Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO chief investment strategist Brian Belski reiterated his belief that dividend growth is the correct strategy for income-oriented investors,
“The shortcomings of singularly yield-focused strategies have never been more obvious than what has unfolded so far in 2023, with high yield sectors and dividend yield factors all significantly underperforming the TSX year to date. While this underperformance is not surprising given higher-yielding sectors tend to underperform during periods of rising rates, we have found that focusing on dividend growth potential and cash flow factors can mitigate the risks to income investing during these periods. In fact, although the high yield factor we follow is underperforming year to date, our dividend growth and free cash flow factors are both decidedly up double digits so far this year. ... Absolute dividend growth when combined with dividend growth potential can mitigate the risks correlated to elevated inflation and rising rates. Furthermore, the yield advantage of many of the high-yielding sectors have eroded to decade lows, diminishing the importance of the “bond proxy” and income nature of these sectors, especially when compared to long-term ‘risk-free’ rates”
The companies in the BMO’s North American Dividend Growth portfolio are BCE Inc., Comcast Corp., Telus Corp., Verizon Communications, McDonalds Corp., Restaurant Brands International, PepsiCo, Procter and Gamble, Target Corp., Enbridge Inc., TC Energy Corp., Ameriprise Financial, Bank of America, Brookfield Corp., Blackrock Inc., Goldman Sachs Group, JP Morgan Chase, Manulife Financial, Morgan Stanley, National Bank of Canada, Power Corp of Canada, Royal Bank of Canada, TD Bank, Amgen Inc., Gilead Sciences, Johnson & Johnson, Merck & Co., UnitedHealth Group, Canadian National Railway, General Dynamics Corp., Lockheed Martin Corp., Waste Management Inc., Apple Inc., Cisco Systems, Microsoft Corp., Texas Instruments Inc., Eastman Chemical, LyondellBasell Industries, Brookfield Infrastructure Corp., Capital Power Corp., and Emera Inc.
***
Wells Fargo global macro strategist Scott Wren is surprised at how quickly U.S. companies are reshoring production,
“Many Americans were shocked [during the pandemic] when they found out just how dependent we had become on foreign producers for what are considered ‘necessary’ goods … ‘Home-shoring’ production in Some cases will cost more and eat into profit margins, but we have been surprised at how quickly reshoring is developing, assisted heavily by technology that offsets much of the labor-cost disadvantage. In addition, many companies are shifting production to countries either perceived to be more friendly toward the U. S. or closer to our markets. Mexico and Southeast Asia countries are benefitting. … U.S. government data is showing that domestic construction is stronger at this point in the cycle than is typical when compared with past cycles. Much of the government’s efforts to re-shore has been focused on directing funds toward the construction of semiconductor fabrication plants here at home. There are also large electric vehicle (EV) battery plants being built or in the planning stages that are benefitting from government infrastructure legislation. Traditional ‘road and bridge’ projects are syncing with increased demands for warehouses and logistics hubs”
***
BofA investment strategist Michael Hartnett’s weekly Flow Show report was typically blunt,
“Zeitgeist: ‘Take out your Magnificent 7 from S&P 500 this year and index would be 3890 right now. Funnily enough, that’s pretty much where everyone thinks it should be.’ … : 5 ‘oil shocks’ of past 50 years: Yom Kippur war ‘73 saw oil up 300 per cent in 4 months, other shocks saw oil jump 40-90 per cent in short order; oil barely moved past week; maybe geopolitics don’t spiral, or maybe oil is sending recession signal … : ‘Magnificent 7′ at new high 30 per cent of S&P 500 market cap, trading 30 times PE vs rest of S&P 500 at 16 times … We remain in 2020s = higher inflation & yields, lower returns; bond yields may go lower in ‘24 but no secular bull market until Fed/govts stop playing Superman, put on their ‘seatbelts’ & express need for lower deficits”
***
Diversion: “New research shows why hunting for the cheapest plane ticket is a waste of your time” – Phys.org
Scott Barlow