Briefing highlights
- Rosenberg’s ugly day
- The optics of pay hikes
- Markets at a glance
- Brent crude hits $80
- CPPIB posts 11.6% gain
- Enbridge in huge restructuring
- Walmart’s online sales jump
- NAFTA talks set to miss key date
An ugly day
David Rosenberg’s morning note to clients today is notably ugly.
This is not to suggest the chief economist at Gluskin Sheff + Associates is wrong – not for a moment – just that he’s particularly downbeat.
The highlights:
1: “Trumponomics will cause the next recession” within the year, as his administration’s policies have been a net “detrimental” to the outlook.
2: The Canadian government is alone in not understanding the benefits of tax reform: “Without getting too down on Canada, it should be said that one of our greatest talents is shooting ourselves in the foot.”
3: The U.S. deficit is “already” at 3 per cent of gross domestic product at a time the government should be in balance or surplus.
4: “We are seeing the global economy beginning to cool off, as the synchronized growth story begins to fade.” There’s “no breakout in growth” in the U.S., Japan’s economy contracted in the first quarter and China is “fraying at the edges.”
5: The latest reading on U.S. industrial production topped the forecasts but … “uncertainty pertaining to trade relationships suggests that growth in this space should begin to wane.”
6: In Canada, manufacturing sales are rebounding nicely. But prices drove the latest gains and the last report showed just three industries accounting for almost half of the jump.
7: The latest measure of U.S. housing starts fell below forecast.
8: The Bank of Canada is “caught in a box,” and Mr. Rosenberg can’t understand why many observers believe rates will rise again soon, given pipeline issues, trade uncertainties, higher mortgage rates, slower job market growth, real economic growth below 2 per cent, and housing troubles.
9: “And as the [Federal Reserve] continues to raise rates, the loonie will remain a casualty.”
And I’ll round it out to 10: It’s only Thursday.
The first rule
Hydro One Ltd.’s board of directors should have learned what the bankers did during the financial crisis: The first rule of Fight Club should be, you do not talk about voting yourselves pay hikes when there’s a target on your back.
First, some for-the-record stuff:
- Hydro One CEO Mayo Schmidt, under political fire for his $6.2-million 2017 pay package, is a respected executive. And, as Laurentian Bank analyst Mona Nazir noted, his all-in compensation was below that of 90 per cent of his top 100 peers in Canada.
- As Ms. Nazir noted, Hydro One directors, under fire for voting themselves some pretty pay raises, pointed out their compensation was near or below the median levels of their peers.
- Um, have Mr. Schmidt, chair David Denison and the directors noticed what’s happened to their stock?
To recap, as The Globe and Mail’s Andrew Willis and Tim Kiladze report, Hydro One chair David Denison told his annual meeting this week that Mr. Schmidt’s pay was “appropriate.”
(No doubt he thought his own was appropriate, too, having gained $70,000 to $330,000.)
Directors got $25,000 more, bringing their pay to $185,000, Mr. Denison noting that their fees had been capped for three years.
Shareholders voted 92 per cent in support of the compensation scheme. Of course, the province, which owns 47 per cent of the utility, abstained, saying it was holding back because Hydro One promised a review.
Electricity is a huge issue, and could well have been a flashpoint in an election campaign, regardless.
But Hydro One has taken on a tainted air in the midst of the Ontario election campaign as the governing Liberals rail and Conservative Leader Doug Ford rails even more, threatening to clean house.
Hydro One may have reported a nice jump in first-quarter profit and an increase in its dividend this week, but it’s going to be dogged for the next few weeks, and possibly even after the June 7 election.
“Ontario elections create unwanted distraction, not warranted in our opinion,” said Laurentian’s Ms. Nazir.
BMO Nesbitt Burns analyst Ben Pham agreed that the election is taking its toll.
“H has sold off in sympathy with rising interest rates, but also due to heightened political risk (June 7 Ontario election) and lower-than-expected Avista deal accretion,” he said, referring to Hydro One by its stock symbol and a proposed takeover of a U.S. company.
“Normally we would view this as an interesting entry point, particularly in the context of a 5-per-cent dividend increase and high-quality earnings,” Mr. Pham added.
“However, peers have sold off just as much and/or offer more attractive [earnings per share growth.”
So he cut his target price on Hydro One stock to $22.50 from $23.50.
Ms. Nazir’s one-year target is $24, while CIBC World Markets analyst Robert Catellier cut his to $24 from $26, citing a “challenging” short-term outlook.
Raymond James analysts also trimmed their target price, to $24 from $25 while reiterating their “positive rate” after this week’s results, citing cost controls and operational improvements.
“We recognized that despite showing continued earnings growth, the stock is languishing amid a political onslaught in Ontario and continued fund flows out of the yield-rich utilities sector,” said Frederic Bastien and David Quezada.
“Therein lies the opportunity for investors who can ignore the noise to scoop up at all-time lows a company with solid long-term fundamentals.”
Read more
- Tim Kiladze: Hydro One CEO warns that political interference is hurting the utility
- Andrew Willis, Tim Kiladze: Shareholders approve Hydro One executive pay plan despite outcry
- Marcus Gee: When it comes to proposed Hydro One solutions, voters must choose between three poor options
- Raises for Hydro One board of directors to be reviewed: Wynne
- Adam Radwanski: If voters aren’t willing to buy what Wynne’s Liberals are selling, none of their advantages matter
- David Denison: The truth about Hydro One and executive compensation
Markets at a glance
Read more
CPPIB posts gains
Canada Pension Plan Investment Board is charting its next strategic direction amid challenging investment conditions after posting net investment gains of 11.6 per cent in its 2018 fiscal year ended March 31, The Globe and Mail’s Jacqueline Nelson reports.
CPPIB, the largest pension investment fund in the country and manager of the Canada Pension Plan’s portfolio, is preparing for an influx in new capital linked to the Canada Pension Plan expansion as its investment teams contend with fiercely competitive global markets.
Read more
More news
- Enbridge to consolidate assets in $11.4-billion restructuring
- Walmart’s U.S. online sales jump 33 per cent in first quarter
- Adrian Morrow, Greg Keenan: NAFTA renegotiation set to miss key deadline as countries remain divided on major issues