May 25, 2017

Douglas Kee's Top Picks: May 25, 2017

BNN Bloomberg

Douglas Kee , BNN

Douglas Kee, chief investment officer at Leon Frazer & Associates

Focus: Canadian dividend-paying stocks
_______________________________________________________________

MARKET OUTLOOK
For 2017 we expect global growth to be in the three-per-cent-plus area. The effects of continued stimulative monetary policy in Japan and Europe have had beneficial effects on economic growth with both countries recording over two per cent growth in the first quarter. Chinese and Indian growth continues above six per cent, but China is forecast to slow in subsequent quarters due to a slowing in infrastructure spending and more restrictive capital and lending policies.

For the U.S., the first quarter GDP growth of 0.7 per cent, while soft, was not a total surprise given the last few years, during which the growth path was slow at the beginning of each year and picked up as each year progressed. For Canada, a strong first quarter is expected to be followed by moderation as the recovery in Alberta takes hold, stricter mortgage rules slow housing, consumer debt remains high and U.S. trade pressures stifle business capital spending.

In equity markets, we have seen the reflationary Trump trade stall out given lower expectations of tax reform and infrastructure spending coming through in the short to medium term. The regulatory environment for business seems to be improving but solid policy changes will be required to move the economy from a sub-par growth rate. Inflationary pressures remain in check, but the U.S. Federal Reserve is likely to raise short-term rates two more times this year.

A bright spot for markets has been the Q1 earnings growth in Canada and the U.S. Year-over-year growth rates have been double-digit and we expect positive earnings momentum for the next few quarters. For the U.S., further upside is possible if the U.S. dollar continues to moderate, while in Canada higher energy prices would be beneficial.

Our valuation range for the S&P/TSX Composite remains 13,500 to 16,500. We remain fully invested and are committed to companies that provide current income and the potential for an increasing dividend stream in the future.

TOP PICKS

TD BANK (TD.TO) ($63.00)
We are at our maximum allowable weight in Canadian banks. The banks have been able to return value to shareholders through growing dividend payouts and share buybacks. To some extent the banks will be challenged by slower revenue growth given stricter mortgage rules. We currently like the prospects for TD given its greater exposure to U.S. retail banking, which should benefit from stronger economic growth and improving loan growth. Dividend growth should be high single-digit.

ENERCARE (ECI.TO) ($18.50)
ECI, through its focus on sales and rentals of water heaters, HVAC systems, sub-metering and protection plans, creates long-term stable revenue streams, which translate into stable and growing earnings and dividends. Enercare shares were very strong in the first four months of the year, rising from $18.00 to near $22.00. The rise was based on three factors: a market shift back to defence, less upside pressure on interest rates and the sale of a major competitor Reliance Home Comfort at a high valuation. Q1 earnings proved to be a disappointment due to a mild winter and poor company guidance on elevated SG&A costs from the rollout of a rental program across the U.S. Service Expert Business. With the shares trading off, we believe the stock is attractive given its 5.2 per cent yield and dividend growth potential of five per cent plus over the next few years.

PEMBINA PIPELINE (PPL.TO) ($43.50)
We believe that the proposed merger of PPL and Veresen will be beneficial to shareholders, provide cash flow accretion, diversify and lower the risk of the company, and extend the visibility of future growth. The merged company’s fee for service business should represent about 87 per cent of EBITDA and should provide six per cent dividend growth over the next few years. PPL will have approximately $6 billion of secured growth and $20 billion of unsecured growth.