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Geoff Ho, CFA - Director, Canadian Equities, Portfolio Advisory Group
Global markets have had a phenomenal run over the past six months, with the S&P/TSX Composite Index posting capital appreciation of 22.5% and total return including dividends of 24.3%. It is not very often that share prices experience such dramatic and rapid advances as this was a rare confluence of severely oversold conditions, unprecedented fiscal and monetary policies aimed at stimulating economic activity, resilient and opportunistic emerging markets, and excess liquidity looking for a home. On a relative basis, dividend income has certainly been a small component of the overall gain during this recent period.
Taking a longer term perspective, however, we continue to highlight the importance of dividend income as a component of total investment return. For example, between 2001 to the present, the S&P/TSX Composite rose by 27.6% while the total return including dividends came in at 54.7%. Accordingly, while it is important to have exposure to cyclical stocks and growth companies to position for the next economic cycle, it is equally important to enhance returns with a core list of strong dividend paying stocks in the portfolio.
For this reason, we have updated the table of Toronto-listed companies that have increased dividends in either 2008 or 2009. We continue to believe that dividend increases are often a good indicator of management’s and board of directors’ confidence in the strength of the company’s capital position and operating outlook. Companies that have consistently done so are likely a good place to start when looking for survivors and leaders once economic growth resumes. Furthermore, these companies also serve as a good starting point for investors looking for dividend growth stories.
At this stage and at current valuations, here are some of the strategies and views that we would like to share pertaining to the list of companies that have increased dividends in 2008 and/or 2009:
- We remain constructive on the energy sector over a longer-term period. While high inventory levels and negative seasonality factors may cap near-term gains, we believe that supply-demand dynamics are extremely supportive for 2010 and beyond. Particularly for crude oil, low prices and lack of available credit over the past two years have limited the amount of exploration and production investment necessary to maintain and increase production when economic growth resumes and consumption increases. Combined with the International Energy Agency’s forecast that OPEC will operate near full capacity by 2013, we believe that unconventional resources such as oil sands in Canada will become evermore important in an environment of constrained supply growth and rising demand. Accordingly we believe that Canadian energy companies are well positioned to benefit from this secular shift. Two of the energy-related names that stand out from the attached list include Suncor Energy (SU) and Husky Energy (HSE). On the back of its acquisition of Petro-Canada, Suncor recently doubled its dividend to $0.40 per year. This remains one of our favourite names in the sector given its status as a leading integrated company with strong growth potential. The company is a holding within the Canadian Core Portfolio. With regards to Husky Energy, the company’s dividend policy has been volatile over the past twelve months but nonetheless, current valuations appear attractive on a relative and absolute basis. This represents another intriguing integrated name with a strong balance sheet and a 3.7% dividend yield.
- Despite current noise surrounding new wireless entrants and concerns over future growth trajectory, we continue to favour the telecom sector. The group offers a reliable income stream through dividends (with yields near their highest level in five years) and a rare combination that offers defensive characteristics and exposure to discretionary and business spending. All three Canadian telecom service providers appear on the list we compiled and our order of preference remains Rogers Communications (RCI.B), BCE (BCE), followed by Telus (T). The sector is trading anywhere between 3.3x to 5.3x trailing cash flows (equivalent to cash flow yield of 18% to 30%) and boasts very reasonable buyout ratios, thereby providing ample room for the possibility of higher dividends in the future.
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