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

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MARKET OUTLOOK

In 2018, volatility and uncertainty has returned with a vengeance. The market has to grapple with the trajectory of interest rates, trade policy, and earnings and profit outlook. The VIX Index, a measure of volatility, has increased from 9.1 in early 2018 to its current level of approximately 21.

The U.S. with a stronger economic outlook may see three rate increases in total. But retail sales have been weaker of late and auto sales in the U.S declined 2 per cent in the month of February. Consumer confidence in the U.S. declined for the first time in 2018. The Canadian market has lagged the S&P 500 for several years and we think it could improve its performance vis-a-vis the U.S. market if we get a positive resolution to NAFTA and if there’s good news from Royal Dutch Shell regarding a $40 billion investment in an LNG plant in north west B.C.

The markets will be choppy and volatile. If you have invested in a quality company that pays a dividend and it has declined in price and this company has the ability to raise its dividend, our strategy would be to buy more shares of quality companies when they decline. A stock yielding 7 per cent has a payback period of approximately 10.2 years.

In Canada, we’re projecting two rate increases in 2018, as the Bank of Canada has to manage overinvestment in the housing sector and elevated levels of debt. We have seen an increase in some agricultural commodities (corn and soya beans). If we get some national infrastructure projects in Canada then growth will pick up. Overall, we see the U.S. having stronger economic growth in 2018 and favour those Canadian companies that can export into the U.S market.

Lastly, investors should stick with their plan and not be fazed by short-term fluctuations in the market. We are into the ninth year of an economic expansion and although we have had tax rate reduction in the U.S., we feel it’s more prudent to take a more defensive posture in our portfolios.

TOP PICKS

CVS HEALTH (CVS.N)

CVS is a drugstore chain with an integrated pharmacy benefit manager. It has 9,800 retail locations and 1,100 minute clinics. Last year, they filled or managed 2.5 billion prescriptions.

The stock has been weak because CVS has proposed to buy a large health insurer Aetna. This would be a horizontal acquisition if approved by the regulators. CVS trades at 9.5 times 2019 earnings and seven times 2019 cash flow. CVS yields 3.26 per cent. If they aren’t allowed to buy Aetna, they will launch a large share buyback we estimate at $6 billion.

INDUSTRIAL ALLIANCE (IAG.TO)

IAG is a Quebec-based Canadian Life and health insurer with a leading position in the individual insurance market. IAG also operates in the group life and health, individual annuity group pension and retail mutual fund segments. It has lagged the insurance group and trades at 9.3 times earnings and 1.2 times book value.

INTER PIPELINE (IPL.TO)

Inter Pipeline operates as a major petroleum transportation, bulk liquids storage and natural gas liquids extraction company. Inter is proposing to build a facility that converts propane into polypropylene, the building block for plastics (the PDH-PP plant will be called the Heartland Complex). Inter has a payout ratio of 75 per cent and trades at 10.5 P/AFFO and 11.5 times EV/EBITDA. It yields 7.68 per cent.

PAST PICKS: JAN. 20, 2017

GILDAN ACTIVEWEAR (GIL.TO)

• Then: $33.44
• Now: $36.57
• Return: 9.37%
• Total return: 11.25%

CVS HEALTH (CVS.N)

• Then: $81.56
• Now: $62.28
• Return: -23.63%
• Total return: -21.65%

INFORMATION SERVICES CORPORATION (ISV.TO)

• Then: $18.45
• Now: $17.61
• Return: -4.55%
• Total return: 0.79%

Total return average: -3.20%

FUND PROFILE

Sentry All Cap Income Series F

• 1 Month: -1.5% fund, -3.0% index
• 1 Year: 3.1% fund, 3.2% index
• 3 Year: 4.2% fund, 3.4% index

*Index: S&P/TSX.

TWITTER: @SentryInvest
WEBSITE: www.sentry.ca