wrote. “We believe this strategy, coupled with longer-term takeover potential, justify the valuation premium that the stock enjoys.”

Rogers Communications Inc. (RCI.B-TSX)
Nov. 19 price: $44.41

Dividend: 50 cents Yield: 1.1 per cent Shaw isn’t the only Canadian cable provider that has raised its dividend sharply this past year.

On April 28, Rogers Communications raised its dividend from 16 cents to 50 cents and has increased its dividend on average by 88 per cent over the last three years, according to Bloomberg.

Bloomberg estimates more increases in the future, speculating Rogers’ dividend will reach 90 cents in April, 2008, and climb to $1.74 by 2010.

UBS securities analyst Jeffrey Fan raised his target price to $60 from $58 in a Nov. 2 note, while maintaining a “buy” recommendation.

Mr. Fan expects further improvement in Rogers’ cable margins based on “savings from the new Yahoo portal agreement, along with ad revenue sharing, elimination of regulatory fees, operational focus on more efficient installation, improved scale of telephony and the shift of traffic on-net in the business segment.”

Enbridge Inc. (ENB-TSX)
Nov. 19 price: $36.08
Dividend: $1.23
Yield: 3.4 per cent

Energy company Enbridge Inc. has made a habit of increasing a high dividend on an annual basis, with its payouts growing on average by about 11 per cent annually over the past five years, according to Bloomberg.

Among Enbridge’s current projects is a wind farm in Bruce County, Ont., and the Gateway project, a crude oil export line from Edmonton to Kitimat, B.C. that is expected to be in service between 2012 and 2014.

Robert Kwan, an analyst at RBC Capital Markets, has a “sector perform” rating on Enbridge. On Nov. 8 he increased his target price to $40 from $38.

“Our target reflects a one-year forward dividend of $1.41 and a required yield of 3.55 per cent,” Mr. Kwan wrote in a report.

Furthermore, as indicated in a Nov. 19 report by Canaccord Adams analyst Bob Hastings, now might be a good time to buy Enbridge. Mr. Hastings points out that uncertainty and bad news have made the stock drop more than 11 per cent since Nov. 6. Given Enbridge’s growth potential and that the average utilities stock is down less than 2 per cent over that period, Mr. Hastings sees the stock turning around.

“We recommend investors take advantage of the weakness as our experience suggests pipelines with growth do well for multiple years,” he wrote.

Fortis Inc. (FTS-TSX)
Nov. 19 price: $27.30
Dividend: 84 cents
Yield: 3.1 per cent

Fortis has a natural gas operation in British Columbia, five electric utilities across the country and three more in the Caribbean. Additionally, the company owns hotels and commercial real estate in Canada.

Like Enbridge, Fortis has increased its dividend on average by about 11 per cent a year over the past five years, and RBC Capital Markets analyst Mr. Kwan believes that trend will continue.

“We believe that the company has the ability to continue increasing its annual dividend by roughly 10 per cent each year through 2009,” he wrote in a Nov. 5 report. With a “sector outperform” rating on the stock, he also estimated that Fortis’s payout ratio would increase to 63 per cent in 2009.

In a Nov. 5 report, Scotia Capital analyst Sam Kanes increased his price target to $29.50 from $28.50 using an unchanged P/E of 18, and rated Fortis a “sector outperform.”

Rothmans Inc. (ROC-TSX)
Nov. 19 price: $24.95
Dividend: $1.40
Yield: 5.7 per cent

Toronto-based Rothmans, which makes Rothmans, Craven A and Benson & Hedges brand cigarettes, provides investors with a high yield and has risen its dividend an average of about 11 per cent annually over the past five years.

While its dividend hadn’t been touched since 2005, Rothmans announced a dividend raise of 16 per cent from $1.20 following a strong second-quarter earnings report on Oct. 26.

Rothmans chief executive officer John Barnett attributed the rise in the quarterly dividend to the company’s strong balance sheet, citing particularly the financial performance of 60-per-cent owned subsidiary Rothmans, Benson & Hedges Inc. (RBH).

“Following our record first quarter, RBH continued to generate strong performance this quarter resulting in the improvement of all significant measures of financial performance including sales, earnings and cash flow when compared with the prior year,” he said in a statement.

Following the announcement, BMO Nesbitt Burns analyst Orin Baranowsky wrote that, based on strong free cash flow, the raised dividend is sustainable. He also said a special dividend is likely within the next 18 months and that more special dividends can be expected in the future.