Happy Canada Day!
When it comes to stock or fund investing, three of the most popular themes or ideas for Canadian investors are banks, energy stocks, and dividends. The three may well be connected, as a Janus Henderson report finds that Canada had had the fastest dividend growth among major developed economies in 2018, up 11.8% on an underlying basis, with Canadian oils making the largest contribution to growth, followed by banks.
The first quarter of 2019 was no different. A weaker exchange rate held back headline growth, but dividends still reached a record USD 10.7 billion, up 12% in underlying terms, the third-consecutive quarter of double-digit growth, the Janus Henderson report read, adding that higher oil prices and the acquisition of Spectra Energy helped Enbridge (ENB) become Canada’s largest payer for the first time. It increased its total payout by a third.
Here is a list of the top 10 dividend payouts in the first quarter of 2019:
|
Company |
USD Billion |
|
Enbridge |
1.12 |
|
Royal Bank of Canada |
1.07 |
|
Toronto Dominion Bank |
0.94 |
|
Bank of Nova Scotia |
0.79 |
|
BCE |
0.51 |
|
Suncor Energy |
0.50 |
|
Bank of Montreal |
0.49 |
|
TransCanada |
0.48 |
|
Canadian Imperial Bank of Commerce |
0.45 |
|
Manulife Financial |
0.37 |
|
Source: Janus Henderson |
|
All of that is the past. What can we expect for the rest of 2019?
What next for the rest of 2019?
“We continue to see Canadian dividend growth in the mid-single digits for 2019 with earnings growth around the same level,” said Patrick Reddy, manager of the Gold-rated Leith Wheeler Canadian Dividend Series F. He said that he sees 7% dividend growth and 8% earnings growth for the fund, slightly above that of the Toronto Stock Exchange.
Reddy’s focus is on businesses that can deliver an attractive total return, meaning both capital appreciation and yield, that can grow their earnings while also growing dividends. He also keeps an eye on valuations.
“The main risk to our forecast remains Canadian economic growth – how much will it be impacted by trade issues with China and a slowing US economy? Also, after a weak 1H19 for the Canadian dollar, the currency seems to be appreciating – what will it do in the second half of 2019, and if it continues to strengthen, will it impact economic growth and does this lead the Bank of Canada to cut rates?,” Reddy asks.
For now, though, he sees the most value in financials and cyclicals.
Stocks to consider
Reddy’s top pick for dividend growth is Canadian Natural Resources (CNQ).
The largest oil and gas producer in Canada, Canadian Natural Resources trades at 11 times forward P/E and has a low teens free cash flow yield, a 4.1% dividend yield, and a 19-year history of dividend increases, Reddy says, adding that the last dividend increase was 12% in the first quarter of 2019. “It’s also returning capital to shareholders with share buybacks - 3% in 2018 and I expect 3% in 2019,” Reddy says.
Morningstar senior equity analyst Joe Gemino pegs the stock’s fair value estimate at USD 45 and says, “The combination of intensive capital requirements, low price realizations, and the uncertainty associated with future projects hampers Canadian Natural's ability to generate sustainable excess returns on invested capital. As such, we project that the firm will not achieve sustainable excess returns on capital within five years and conclude that it does not possess an economic moat.”
Reddy’s second pick is insurance firm Great-West Lifeco Inc (GWO). With a 14% return on equity, 10 times forward P/E, and a 5.5% dividend yield, Reddy expects the insurer to have mid-single-digit per year earnings per share and dividend growth over the next three years. “After buying back a sizable amount of stock in 2019, the company still has the financial flexibility to make acquisitions if they find the right asset or company,” Reddy points out.
Morningstar senior equity analyst Bill Horn says that “Great-West has distinguished itself by consistently earning above-average returns, with returns on equity averaging nearly 14% over the past five years.” He increased his fair value estimate to USD 32.
Reddy’s third pick is one of the world’s largest Caterpillar dealers, Finning International (FTT). “We see mid-single digit EPS and dividend growth per annum over the next three years,” Reddy says, adding that the stock has 13 times forward P/E, with a 3.5% dividend yield. “It continues to generate healthy levels of FCF, which it is using to buy back stock and increase financial flexibility. The approval of the LNG Canada project in late 2018 as well as the TransMountain pipeline expansion recently will be positive for its business going forward,” he added.
Morningstar analysts do not cover Finning International.
