Aug 18, 2016

Michael Simpson's Top Picks: August 18, 2016

BNN Bloomberg

Michael Simpson , BNN

Michael Simpson, Senior VP and Sr. Portfolio Manager, Sentry Investments

FOCUS: North American Dividend Stocks

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MARKET OUTLOOK:

With markets in the U.S. at all-time highs, and interest rates at all-time lows, investors may be perplexed. We expect the markets to take a pause. The markets had reached all-time highs on traditional (lower) summer volumes. With the resolution of the Brexit vote, investors will wait for the outcome of the U.S. election on November 8. With the polls showing that Hillary Clinton is in the lead, the markets are less apprehensive about political risk, but the markets will still continue to focus on the path of interest rates and earnings.

We continue to believe that the U.S. economy will show the most robust growth. The Canadian economy will offer lackluster growth unless oil and other commodities have a stronger recovery. The Canadian dollar will trade in a range of 0.75 to 0.80 cents. We do not believe it would be prudent for the Bank of Canada to further reduce rates given the asset appreciation in the Toronto and Vancouver Real Estate market.

With rates so low and no sign of inflation, we will continue to favour those companies that can increase their dividend. Investors should be prepared for more volatility in the autumn and take advantage of this volatility by adding to their positions.

Top Picks:

Brookfield Asset Management (BAMa.TO)

Brookfield is an asset management company that operates on a Global basis that specializes in hard assets, real estate, Renewable power, and infrastructure assets. BAM raises money to invest in hard assets and has closed on $27 billion of commitments. Has assets of $108 billion.

They invest along with their clients and target 12 per cent to 15 per cent returns. Real Assets offer higher yields than government bonds. Fees from Affiliate companies such as Brookfield Property Partners, Brookfield Infrastructure Partners, and Brookfield Business Partners flow to the Parent BAM.A. Has an FFO yield of 8 per cent and trades at about 11.8 Price/Cash flow

Transcontinental (TCLa.TO)

It is Canada’s largest commercial printer, printing newspapers, catalogues, flyers, and books. Has diversified into flexible packaging, trades at 8 times earnings and 5 times Price to Cash Flow. ROE of 17 per cent and Return on Invested Capital of 20.3 per cent generates stable cash flow 5 year dividend growth rate of under 10 per cent Debt to EBITDA of 0.9x. Has printing contracts with the Toronto Star, Globe and Mail, and Hearst Corporation.

Cigna Corporation (CI.N)

Cigna is a global healthcare organization and among the leading diversified players in the U.S. health insurance market. The company operates across 3 segments Global Health care, Global Supplemental Benefits, and Group Disability and Life. The majority of Cigna’s revenue comes from the Global Healthcare segment. Cigna operates in 30 countries and has more than 93 million customer relationships. Anthem has made an offer to buy Cigna for $103.40 + 0.5152 Anthem shares. That equates to about $170.00. The Department of Justice on July 21 has sued to block the Anthem Cigna deal and another deal (Aetna proposed buy of Humana).

Our view is that the deal will not go through. Cigna will then receive a 1.85Billion break fee ($1.25B after tax) Break fee is 7.21 per share. Cigna currently has $2.75B of cash. It trades at about 14 times 2017 earnings. Re-purchased 685 million of stock in 2015.