Full episode: Market Call for Tuesday, February 13, 2018
Christine Poole, CEO and managing director at GlobeInvest Capital Management
Focus: North American large caps
The inevitable pullback has occurred, albeit at a faster pace than most would have envisioned. The catalyst for the recent correction was the spectre of rising interest rates driven by U.S. wage inflation. Bond yields have risen, with the 10-year U.S. Treasury yield at 2.85 per cent today, up from 2.40 per cent at the start of the year. Nevertheless, bond yields remain low on both an absolute and relative basis, especially given the duration of the current economic recovery. Investors have grown accustomed to abnormally low interest rates. We think a normalized rate for 10-year Treasuries is in the four per cent range.
The decline was also exacerbated by technical factors, selling activity triggered by the unwinding of leveraged structured products and outflows from passively managed funds. Our continued longer-term constructive view on equities is based on a strengthening global economy and outlook for rising corporate profits. Corporate earnings in the U.S. for 2018 are also being revised upward due to tax reform. So far, reported 2017 fourth-quarter earnings for S&P 500 companies are up 15 per cent year-over-year, ahead of the consensus expectations for 12 per cent growth. The weaker U.S. dollar is also a tailwind for multinationals. Presently, consensus earnings for 2018 are expected to be up 18 per cent for the S&P 500 and 11 per cent for the TSX.
All the economic data, indicators, manufacturing and services survey data and sentiment measures suggest growth is sustainable with no signs of a recession on the horizon. The underlying fundamentals remain sound. Stock valuations are now looking more reasonable, with price-to-earnings multiple for the broad market indexes closer to historical averages. We do not view the pullback as a start of a bear market.
ALGONQUIN POWER AND UTILITIES (AQN.TO)
Algonquin is a North American diversified clean power generation (about 25 per cent of operating profits) and utility company (about 75 per cent of profits). The power generated from its wind, hydro and solar facilities are sold under long-term contracts. The utilities business services customers across 13 states in the U.S., providing electricity, natural gas and water transmission and distribution.
Based on its development pipeline, Algonquin has targeted 10 per cent annual dividend growth until 2021. The recently announced joint venture with Spanish-based Abengoa opens up the opportunity to develop clean energy and water infrastructure assets globally. Algonquin provides a dividend yield of 4.7 per cent. Recent purchase at $12.95 range on February 2018.
TD BANK (TD.TO)
TD is a leading North American bank, deriving 60 per cent of its net income from Canadian retail operations, 28 per cent from U.S. retail, eight per cent from wholesale/capital markets and four per cent from TD Ameritrade. A strong balance sheet and capital position, a track record of consistent dividend growth (10 per cent annualized over the last 20 years) combined with attractive valuation metrics makes TD a timely investment for both income and growth-oriented investors. Its dividend payout ratio is 43 per cent, the lower end of its 40-to-50 per cent target. TD’s current dividend yield is 3.4 per cent. Recent purchase at $71.40 range on February 2018.
JPMORGAN & CHASE CO (JPM.N)
JPMorgan is a leading financial services company with operating segments in consumer and business banking (45 per cent of revenues), corporate and investment bank (35 per cent), asset and wealth management (12 per cent) and commercial banking (seven per cent). With 77 per cent if its sales coming from North America, JPMorgan is well-positioned to expand its businesses amidst a growing U.S. economy. It provides a dividend yield of two per cent. Recent purchase at $112.95 range on February 2018.
PAST PICKS: FEB. 17, 2017
- Then: $43.20
- Now: $40.95
- Return: -5.20%
- Total return: -2.63%
JOHNSON & JOHNSON (JNJ.N)
- Then: $118.86
- Now: $129.19
- Return: 8.69%
- Total return: 11.49%
- Then: $47.80
- Now: $72.31
- Return: 51.27%
- Total return: 52.65%
Total return average: 20.50%