Michael Simpson, senior vice-president at Sentry Investments
Focus: North American dividend stocks
MARKET OUTLOOK
The investing world today is obsessed with growth and safety of yield. Currently, there’s over $13 trillion of global bonds with a negative yield.
The G20 has come and passed and the U.S. and China still have tariffs on each other’s products. Canada is facing its own difficulties in China, with the export restrictions placed on canola, soybeans and most recently pork.
The economic data in the U.S has been mixed, but shows that GDP growth is slowing and inflation is low. In Canada, retail sales increased 0.1 per cent and wholesale prices increased 1.7 per cent in April. The Canadian unemployment rate declined to 5.4 per cent. If we get a trade deal, the economic cycle will continue. Failure to reach a trade deal will leader to lower business confidence and increase the risk of a slowdown.
The first half of 2019 was very robust in the markets, with the S&P/TSX index up 14.38 per cent, the S&P 500 up 17.35 per cent and the Dow up 14.03 per cent. Investors should expect lower returns in the second half of the year. It’s always desirable to invest in great companies, but there are times when the valuation becomes expensive and investors should be patient.
As the cycle ages, investors should look to companies with strong balance sheets and the ability to pay dividends and grow dividends. Summer will see both lower volumes and enhanced volatility. In October, Canadians will go the polls and there could be some additional volatility.
Invest for the long term, ignore the day-to-day noise and use volatility and irrational pricing to build positions in great companies.
TOP PICKS
WESTSHORE TERMINALS (WTE.TO)
Westshore operates the largest coal loading facility in the Western Hemisphere on Roberts Bank, B.C. The terminal operates on a throughput basis and is paid a handling charge by its customers when the coal is loaded on a ship.
The stock trades at 11 times earnings 8.7 times price to cash flow and has a free cash flow yield of 8.5 per cent. The company has no debt on its balance sheet. This is a strategic infrastructure asset and would be very difficult to replace or duplicate.
UNITEDHEALTH GROUP (UNH.N)
UnitedHealth owns and manages organized health systems in the U.S and internationally. The company provides employers products and resources to plan and administer employee benefit programs. It delivers medical benefits and services to people residing in all 50 states in the U.S. and more than 130 countries.
They have three main divisions: Optum Health, which helps manage chronic complex and behavioural health needs; Optum Insight, which provides analytics, research, consulting, technology and managed solutions to hospital physicians health plans and government agencies; and Optum Rx, which delivers value through a full spectrum of pharmacy care services. Optum Rx processed 1.3 billion drug prescriptions.
The company trades at 14.0 times earnings, has a five-year dividend growth rate of 25 per cent and generated return on equity of 24 per cent. It has a strong balance sheet, with debt to EBITDA at 1.1 times
ALIMENTATION COUCHE TARD (ATDb.TO)
Couche-Tard operates a network of convenience stores and gas stations in several countries. The company offers food products, fast food services, lottery tickets and fuel lubricants. Their main fuel brand is Circle K. Couche-Tard has an ambitious goal to double their business over the next five years. It has 16,000 stores around the world and over the next several years it will probably expand into Asia.
Couche-Tard is expected to generate a return on equity of 25 and a return on invested capital of 16 per cent. It trades at a reasonable valuation for its growth prospects and the strong cash flow it generates at 19-times 2020 earnings and 11-times enterprise value to EBITDA.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| WTE | Y | Y | Y |
| UNH | N | N | Y |
| ATDb | N | N | Y |
PAST PICKS: JULY 25, 2018
COMCAST (CMCSA.O)
- Then: $33.42
- Now: $43.32
- Return: 30%
- Total return: 32%
INDUSTRIAL ALLIANCE (IAG.TO)
- Then: $52.31
- Now: $53.18
- Return: 2%
- Total return: 5%
WESTSHORE TERMINALS (WTE.TO)
- Then: $24.09
- Now: $22.26
- Return: -8%
- Total return: -5%
Total return average: 11%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CMCSA | N | N | Y |
| IAG | N | N | Y |
| WTE | Y | Y | Y |
FUND PROFILE
Sentry Canadian Income Fund F
Performance as of: May 31, 2019
- 1 month: -2% fund, -3% index
- 1 year: 1.2% fund, 3.4% index
- 3 years: 3.5% fund, 7.6% index
INDEX: TSX. Returns are based on reinvested dividends, net of fees and annualized.
TOP 5 HOLDINGS
- BCE
- CVS Health
- Keyera
- Smart REIT
- Waste Connections
WEBSITE: sentry.ci.com
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