Douglas Kee, Chief investment officer for Leon Frazer & Associates.Market Call
Douglas Kee is chief investment officer at Leon Frazer & Associates. His focus is Canadian dividend-paying stocks.
Top Picks:
Altagas (ALA-T)
The ALA share price has lagged behind its pipeline and utility peers this year given its higher exposure to power prices, lower gas and liquids volumes and less contracted growth profile. EBITDA is expected to grow 20 per cent in 2016 given a full year's contribution from three B.C. hydro projects and the second-half accretion from the new Townsend gas processing plant. We expect a dividend increase in the 5-per-cent to 10-per-cent range this year. Longer term, ALA recently signed a MOU for 50 per cent of LPG production from its Ridley terminal, will be bidding on the Blythe II power project in California and is working on two liquid separation plants in British Columbia and Alberta which, if successful, will add to the company's growth profile.
Manulife Financial (MFC-T)
The MFC share price has traded in a narrow band for the last few months and has underperformed most of its peers, primarily due to a higher energy exposure and some specific writedowns. The shares yield 3.9 per cent and the company increased its dividend 8.8 per cent this year. The stock is trading at book value and a 9.6 P/E which is cheaper than its peers and the banks. MFC's North American insurance operations would benefit from any rise in interest rates, wealth management is growing and its 32-per-cent Asian exposure is attractive.
Shaw Communications (SJR.B-T)
While we do not expect a dividend increase until 2018, the current yield of 4.8 per cent is attractive. Shaw is in the midst of a major transformation, selling its media assets, buying Wind and expanding its wireless business nationally with a potential $2-billion capex program over the next few years, funded by free cash flow from its cable and Internet assets. The wind purchase provided them with cheap spectrum and set aside spectrum in the 2017 auction. While the wireless business is competitive the market has historically paid up for subscriber growth, which should favour SJR.B shares over the next few years.
Past Picks: July 16, 2015
CN Rail (CNR-T)
Then: $76.73 Now: $76.56 -0.22% Total return: +1.61%
Scotiabank (BNS-T)
Then: $64.93 Now: $66.32 +2.14% TR: +5.88%
Pembina Pipeline (PPL-T)
Then: $40.59 Now: $39.82 -1.89% TR: +3.14%
Total Return Average: +3.54%
Market outlook:
At the beginning of each year we establish a valuation trading range for the S&P/TSX. This year it was 12,500 to 14,500. In January and February the market traded below the range, and more recently we're trading near the high end. Economic recession fears have abated but global growth remains sub-optimal. The U.S. Federal Reserve continues to talk about raising rates but the magnitude will be limited to one or two hikes by year-end. Quantitative easing in Europe and Japan and stimulus in China have had a modest effect. Oil prices have rebounded significantly from February lows driven by declining U.S. production, a softening of the U.S. dollar and temporary production cuts in Canada, Libya and Nigeria. Global demand growth continues at a 1.5-per-cent to 2-per-cent clip. Market valuations have moved higher on the expectation of a second-half earnings rebound, which is likely given higher energy prices and a lower U.S. dollar. We remain committed to companies that provide a current yield and the potential for increased dividends in the future.