Market Outlook
Rebecca Teltscher, Portfolio Manager at Newhaven Asset Management, shares her outlook on Canadian dividend stocks. While interest rate cuts are often seen as a tool to stimulate economic growth and alleviate financial strain, they do not guarantee that an economy will avoid a recession. Over the past year, markets have been largely banking on central bank rate cuts to bolster economic activity, with further rallying at the prospect of an additional rate cut in December. However, recent market volatility, such as the reaction to a stronger-than-expected jobs report two weeks ago, highlighted the uncertainty around this approach.
Economic Recovery in Canada
In Canada, despite consistent rate reductions by the Bank of Canada over the past year, the broader economic recovery has remained sluggish. While lower interest rates can encourage borrowing and spending and may help consumers and businesses cope with financial pressures, they are not a cure-all for deeper structural economic challenges. Markets may be overly optimistic in believing that rate cuts alone will steer economies away from recession, as these measures do not address the underlying issues that could still lead to economic contraction.
Valuations and Investments
As a result of an additional rate cut expected in December, markets continue their upward trajectory with no signs of slowing by the end of the year. Valuations continue to be stretched, trading above long-term averages even in a slowing economy. We continue to be prudent and conservative with our investments and have been deploying cash at a much slower rate as we anticipate a market pullback.
Top Picks
Rebecca Teltscher’s top picks include Enbridge, K-Bro Linen, and Premium Brands Holdings.
Enbridge (ENB TSX)
Enbridge is a leading North American energy infrastructure company focusing on oil and gas transportation and distribution. Earlier in November, Enbridge announced a final investment decision on a Mainline Optimization Phase 1 project which will add capacity to the company’s Mainline network and Flanagan South Pipeline. This represents US$1.4 billion and will add 150,000 b/d of capacity by 2027. The project is backed by long-term take or pay contracts and carries very little regulatory/political risk. Enbridge has over $35 billion in secure capital projects for the next several years. Most of these projects are brownfield, or expansions of existing facilities which implies lower regulatory/political risk. Over the medium to long term, we expect Enbridge to grow its EBITDA approximately five per cent annually with dividend growth following at the same capacity. With a yield of 5.5 per cent, we feel Enbridge is a solid investment combining dividend yield and stable growth.
K-Bro Linen (KBL TSX)
K-Bro is the largest owner and operator of laundry and linen processing in Canada and one of the largest in the U.K. Their two main distribution channels are healthcare and hospitality. In addition to regular linen washing and drying services, their hospitality segment provides rental services while the healthcare segment provides on-site services for sterilization and surgical packs. They are an essential service provider in a niche market generating consistent and recurring cash flows. Earlier this year, K-Bro made a transformational acquisition in purchasing Star Mayan, a U.K. based laundry company with a focus on healthcare. While the equity issue to fund the purchase temporarily dilutes the shares, we believe the firm will achieve significant synergies over the next 24 months while maintaining organic growth of six per cent annually.
Premium Brands Holdings (PBH TSX)
Premium Brand’s is well-positioned to grow despite poor economic conditions. Over the past few years, Premium Brands has invested in significant U.S. capacity expansions in order to satisfy large customer needs. With the capacity buildout now complete, Premium Brands is at an inflection point and will benefit from significant organic growth while decreasing leverage in the near term.
Past Picks
Rebecca Teltscher’s past picks include Canadian Natural Resources, Savaria, and NFI Group.
Performance Review
- Canadian Natural Resources (CNQ TSX): Then $45.18, Now $48.50, Return: 7%, Total Return: 11%
- Savaria (SIS TSX): Then $20.26, Now $21.46, Return: 6%, Total Return: 9%
- NFI Group (NFI TSX): Then $14.43, Now $13.74, Return: -5%, Total Return: -5%
- Total Return Average: 5%
Conclusion
In conclusion, while the market outlook remains uncertain, with valuations stretched and the potential for a market pullback, there are still opportunities for solid investments in the Canadian dividend stock market. Companies like Enbridge, K-Bro Linen, and Premium Brands Holdings offer a combination of stable growth, dividend yield, and recurring cash flows, making them attractive picks for investors. It’s essential to remain prudent and conservative with investments, focusing on companies with strong fundamentals and growth potential, regardless of the overall market conditions. By doing so, investors can navigate the current market landscape and position themselves for long-term success.
