Full episode: Market Call for Thursday, September 7, 2017
Michael Simpson, senior vice president and senior portfolio manager at Sentry Investments
FOCUS: North American dividend stocks
Recent data from Statistics Canada show the economy is strong; Q2 annualized GDP growth in Canada was 4.5% per cent. On a year over year basis, GDP growth came in at 4.3 per cent. This is in contrast to the moderate Q2 growth in the U.S. of 2.6 per cent (source: Bloomberg).
Along with this stronger growth, the Canadian dollar has appreciated approximately 11 per cent from its lows in May. This will be a headwind for Canadian business on the export side. The U.S. is our largest trading partner taking about 76 per cent of our exports. In addition, the continuing NAFTA renegotiating could lead to more uncertainties for Canadian companies.
In Q2 the construction sector posted its largest gain since July 2013. Non-residential construction grew 2.9 per cent in June. The construction sector may be not able to contribute as much to GDP going forward.
Small and large businesses in several provinces will have to cope with minimum wage increases starting January 2018, and the federal government is proposing new rules for small businesses that could affect hiring and investment.
The Canadian dollar has priced in a 25 basis point rise in the bank rate and is at the high end of its trading range. The European economy is performing better but the strengthening euro could dampen growth.
The U.S. economy will continue to strengthen despite the worries of a government shutdown and we are looking at some sectors with lower valuations such as health care and consumer and energy infrastructure.
Although September and October have a tendency to be volatile, remember why you invest, and invest in companies that pay a dividend and have the ability to grow their dividend. GICs are not an alternative to a high-quality company that has an ability to raise their dividend. Dividends are more tax efficient than interest income.
Enbridge provides energy transportation, distribution and related services in North America, and operates a crude oil and liquids pipeline system. The company has a regulated utilities business that serves 3.5 million customers in Ontario, Quebec, New Brunswick and New York. Over the next several years it has $30 billion of growth projects. It trades at a 5 per cent yield and has a 5 year dividend growth rate of 16 per cent.
WEST FRASER TIMBER (WFT.TO)
West Fraser is a diversified wood products company producing Lumber LVL, MDF, plywood, pulp newsprint wood chips and energy with facilities in Western Canada and the southern United States. With recent acquisitions, 57 per cent of productive capacity will be in Canada and the remaining 43 per cent will be in the southern U.S. Concerns over resolution of the Canada-U.S lumber dispute and the stronger Canadian dollar have had an impact on the stock. However, Hurricane Harvey will necessitate the rebuilding of America's fourth largest city, Houston. West Fraser trades at 6.7 times P/CF and has a return on invested capital of 28 per cent. It has a debt to EBITDA of 0.7 times and the ability to grow their dividend as they take costs out of their facilities.
Cinemark is a movie theater operator. The company owns and operates the third largest theater chain in the U.S under the brands Cinemark, Century Theaters, Tinseltown, and Rave. Cinemark also operates theatres in Brazil, Argentina, and other Latin American countries. Latin America represents 22 per cent of EBITDA and they are the number one operator in Brazil and Argentina, where it is easier to pass on price increases. It trades at 7.6 times P/CF and 14.5 times earnings with a decent balance sheet.
PAST PICKS: AUGUST 17, 2016
BROOKFIELD ASSET MANAGEMENT (BAMa.TO)
- Then: $44.66
- Now: $47.30
- Return: 5.91%
- Total return: 7.91%
It is an excellent company but we sold because it reached our price target. (As a policy we do not disclose the price we sold at.)
- Then: $18.82
- Now: $25.30
- Return: 34.43%
- Total return: 39.14%
CIGNA CORPORATION (CI.N)
- Then: $132.30
- Now: $184.75
- Return: 39.64%
- Total return: 39.68%
TOTAL RETURN AVERAGE: 28.91%
Sentry Diversified Equity Fund Series F
Performance as of: August 31, 2017
1 Month: -0.84% fund, 0.67% index
1 Year: 8.04% fund, 7.23% index
3 Year: 5.08% fund, 2.10% index
*Index: S&P/TSX Composite
*Returns are net of fees and based on reinvested dividends
1. CVS Health Corp.
2. Morneau Shepell Inc.
3. Linamar Corporation
4. AGT Food & Ingredients Inc.
5. Gilead Sciences Inc.