Oct 12, 2016

Christine Poole's Top Picks: October 12, 2016

BNN Bloomberg

Christine Poole , BNN

Christine Poole, CEO and managing director at GlobeInvest Capital Management
Focus: North American large caps
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MARKET OUTLOOK
The U.S. manufacturing and services surveys released last week re-affirmed that the economic recovery is on track. Sustained job growth in the U.S. support ongoing improvements in consumer spending and the housing market. Consumer confidence in the U.S. is at its highest level since the recession, which bodes well for improvement in the economy given that two-thirds of GDP comes from personal consumption expenditures.

The Canadian economy continues to lag behind the U.S. economy, exacerbated by the Fort McMurray fires earlier this year. Sources of future economic improvement include exports to a relatively stronger U.S. economy, which accounts for close to 75 per cent of Canadian exports, re-building to repair the damage from the fires and an expansionary fiscal policy to stimulate economic growth. Exports represents approximately 33 per cent of Canadian GDP. Recent economic data is positive with July GDP growth and September employment (Labour Force Survey) coming in much better than expected.

Central banks around the world continue to maintain accommodative monetary policies, keeping interest rates low over the foreseeable future. In the U.S., interest rate normalization is inevitable. However, the pace of rate increases is expected to be gradual and measured given a somewhat muted overall economic growth rate (GDP growth in the two per cent range), the lack of inflationary pressures and global geopolitical uncertainty.

CHRISTINE’S CATALYSTS TO WATCH

Q3/16 earnings season — inflection point for year-over-year profit growth?
Economic indicators, e.g. ISM Manufacturing and Non-manufacturing indices remain in expansionary mode
Employment situation — continued job growth and contained wage inflation
Canadian dollar relative to U.S. dollar — impact on Canadian dollar denominated portfolios

TOP PICKS

ENBRIDGE (ENB.TO)
Enbridge owns and operates the world’s longest crude oil and liquids transportation system, as well as Canada’s largest natural gas distribution company. Its reliable low-risk business model is underpinned by long-term commercial contracts with financially-strong customers. Enbridge’s $26 billion capital program provides high visibility to meet its targeted dividend per share growth of 10 per cent to 12 per cent. Following its announced acquisition of Spectra (expected to close in Q1/17), the annual dividend growth target was extended through to 2024, while maintaining a prudent payout policy of 50 per cent 60 per cent of available cash flow from operations. Spectra is considered an excellent strategic fit, providing both asset base and geographic diversification. Enbridge provides a dividend yield of 3.7 per cent.

FORTIS (FTS.TO)
Fortis is an electric and gas utility company, with 94 per cent of its assets regulated (69 per cent electric and 25 per cent gas) and the remaining under long-term contracted power generation operations. Canadian regulated operations represent 54 per cent of earnings, U.S. regulated 35 per cent, Caribbean regulated four per cent, and non-regulated energy infrastructure seven per cent. Its acquisition of ITC Holdings Corporation, a fully regulated U.S. electric transmission utility company, is expected to close by the end of this week, and will significantly increase its footprint in the U.S. Fortis is a stable cash flow generator, posting 43 consecutive years of annual dividend increases, with an annual dividend growth forecast of six per cent to 2021. Fortis offers a yield of four per cent.

WHIRLPOOL (WHR.N)
Whirlpool is a global, leading home appliance manufacturer, and markets products under brand names such as KitchenAid, Jenn-Air, Maytag, Whirlpool, Hotpoint and Amana. North America accounts for 51 per cent of sales, Europe/Middle East/Asia 26 per cent, Latin America 16 per cent and Asia seven per cent. Recent acquisitions have expanded Whirlpool’s presence and competitiveness in Europe and China. International markets, specifically in emerging markets, are characterized by low levels of appliance penetration. In contrast with a more developed economy like the U.S. (79 per cent penetration), emerging markets in Latin America (42 per cent), China (36 per cent) and India (16 per cent) represent potential for higher levels of appliance penetration over the long-term. Whirlpool provides a dividend yield of 2.5 per cent.