Two Canadian dividend stocks should be avoided by investors interested in preserving their capital, according to Accountability Research Corp., a Toronto-based research firm focused on forensic accounting.
The firm put sell recommendations on both PrairieSky Royalty Ltd. and TransAlta Corp. in an update of its list of top investment ideas.
Both companies have had to implement deep dividend cuts this year in the face of significant pressures on their respective businesses.
And PrairieSky's dividend is still high, considering the environment of low oil prices that still persists, Accountability Research said in the note.
"We remain concerned that PSK shareholders may be footing an unnecessarily high bill for future growth potential."
PrairieSky's balance sheet has points of concern, the note said. Goodwill remains "very high" at 22 per cent of total assets, while the deficit in shareholder's equity continued to grow in the second quarter, to $470.6-million, compared to $359.4-million at the beginning of the year.
TransAlta, meanwhile, is facing the loss of its main source of power as the province aims to phase out coal-fired power generation by 2030.
"Its main business is being regulated away, and assets with 50-plus year expected lives will be forced to shut down long before, drastically lowering the expected return on those prior investments," the note said. Accountability Research also added TransAlta to its Top 25 Accounting Issues list.
"Investors can easily find better risk-adjusted prospects elsewhere."
Canadian Tire Corp., for instance, has appeal based on its diversified business, expected continue growth across its retail banners, strong balance sheet, and share price support through buybacks, the note's authors said.
Whirlpool Corp. represents a new top pick in the U.S. market, based on the company's valuation and market position. "With its fairly low payout ratio, expected growth in free cash flow over the next few years should lead to further dividends hikes, share buybacks and shoring up the balance sheet."
The company's updated list of investment recommendations is below.
ARC's top investment ideas
|Top Five Buys -- Canada|
|Gildan Activewear Inc.||GIL-T||44.00||15||1.1|
|Magna International Inc.||MG-T||70.00||32||2.4|
|Alimentation Couche-Tard Inc.||ATD.B-T||70.00||16||0.5|
|Canadian Tire Corp.||CTC-T||172.00||21||1.6|
|Manulife Financial Corp.||MFC-T||23.00||34||4.3|
|Top Five Buys -- U.S. and Int'l|
|Top Five Sells|
|PrairieSky Royalty Ltd.||PSK-T||20.00||-27||2.6|
|Choice Properties REIT||CHP.UN-T||10.50||-26||5.0|
|Hydro One Ltd.||H-T||18.00||-29||3.3|
|Northland Power Inc.||NPI-T||18.00||-28||4.3|
Source: Accountability Research Corp.
Figures in Canadian dollars, except the Top Five Buys - U.S. and Int'l, which have target prices in U.S. dollars