MARKET OUTLOOK:

Fall is traditionally a difficult time for equities and I am expecting volatility in September and October.  The pandemic continues and we are likely to see increased viral spread as we enter the seasonally difficult period in the Northern Hemisphere. 

Commodities have corrected sharply recently as a draconian Chinese lockdown cooled marginal demand quickly in July and growth concerns could intensify this fall if stimulus wanes and/or viral spread intensifies. 

I remain positive on equities broadly due to central bank policies and the Canadian market specifically in the medium to longer term. Canada supplies much of what the world is demanding and our market valuation is inexpensive on a relative basis. The Canadian dividend payers in our portfolio have an average dividend yield that is nearly 3x the benchmark 10-year Government of Canada bond yield while also having the ability to benefit from inflation should it occur given the ability to pass through price increases. 

I am looking to add to positions for clients this fall with cash accumulated from dividends in the first 8 months the year and the three takeovers we expect to close during the balance of 2021 (Inter Pipeline, Shaw Communications and WPT Industrial REIT). Going forward, I believe the path of the pandemic and related policy direction from governments and central banks will be the key factors determining the path of investment performance.

TOP PICKS:

TC Energy (TRP TSX) 
(last bought $59)
With Keystone XL in the past, TC Energy is a more stable, utility-like company with a focus on natural gas transmission. The stock has performed poorly year-over-year, down around 4 per cent including dividends. The dividend yield is currently approaching 6 per cent and will continue to grow steadily as they execute fairly boring bolt-on expansions/projects. 

Freehold Royalties (FRU TSX) 
(last bought $8.25)
Freehold Royalties has more than doubled their dividend since the beginning of the year and has nearly reclaimed its pre-COVID dividend level ($0.05/share/month currently versus $0.0525/share/month).  The dividend yield is over 7 per cent at present and the company is expanding rapidly in the United States. The company has a strong commitment to their dividend and has paid over $32/share in dividends/distributions in its 24-year history despite a couple of crisis driven temporary reductions.  With a new management team and a relatively small base from which to grow, I like the setup for this company in the years to come.

Shaw Communications (SJR.B TSX) 
(last bought $36.50)
I continue to believe the transaction with Rogers has a very high likelihood of closing within the next 6 months. Given this view, Shaw Communications shares represent compelling value in an uncertain market at present with a 20 per cent or more annualized return to the $40.50 takeover price depending on the timing of the deal closing. Quebecor purchased significant national spectrum in the most recent auction while the incumbents spent more than expected, both of which set up nicely for an approval.  Rogers stands ready to divest Shaw’s wireless assets in whole or in part adding an additional level of flexibility for the regulator.

PAST PICKS: August 18, 2020

Algonquin Power (AQN TSX)

• Then: $18.20
• Now: $19.79
• Return: 9%
• Total Return: 13%

Aecon (ARE TSX)

• Then: $14.65
• Now: $20.74
• Return: 42%
• Total Return: 46%

Telus (T TSX)

• Then: $24.22
• Now: $28.89
• Return: 19%
• Total Return: 24%

Total Return Average: 28%