Ryan Bushell’s Top Picks
Ryan Bushell, president and portfolio manager, Newhaven Asset Management
FOCUS: Canadian dividend stocks
The trade-in August has turned more cautious as U.S. 10-year Treasury yields have spiked higher, taking out the previous high from last October. Despite a reasonably positive earnings season, the market has struggled so far in August under the weight of an additional rate hike and four per cent or higher yields across the U.S. Treasury curve.
The positive correlation between stocks and bonds (negative correlation with yields) that has persisted for more than two years has reasserted itself recently. We believe that there remains a strong possibility of a significant market correction in the next 12 months and that a recession is imminent. We have maintained that higher borrowing costs will eventually stifle economic growth and that inflation is more embedded than consensus beliefs.
Recent labour settlements with truck drivers in the U.S. are evidence that inflation expectations are becoming firmly embedded, while energy prices are no longer in deflationary territory year-over-year. Caution is warranted and cash is an attractive asset yielding around five per cent with optionality to deploy if and when lower share prices materialize.
That said, there are pockets of attractive dividend yields in the Canadian market that we have been picking away at recently, especially telecom and energy infrastructure. We have already seen a soft landing on an interim basis, but as we rightly pointed out earlier this year, we did not get lower rates as well. Current interest rates are not sustainable for the consumer or the government but will only drop if and when we see much tougher economic conditions. The “goldilocks” scenario that consensus seems to favour at present (lower rates, continued growth) is a relic of the last decade and we believe it is a mirage.
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We continue to accumulate pipeline companies with six to eight per cent dividend yields. Pembina is in excellent shape with a strong balance sheet and gas volumes set to markedly increase in the back half of this decade due to the startup of LNG Canada next year. The overhang of a Transmountain purchase is overdone in our view. We believe in CEO Scott Burrows’ ability to make careful and accretive acquisition decisions given his track record.
Brookfield Infrastructure Partners has corrected recently along with the utility space, presumably in the face of higher interest rates. While the company has some utility-like assets, other businesses have positive correlations with inflation and interest rates and the Enercare business should be performing quite well with recent generous subsidies for home energy upgrades offered by the federal government. Additionally, the partnership units trade at around a 20 per cent discount to the corporate shares, a discount that can be fully taken advantage of by Canadian investors with registered accounts. A 4.79 per cent yield is as high as it has been in the last five years with the exception of March 2020.
Telus shares are sitting at the highest dividend yield (6.3 per cent) in nearly 20 years, higher than both the COVID-19 and great recession bottoms in 2020 and 2009 respectively. Clearly, the recent rise in interest rates justifies a lower multiple, but this is overdone in our opinion. Ongoing immigration to Canada allows for robust subscriber loading with minimal capex. The company has largely completed its Fibre To The Home (FTTH) buildout and is generating sufficient cash to pay down debt and increase the dividend. Long-term investors can lock in a solid multi-decade annualized total return at these levels.
PAST PICKS: November 11, 2022
Altagas (ALA TSX)
- Then: $23.80
- Now: $26.25
- Return: 10%
- Total Return: 14%
TC Energy (TRP TSX)
- Then: $64.02
- Now: $48.42
- Return: -24%
- Total Return: -20%
Brookfield Renewable Partners (BEP.UN TSX)
- Then: $40.30
- Now: $35.30
- Return: -12%
- Total Return: -9%
Total Return Average: -5%