Douglas Kee, senior vice-president and portfolio manager at Cardinal Capital Management
Focus: North American dividend stocks


MARKET OUTLOOK

The expectation coming into 2020 was that the global economy would pick up as it progressed due to the lowering of interest rates in 2019. Global manufacturing continues to be shaky, especially in semiconductors and autos, which have been heavily affected by a slowdown in China. The effects of the coronavirus outbreak on the Chinese economy will not be known for some time, but the anticipated recovery will be delayed. On the other hand, the global consumer remains in good shape, unemployment levels remain low, spending continues to be strong and Canadians aside, consumer balance sheets are healthy.

With slow economic growth and modest inflation, expectations are central banks will keep interest rates low and providing ample liquidity. The Federal Reserve has indicated they would react to rising inflation, but not lead the charge. At Cardinal, our emphasis is on companies that have a proven record of increasing their dividends, which protects your cash flows from inflation. Over the last three years, dividend growth in the portfolios has averaged near 10 per cent yearly.

Year-to-date, North American equity markets have been quite positive, up roughly 4.5 per cent. Interestingly, technology continues to lead but there has also been strong performance from defensive sectors such as utilities and REITs. The biggest challenge we’re facing with markets is that there are definitely some overvalued companies and sectors. Sectors such a technology, utilities and U.S. consumer companies have high valuations, which leaves little room for disappointment. At Cardinal, our emphasis on value and dividend growth provides current income and lower volatility.

TOP PICKS

TC ENERGY (TRP TSX)

TC Energy is a significant player in the secular trend towards natural gas in North America through pipeline and infrastructure assets in the Western Canadian Basin, Marcellus Basin and Mexico. The company also has power generation and nuclear energy assets.

TC Energy has $30 billion of secured capital programs and potentially an additional $20 billion in development programs. The company has successfully migrated to a self-funding model where internally generated cash flow, debt issuance and asset sales have lowered the need for equity issuance.

The stock currently yields 4.4 per cent. The company increased its dividend by 8 per cent last year and has raised it 9 per cent yearly over the last five years. TC trades at about 17.8 times 2020 earnings. Earnings are expected to be up 4 to 5 per cent yearly over the next three years, with dividend growth in the 5 to 7 per cent range.

TD BANK (TD TSX)

TD is a truly North American retail bank, with an addressable market of 37 million people in Canada and 110 million in its U.S. branch network. TD has the deposit and loan portfolio scale to grow organically, but further acquisitions in the U.S. may be contemplated.

A concern for the banking sector overall is the health of the loan book and the inevitable rise in provisions for credit losses. While still near historic lows, credit losses are rising. TD’s relatively larger exposure to the U.S. consumer may benefit as consumers are in a better financial position versus Canadians.

Historically TD shares have traded at a premium multiple to the Canadian peer group, but at 10.5 times TD is currently trading in-line. Dividend growth in the last 12 months was 10 per cent and over the last five years, it’s grown 9.5 per cent yearly. While dividend growth will likely moderate to around 8 per cent, TD’s payout ratio is still the lowest of the Canadian banks.

CVS HEALTH (CVS NYSE)

We view CVS as an emerging integrated health care services provider that will benefit from favourable long-term industry trends such as aging demographics, specialty pharmacy growth and rising usage of lower-cost clinics and managed care.

The integration of Aetna has progressed well, with further synergies expected. CVS took on a considerable amount of debt with this acquisition. In 2019, the company paid down $8 billion and forecast a $4.5 billion paydown per year going forward.

CVS shares currently yield 2.8 per cent. Five-year dividend growth was 11 per cent, but we don’t expect further growth until 2022 at the earliest, once the balance sheet is back in order. CVS shares trade at 10.2 times 2020 earnings, below its five-year median of 12.8 times.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
TRP Y Y Y
TD Y Y Y
CVS Y Y Y

 

PAST PICKS: MARCH 13, 2019

Douglas Kee's Past Picks

Douglas Kee of Cardinal Capita reviews his past picks: Fortis, Scotiabank and Canadian Tire.

FORTIS (FTS TSX)

  • Then: $48.81
  • Now: $58.34
  • Return: 20%
  • Total return: 24%

SCOTIABANK (BNS TSX)

  • Then: $72.76
  • Now: $74.63
  • Return: 3%
  • Total return: 8%

CANADIAN TIRE (CTC/A TSX)

  • Then: $146.08
  • Now: $149.53
  • Return: 2%
  • Total return: 5%

Total return average: 12%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
FTS Y Y Y
BNS Y Y Y
CTC/A Y Y Y

 

WEBSITE: cardinal.ca