Darren Sissons, vice-president and partner at Campbell, Lee & Ross
Focus: Global and technology stocks

MARKET OUTLOOK

The near-term the market outlook is still clouded in COVID uncertainty and the forward-looking U.S. policy direction. Having said that, with uncertainty comes opportunity.

The year-to-date performance for most indexes has driven a growing market bifurcation between high growth, and in many case non-profitable, large capitalization technology companies versus everything else. Currently, dividends are not overly important to many investors as they see greater upside in the continued run up in highly valued growth stocks. However, for that strategy to continue to prove effective longer-term, two key historical considerations must be nullified: 1) the longer-term return performance of an investment is driven almost exclusively by dividends or cashflows paid to shareholders, not by capital gains as is the current experience for growth investors. 2) A mean revision, which is a basic mathematical tenet, back to historical valuation levels will not occur and valuation metrics have now structurally changed to a higher threshold, aka “this time is different.”

Looking forward, we favour dividend-generating investments priced at reasonable valuations. We continue to see excellent value in a number of verticals and across a number of geographies. We also see opportunities for investors to enhance their portfolio yield through exposure to sectors the market is currently ignoring.

TOP PICKS

Visa Inc. (V NYSE)

A high-growth payment processing platform benefitting from the secular transition to digital payments. The company has been a major beneficiary of COVID lockdown as consumers and businesses transitioned en masse to online purchases. While, COVID is a near-term tailwind, the COVID-related lockdowns have merely accelerated the structural growth of online payments. The franchise grew revenue, net income and dividends in Canadian dollars at 13, 17 and 29 per cent respectively in the last 10 years. The company also has an active buyback program and has retired an average of 1.6 per cent of the share count per annum since 2010.

Atco Ltd. (ACO/X TSX)

Atco is a utilities aggregator with operations built initially from Canadian Utilities, but which now also include Structures & Logistics and Neltume Ports. It boasts a credible 27-year track record of sequential dividend increases and a sub 50 per cent payout ratio will drive further dividend increases looking forward. Atco is attractively priced as it trades at a 6 per cent discount to its Canadian Utilities stake alone, which therefore generates zero credit for the other company assets. A high degree of regulated operations provides a predictable stream of earnings. Its A/A- credit rating supports inexpensive financing over the foreseeable future. International operations is also a growth segment.

Novartis AG (NVS NYSE)

A Switzerland-based pharmaceutical giant that develops, manufactures, and markets branded drugs. It also sells generic drugs through its Sandoz subsidiary. Its targeted therapies include: immunology, dermatology, cancer, ophthalmology, neuroscience, respiratory, cardiovascular, renal and metabolism. The dividend currently yields 4 per cent and has grown at an average annual rate of 6 per cent in Canadian dollars since 2010. Post-COVID, in a budget-constrained environment Sandoz, its generic business, will add value for shareholder and the pipeline of new products and drugs currently in development should create further value. No major near-term patent expiries are expected to meaningfully drag on earnings. A global scope of operations.

PAST PICKS: OCT. 25, 2019

EQUINOR (EQNR NYSE)

• Then: $19.12
• Now: $13.46
• Return: -30%
• Total Return: -30%

JARDINE MATHESON (JARLF OTC)

• Then: $56.99
• Now: $46.10
• Return: -19%
• Total Return: -17%

VISA (V NYSE)

• Then: $177.85
• Now: $198.28
• Return: 11%
• Total Return: 12%

Total Return Average: -12%