Michael Simpson, senior vice-president and portfolio manager at Sentry Investments
Focus: North American dividend stocks

MARKET OUTLOOK

Volatility returned with a vengeance in 2018. Its most widely followed measure, the VIX, averaged 16.6 for 2018, but closed on December at 25.4. December was the cruelest month for investors, with the S&P/TSX index down 5.41 per cent, the S&P 500 down 9.03 per cent and the Nasdaq down 9.38 per cent. From this upheaval sprung many bargains and we were putting money to work in December. For context, 2018 was a difficult year for many asset classes: gold was down 1.9 per cent, copper down 19.6 per cent and international equities down 11 per cent (as measured by the MSCI EAFE index).

Two big events will weigh on the market in the first quarter of 2019: the U.S. government shutdown, which will lead to a reduction in U.S. GDP in Q1/19, and if the U.S. reaches a trade deal with China in late February. Chinese exports fell 4.4 per cent in December, indicating that the Chinese economy is slowing and that they’re interested in a deal.

It’s our belief that the Bank of Canada is on hold for at least six months to determine what direction the economy is headed. They have to tread carefully, given that Canadian households are at record levels of debt.

Our outlook favours companies that can grow their dividends and participate in the late stages of the economic cycle. Because Canadian stocks underperformed the U.S., we feel there’s a better chance Canada will outperform the U.S. market.

Oil will be dominated by supply. The U.S. and Russia are the world’s largest producers. Saudi Arabia produces just over 10 per cent of world demand. With overall demand growing at 1 to 1.5 per cent yearly and with much of that growth being in the emerging markets, oil will trade in a range of US$50 to US$60 if too much supply comes out of the U.S. or Russia.

Lower oil prices benefits consumers, but hurt the major oil-producing regions. Western Canada has diversified since the last downturn and major projects such as LNG Canada will help buffer it if low oil prices persist.

Investors should be prepared for more volatility. Recall that volatility was kept artificially low by the Federal Reserve’s buying of U.S. government debt. Use volatility as your friend and buy when pricing gets irrational.

TOP PICKS

BECTON DICKINSON (BDX.N)

Becton Dickinson is a global medical technology company engaged primarily in the development, manufacture and sale of medical devices, instrument systems used by healthcare institutions labs and the pharmaceutical industry. They’re the oldest makers of syringes and needles in the U.S. and they purchased C.R. Bard in 2017, which allowed them to enter the higher-growth therapy-oriented device segment. Becton Dickinson trades at 16.7 times 2020 earnings and has a five-year dividend growth rate of 8.2 per cent. It also has a strong market share in syringes, catheters and medical dispensing sets.

More than 60 per cent of hospitals have the company’s devices. After their acquisition of C.R. Bard, net debt will be at three times by the end of 2019.

FORTIS (FTS.TO)

Fortis operates as a gas and electric distribution company. Fortis is diversified geographically, with operations in Canada, the U.S. and the Caribbean that span 17 jurisdictions. 92 per cent of revenue is from transmission and distribution assets. We see rate base growth of 6 to 7 per cent and a dividend payout ratio of 67 per cent. Fortis has 60 per cent of their earnings come from the U.S., trades at 16.3 times 2019 earnings per share (EPS) which is a discount to U.S. peers trading at 18 times EPS, it has a five-year dividend growth rate of 6.8 per cent and 45 years of dividend increases.

SCOTIABANK (BNS.TO)

Bank of Nova Scotia provides retail, corporate and investment banking services primarily in Canada and Latin America. Its main operating arm has nearly 1,000 branches and some 1,800 additional offices in countries throughout the world. Scotia has a strategy of growing in the Pacific Alliance countries of Mexico, Chile, Colombia and Peru. Scotia has a 16 per cent return on equity, trades at 9 times 2020 earnings and has been good at managing costs. They were active in 2018 and 2017, buying MD Fund Management, Jarisolwski Fraser, and banking assets in South America. They will integrate these recent purchases in 2019 and not make any large acquisitions.

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
BDX N N Y
FTS N N Y
BNS N N Y

 

PAST PICKS: DEC. 15, 2017

SUN LIFE FINANCIAL (SLF.TO)

  • Then: $52.24
  • Now: $47.99
  • Return: -8%
  • Total return: -5%

STANLEY BLACK AND DECKER (SWK.N)

  • Then: $165.70
  • Now: $129.99
  • Return: -22%
  • Total return: -20%

ALLERGAN (AGN.N)
Sold at an average price of $191.

  • Then: $171.68
  • Now: $154.63
  • Return:  -10%
  • Total return: -8%

Total return average: -11%

 

DISCLOSURE PERSONAL FAMILY PORTFOLIO/FUND
SLF  N N Y
SWK N N Y
AGN N N N

 

FUND PROFILE

Sentry Diversified Equity Fund Series F
Performance as of: December 31, 2018

  • 1 month: -5.57% fund, -5.40% index
  • 1 year: -6.31% fund, -8.90% index
  • 3 years: 3.68% fund, 6.37% index

INDEX: TSX Composite.
Returns are net of fees, distributions and annualized.

WEBSITE: www.sentry.ca
msimpson@sentry.ci.com