Full episode: Market Call for Wednesday, February 27, 2019
Ryan Bushell, president of Newhaven Asset Management
Focus: Large cap Canadian dividend stocks
2019 has started with a bang! It appears the selling in December into a void of buyers looking to stumble to year end left the market far too cheap relative to the underlying fundamentals which are decent at present. The TSX is up nearly 13 per cent year-to-date and is outperforming the S&P 500 by four per cent on a constant currency basis. Global growth fears from Q4 have seemingly been cured by the prospect of a trade truce between the United States and China. I am of the view that things are not as bad as markets discounted in Q4, but they aren’t good enough to push markets too much higher from here either. The Canadian market still has pockets of value with energy, financials, select industrials and it seems to finally be benefiting from a flow of funds back into the country after years of apathy towards Canadian equities. I believe both oil prices and Canadian housing will hold up for the duration of 2019 and remain optimistic about the prospect for 2019 to look similar to 2016 when the TSX gained over 20 per cent- but there is still a long way to go. Regardless, for my clients I continue to own a conservative portfolio of dividend paying names with an overall yield of 4.5 per cent at present.
Given the dividend yield represents two-thirds of my long-term total return assumption of seven per cent for equities I feel confident owning this defensive portfolio for clients to sustain their lifestyles and meet their goals. Recently I have been raising a little bit of cash and allowing dividends to accumulate given the pace of the recent run and my clients were well positioned at the bottom in December.
CANADIAN NATURAL RESOURCES (CNQ.TO)
Most recently purchased at $35.
Following a difficult Q4 where both oil prices and differentials hurt Canadian Natural and other major Canadian producers, there is light on the horizon (pun intended) again. I expect a big dividend increase out of CNQ when they report next week and in long-term I expect them to continue to produce significant free cash to increase the dividend, buy back shares and pay down debt as the years go by. Additionally, as Canada’s largest gas producer they have untapped upside to natural gas pricing improvements on the back of major infrastructure projects underway including LNG Canada. Oil prices will continue to be volatile but CNQ is well positioned to ride out the volatility with a long-term view. That said, I sincerely hope they pass on Devon’s oil sands assets currently on the market as they have enough debt to chew on at present.
NORTHLAND POWER (NPI.TO)
Most recently purchased at $24.
Northland Power continues to make steady development progress on offshore wind projects in Asia following a successful campaign in the North Sea over the past decade. The final North Sea wind farm is set to come fully into service in late 2019. Given their payout ratio is less than 65 per cent of free cash there is a lot of room for the company to continue to fund growth without dilution and increase dividends down the road. While the shares have performed well over the past six months they still remain below the levels seen when they entered a strategic review three years ago. Investors get a 4.8 per cent dividend yield while they wait for the shares to reflect their true valuation which I believe is north of $30.
WESTERN FOREST PRODUCTS (WEF.TO)
Most recently purchased at $1.83.
This is a new holding for my clients that I purchased last fall. Although this is a smaller company and not really in line with my infrastructure focus, it shows the ability for our clients to own smaller dividend payers with good underlying businesses. In this case Western Forest Products has no debt, a 4.9 per cent dividend yield and a strong fundamental business producing dimensional lumber for specialized construction. Recently, clouds around tariffs and U.S. housing starts have clouded the picture for investors and thus the company is under appreciated at current levels given it has small exposure to the U.S. housing market (less than 15 per cent). There is good support around these levels and with a sufficient time horizon and I think investors will do well owning this company. I just bought more stock today for clients ahead of the ex-dividend date tomorrow.
PAST PICKS: MARCH 12, 2018
- Then: $20.67
- Now: $12.88
- Return: -38%
- Total return: -36%
- Then: $41.94
- Now: $48.80
- Return: 16%
- Total return: 24%
CANADIAN NATURAL RESOURCES (CNQ.TO)
- Then: $38.63
- Now: $37.81
- Return: -2%
- Total return: 1%
Total return average: -4%