Nick Majendie is portfolio advisor at ScotiaMcleod's Anchor Funds, focusing on Canadian large caps.
Brookfield Infrastructure Partners (BIP.UN-T)
Brookfield Infastructure Partners fits with our infrastructure theme. BIP had a strong first half with FFO up 12 per cent. Consequently, the company unusually increased its dividend mid-year by 3.5 per cent and announced a 3-for-2 stock split that came into effect last week. BIP's FFO momentum going into 2017 is strong with the additional contributions from the closing of its $660-million of investments in Australian ports, Peruvian toll roads and North American gas storage assets and further substantial FFO from regulated transmission assets in Brazil, which should be closed by the first quarter of 2017. BIP ties with Global Investment Partners as the No. 1 investment vehicle in the infrastructure space, but the latter is a private equity vehicle. Distribution growth is likely to be in the upper end of its 7-to-9-per-cent-a-year targeted range.
In September, Enbridge announced an all-stock merger with Spectra, which is expected to close in Q1 2017. ENB is a long-term holding of ours, but we like the latest move. With expected synergies of better than $500-billion by the end of 2018, we believe the combination strengthens the balance sheet, provides better balance (approximately 50 per cent oil pipelines and 50 per cent natural gas pipelines), geographical diversification with a low-risk commercial structure and predictable dividend growth (dividend per share should double within six years and increase meaningfully beyond that through 2024.) Currently, Canada's second-largest wind producer after Transalta Renewables, ENB should double its wind production when its joint venture with EDF Energies Nouvelles sees its projects come on stream.
We recently bought Methanex, having not owned it for a number of years. Methanex increased its methanol price modestly in North America in August while holding it flat in Asia. We believe prices should recover moderately over the next couple of years unless oil prices move beyond $70 (WTI), in which case the methanol price rise will be more dramatic. Global methanol demand grew 8 per cent in the first half of 2016 and should continue to eat up excess capacity. MX recently announced increased gas supply to its Chile1 plant to bring it to 60 per cent of capacity. Any further contracts signed to fully utilize the plant would be a strong positive in the medium term. We believe the dividend is safe and the shares attractive at current levels.
Past Picks: Sept. 25, 2015
Closing the acquisition of Tampa Electric was a strong positive, and EMA now becomes one of the top 15 utilities in the U.S. We believe that EMA's 5-year annual 8-per-cent increase in dividend is fully achievable. The stock is off its 52-week highs through fears of rising long-term interest rates.
Then: $43.07 Now: $47.63 10.53% Total return: +15.30%
Peyto Exploration & Development (PEY-T)
One of the best performers in the oil and gas sector. Continues to be Canada's lowest-cost natural gas producer. Will produce an excess of 100,000 BOE's a day with only 51 employees.
Then: $27.69 Now: $37.24 34.49% Total return: +40.51%
Q3 EPS surprised the Street on the upside. Personal and commercial banking saw 6-per-cent earnings growth, maintaining last year's momentum. The PrivateBancorp acquisition is not cheap but is in line with the previously announced strategy. Not accretive until year 3. It will pull down CIBC's CET1 ratio but should still be above 10%.
Then: $93.14 Now: $102.42 9.96% Total return: +14.05%
Total Return Average: +23.29
While there are still significant market risks, we do not believe we are in bubble territory yet – and particularly not in Canada thanks to a strong component of globally competitive higher-yielding stocks with good balance sheets, its relatively cheaply-valued financial sector and its commodity stocks that are still favorably valued in a moderately rising commodity price environment. Notwithstanding the seasonal correction risk that often happens between Labor Day and early October, we are optimistic that the TSX will end the year higher than current levels and that the overall returns over the next 12 months will be rewarding.
We would add that Canada and its stock market are internationally known for its banking sector and oil and gas, base metal and precious metal sectors. However, through our regular six-month interviews with the CEOs and CFOs of Canada's largest companies, we have identified 15 globally competitive entities that have excellent balance sheets and strong and predictable cash flow and dividend growth. These are to be found in what we call "regular infrastructure" (roads, ports, airports and railways), energy infrastructure (transmission, transportation, distribution and renewables) as well as telecom infrastructure. In fact, we have recently launched a Canadian Infrastructure portfolio, which currently has a yield of 4.5 per cent while the blended dividend growth rate is projected to be 7 per cent to 8 per cent a year over the next five years and 6 per cent to 7 per cent over the following five. We have a reasonably high level of confidence in these growth rates being achieved since over 70 per cent of their next 10 years' cash flow is covered by long-term/take- or-pay contracts or by regulation.