Douglas Kee, chief investment officer at Leon Frazer & Associates

Focus: Canadian dividend stocks
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MARKET OUTLOOK
The global economic growth outlook continues to improve slowly with a three-per-cent-plus number expected over the next 12 months. Inflationary pressures remain subdued with industrial overcapacity, technological advancement and slow employment growth keeping a lid on wage pressures. While Japan and Europe continue with an accommodative interest rate bias, the U.S. and more recently Canada are becoming more restrictive. We expect another interest rate hike in both countries before year’s end.

Second-quarter earnings season is coming to a close and has generally been supportive of equity markets. S&P 500 Index companies recorded a year-over-year increase of 11 per cent in earnings and about a five-per-cent revenue increase. We expect that second-half earnings comparisons will be slower but still positive. A further decline of the U.S. dollar could improve earnings further in the second half. In Canada, earnings growth has also been double-digit, but some of the heavily-weighted banks have yet to report and could moderate the earnings growth. The divergence in equity market performance between the U.S. and Canada year to date has been significant, with the U.S. benefitting from high exposure to health care and technology and Canada suffering from a high exposure to commodity sectors. Our valuation range for the S&P/TSX Composite is 13,500 to 16,500. We remain fully invested and are committed to companies that provide current income and the potential for increasing dividend stream.

TOP PICKS

ALTAGAS (ALA.TO) – $27.55)
Since announcing the proposed purchase of WGL Inc. for $8.4 billion, shares of ALA have been down 16 per cent. The pressure on the stock price reflects the issuance of $4 billion in instalment receipts, the uncertainty of regulatory approval, the delay in announcing a dividend increase, potential asset sales and the forward valuation of the stock. While we wait we get a 7.5 per cent yield, with a dividend increase likely in Q4.

TD BANK (TD.TO) – $64.25
We remain at maximum allowable weight in Canadian banks. The banks have been able to return value to shareholders through growing dividends and more recently share buybacks. Bank shares have corrected from February highs reflecting Canadian housing concerns and slower mortgage growth prospects. We like the TD outlook due to its higher exposure to U.S. through its retail bank network. This network should benefit from higher interest rates, which will increase margins and potentially loan demand. TD has increased its dividend by 8.5 per cent per year over the last five years, and we would expect high single-digit dividend growth going forward.

CANADIAN NATURAL RESOURCES (CNQ.TO) – $38.25
CNQ has been on a path to transition itself from conventional production to a long-life, low-decline production base. With the Horizon Phase 3 expansion and the recent purchase of the Albian Oil Sands Project, the strategy is near completion. At current strip pricing CNQ should have free cash flow of approximately $2.5 billion after dividends. Management has indicated that their strategy is to lower costs and return money to shareholders through dividend increases and share buybacks. Over the last five years, CNQ has increased its dividend 10 per cent per annum. We would expect a similar hike in 2018.
 

PAST PICKS: JUNE 9, 2016

ALTAGAS (ALA.TO)

• Then: $30.60
• Now: $27.70
• Return: -9.46%
• Total return: -1.70%

MANULIFE FINANCIAL (MFC.TO)

• Then: $18.55
• Now: $24.58
• Return: 32.50%
• Total return: 38.47%

SHAW COMMUNICATIONS (SJRb.TO)

• Then: $24.08
• Now: $27.59
• Return: 11.79%
• Total return: 18.07%

TOTAL RETURN AVERAGE: 18.28%