Recession clouds are lurking, but there can be a silver lining.
Global stock markets have been roiled by the coronavirus fears and plunging oil prices. Despite central banks’ interest-rate cuts and other government stimuli, it’s unclear whether that can stave off a sharp economic downturn.
Still, certain dividend-paying stocks can help ease the pain. When the S&P/TSX Composite Index dropped by 35 per cent in 2008, some of these equities outperformed the market or eked out a gain. Others outpaced the market in the ensuing years. At the very least, investors can get paid while waiting for a recovery.
We asked three fund managers for their top recession-resistant stock picks.
Donny Moss, senior portfolio manager, Industrial Alliance Investment Management Inc.
His fund: IA Clarington Canadian Dividend Fund
The pick: Waste Connections Inc. (WCN-T)
Forward dividend and yield: 74 cents a share (0.85 per cent)
Waste Connections is an attractive recession-proof stock because it provides an essential service in collecting garbage, Mr. Moss says. This Vaughan, Ont.-based company, which grew its earnings during the last recession, also saw its shares rise by 2 per cent in the 2008 bear-market year, he adds. North America’s third-largest waste-services company gets a recurring revenue stream from contracts signed with municipalities and can raise prices. It owns most of the transfer stations for garbage disposal “so that increases their margins,” he says. Although its stock valuation is “a little ahead of its peers,” that can be justified by its strong management team, he says. A risk is a push-back by municipalities when it tries to raise prices during tough economic times.
The pick: Fortis Inc. (FTS-T)
Forward dividend and yield: $1.91 a share (4.04 per cent)
This North American gas and electric utility is an appealing investment during an economic downturn because its earnings have more certainty, Mr. Moss says. St. John’s, Nfld.-based Fortis operates in a regulated industry in which provinces or states allow it to earn a certain return on equity in the 8 to 10 per cent range, he adds. Fortis’s earnings grew during the last recession. And while shares fell by 15 per cent in 2008, that drop outpaced the broader market sharply, he notes. Fortis also has had 46 consecutive years of dividend increases. Its shares, the valuation of which are in line with Canadian peers, have also benefited in recent years from investors seeking yield amid low interest rates, he adds. The risk is a lack of opportunities to develop new projects as acquisitions have become pricey.
Stephen Groff, principal and portfolio manager, Cambridge Global Asset Management, a division of CI Investments
His fund: Cambridge Canadian Dividend Fund
The pick: Dollarama Inc. (DOL-T)
Forward dividend and yield: 18 cents a share (0.47 per cent)
This Montreal-based discount retailer is a recession-resilient business because it sells goods that are necessities, can give consumers the “‘best bang for their buck’” and is also less affected by the e-commerce trend than other retailers, Mr. Groff says. “We like the business because it has a proven concept which enables them to earn high returns.” It’s the leading dollar store in Canada, with growth in urban centres coming from smaller-format stores, while its foray into Latin America is still in its early days, he says. Its stock has traded at under or around 19 times forward earnings lately. While the COVID-19 pandemic could affect Dollarama’s ability to source goods from China, that only has the “potential to be a modest blip later in the year,” he suggests.
The pick: K-Bro Linen Systems Inc. (KBL-T)
Forward dividend and yield: $1.20 a share (3.14 per cent)
This provider of laundry and linen services runs a business for which “demand does not go away” and is often the biggest player in its local markets, Mr. Groff says . Edmonton-based K-Bro Linen Systems operates mainly in Canada as well as in Britain. In the health-care sector, it has long-term contracts with hospitals. But the hospitality sector, which includes hotels, can be more cyclical, he adds. The latter could potentially be affected by the coronavirus outbreak, but it represents less than half of the business. While the stock struggled for a few years as it took on debt to build new plants, that’s now over and “its margins are rising.” K-Bro Linen’s stock is compelling because it has a “greater than mid-single-digit free-cash-flow yield, and that is expected to grow,” he adds.
Steve DiGregorio, portfolio manager, Canoe Financial LP
His Fund: Canoe Premium Income Fund
The pick: BCE Inc. (BCE-T)
Forward dividend and yield: $3.33 (6.56 per cent)
The Montreal-based telecommunications giant, which has raised its dividend annually since 2009, will benefit from investors seeking yield amid low interest rates, Mr. DiGregorio says. BCE’s free cash flow should rise slightly this year from $4-billion in 2019. Like other telecom firms, its shares have been trading at a discount to power utilities, he notes. BCE’s stock fell in line with the market in 2008, but it was also under pressure from a failed bid by a consortium to buy the company, he says. However, its shares outperformed over the next five years, with an 83-per-cent gain. Ottawa recently gave telecom companies two years to slash their prices for wireless services by 25 per cent, but that’s not a concern partly because it can entice some consumers to sign up for more expensive packages with higher data limits, he adds.
Forward dividend and yield: 72 cents a share (1.49 per cent)
Brookfield Asset Management, which invests in renewable energy, infrastructure, real estate and business development, is attractive because it owns hard assets and grows its dividend annually, Mr. DiGregorio says . Shares of the Toronto-based company also trade at a discount to its net asset value of about $85 a share. It earns fees from operating its units – including Brookfield Renewable Partners, Brookfield Infrastructure Partners, Brookfield Property Partners and Brookfield Business Partners – and from running investment funds. While its stock lost 46 per cent in 2008, it gained 129 per cent over the next five years, he notes. A risk is whether it may be too big to buy assets that can “move the needle,” he says. “Still, if you buy one stock for the rest of your life, this is the one.”