Lorne Zeiler, vice president and portfolio manager at TriDelta Investment Counsel
Focus: North American dividend stocks and portfolio strategy
Since the U.S. election, equity markets have rallied and bond yields have experienced their sharpest increase in three years. Markets are anticipating stronger economic growth, higher inflation, favourable tax policy and increased fiscal stimulus in 2017. If these expectations turn into reality, the equity market will continue to advance as higher earnings will offset high valuations and bond investors will feel further pain.
It is uncertain at this time which Trump policies will get implemented. If the populist victories of Brexit and Trump are repeated in France, Germany and Italy next year and protectionist policies are enacted, equity markets will be constrained and bond yields will decline. Investors should be positioned for both types of events by diversifying their equity holdings, particularly by allocating a greater share to the U.S. market as the USD is likely to advance in either scenario, and protect their downside by holding a shorter-duration bond portfolio.
Apple offers compelling valuation at approximately 10 times earnings (excluding cash). A few significant catalysts to increase earnings and shareholder returns in 2017 are: iPhone 8 launch will be supported by a super upgrade cycle to reverse the trend of declining iPhone sales; services, such as iTunes, App Store and Apple TV should continue their 20 per cent+ pace of revenue growth; and Apple could be one of the biggest winners of U.S. corporate tax reform with a lower overall tax rate and a massive cash repatriation that could be as high as $100 billion (over $150 billion resides offshore) leading to higher dividends and more share buybacks.
TransCanada should continue to reward income-focused investors with expected dividend increases of 10 per cent per year over the next five years. Higher earnings will support the dividend increases as approximately $25 billion of TransCanada’s infrastructure projects are put to service over the next two years and the Columbia Pipeline acquisition will be fully reflected in earnings. Approval of the Keystone XL pipeline will be a further catalyst and another source for future earnings growth.
AbbVie offers a reasonable valuation of 13 times earnings, strong growth profile and high dividend rate of over four per cent. AbbVie’s blockbuster drug Humira, which treats auto immune diseases such as rheumatoid arthritis, should see continued sales growth, particularly from emerging markets in 2017. Despite the drug coming off patent, legal challenges should keep biosimilars out of the market for another five years. AbbVie has a very strong pipeline that could see the launch of up to 10 new medications over the next few years, resulting in higher future revenues and earnings.
PAST PICKS: JULY 29, 2016
COMPUTER PROGRAMS AND SYSTEMS (CPSI.O) – Sold on Aug. 5 at $28.67
Q3 earnings were well below our expectations and guidance suggested further delays in recording sales in the pipeline.
- Then: $39.64
- Now: $23.35
- Return: -41.09%
- TR: -39.82%
LYONDELLBASELL INDUSTRIES (LYB.N)
We continue to hold this in our equity portfolios. LYB still trades at about a 30 per cent discount to other commodity-based industrials. Very reasonable valuation and approximately four per cent dividend yield.
- Then: $75.26
- Now: $87.70
- Return: +16.53%
- TR: +19.00%
BMO LADDERED PREFERRED SHARE INDEX ETF (ZPR.TO)
We have been reducing our ZPR position to buy individual Rate Reset preferred shares, including two new issues. We believe that perpetual preferred shares are becoming more attractive.
- Then: $9.96
- Now: $10.54
- Return: +5.86%
- TR: +8.13%
TOTAL RETURN AVERAGE: -2.72%
FUND PROFILE: TRIDELTA HIGH INCOME BALANCED FUND
PERFORMANCE AS OF NOVEMBER 30, 2016:
- 1 month: Fund 0.1%, Index* 0.0%
- 1 year: Fund 16.8%, Index* 10.9%
- 3 years: Fund 8.7%, Index* 4.7%
* Index: 50% S&P/TSX Composite, 50% DEX Bond Universe
- Government of Canada: 2.75% | 12/01 2048
- Metro Inc.: 5.97% | 10/15/2035
- Intact Financial Corp.: 4.7% | 08/18/2021
- TransAlta Preferred Share Series D (TA_pd.TO)
- Capital Power Corp. (CPX.TO)
- Exchange Income Corp. (EIF.TO)