**August 7th Issue of The JMRD Market Observer**
In This Week’s JMRD Market Observer
- NBF Asset Allocation Strategy: Summer Lull
- NBF Dividend All-Stars: H2 2015 Update
- JMRD Basket Corner
- Retirement Corner
- Week at a Glance
- Reads of the week
- Economic Calendar
- Earnings Reports
NBF Asset Allocation Strategy: Summer Lull
Supported by its Consumer (discretionary: + 4.8 %, staples: +5.5%) and Utilities (+ 6.0 %) sectors, the S&P 500 performed well, posting a return of 2.1 %. North of the border, the S&P/TSX lost 0.3 %, unable to overcome the drag from its heavy commodity weighting – Materials and Energy fell by 14.5 % and 6.5% respectively.
The yield for U.S. 10-year treasuries yield fell by 0.12 % to reach 2.21 % while Canadian 10-year bond yields dropped 0.25% to 1.44%. The 0.25% target rate cut implemented by the Bank of Canada (BoC) is the main reason the Canadian dollar weakened by 6 cents this month compared to its U.S. counterpart.
Asset allocation strategy
- While acknowledging that lower rates may also exacerbate record household debt levels, the BoC remains confident that the weaker Canadian dollar, its effect on exports and ongoing U.S. growth will help get the economy back on track by the end of the year.
- Fed Chair Janet Yellen expects that a rate increase will be appropriate at some point later this year if conditions continue to improve at the current pace.
- We feel that the Fed’s transparency with regards to normalization and the expected very gradual pace of eventual rate increases will not impact the performance of equities in a meaningful way.
- We remain underweight government bonds for the short-term, but would see 10-year yields rising to 3% as a buying opportunity.
(Full report attached)
NBF Dividend All-Stars: H2/15 Portfolio Update
National Bank analysts collectively cover over 300 TSX-listed equities, of which more than half offer investors income in the form of dividends or distributions. To help navigate this universe we assembled a portfolio that contains 28 of NBF’s favourite yield ideas, the group spanning a variety of industries, sizes and liquidity, but sharing three investment criteria:
- Dividend/distribution yield north of ~3.5%;
- Extremely low risk of the current payout proving unsustainable; and,
- Positive analyst bias regarding the prospects for share/unit price.
- NBF’s Dividend All-Stars portfolio updated Jan. 26, 2015 has returned income of 2.9% and realized an average price return of -9.7% for its first six months of 2015, this -6.8% total return below the S&P/TSX composite’s -3.9% for the same period (1.5% income & -5.4% price for the index). Six of the 26 equities from the January 2015 list outpaced the benchmark. 21 delivered negative total returns H1 and 10 posted a total return less than -10%, which we note consists mostly of oil and gas
- Five All-Stars increased dividends since the last publication by an average of ~6%: AltaGas +8.5%, Bank of Montreal +2.5%, Gibson Energy +6.7%, Innergex Renewable Energy +3.3% and Premium Brands +10.4%. To date there have been 40 dividend/distribution increases amongst the 66 companies that have been named NBF Dividend All-Stars, versus just two cuts.
- There are five additions this update (Canadian Energy Services, CIBC, Dream Global REIT, Exchange Income Corp. and National Bank) and three subtractions (Chemtrade Logistics, EnerCare and MCAN). With these adjustments the basket of equities increases to 28.
- The average yield of an All-Star remains elevated at 6.3%, but payout is easily funded for each, with most having the capacity to grow dividends/distributions over time.
For investors seeking stable, predictable, elevated income and exposure to high quality companies, the following portfolio reflects NBF’s favourite ideas.
(Full report attached)
Enbridge Inc. – U.S. drop down strategy moves to “selective” basis / TransCanada Corporation: Free call option on over $30 bln of growth potential
We have included the quarterly updates from Enbridge and TransCanada, the largest pipeline companies in Canada. Each company is undergoing significant changes as they will be key participants in North America’s continued expansion of energy infrastructure assets.
JMRD Basket Corner
Diversified Income & Growth Basket
Keyera (KEY) – Keyera reported Adjusted Funds From Operations per share of $0.55 versus NBF’s estimate of $0.52 (Street: $0.50) on adjusted EBITDA of $157M versus NBF estimate of $158 million (Street: $148 mln). Elsewhere, the company announced a 9% dividend increase to $1.50/share annually (from $1.38) commencing with the August payment versus NBF’s next forecast dividend increase of 10% modeled in for Q2 2016. Together with the 7% increase announced in conjunction with its Q4 2014 results, Keyera has increased its dividend 16% year-to-date. (full report attached) Keyera Corp.
WSP Global (WSP) – Following Q2 results announced Wednesday morning, WSP moved higher by 7% to a new year high. “WSP Global Inc climbs to the top of the engineering space: ‘The name to own'”
Whitecap Resources (WCP) – After market close on Wednesday, Whitecap reported operating and financial results for the second quarter. In NBF’s view, the event could be viewed positively by the Street, given: 1) the sizable production and cash flow beat (6% and 11% above consensus, respectively); and 2) the increase to 2015 production guidance (with no change to capital expenditures). The company continues to make positive advancements in the field (as evidenced by improving operating and well costs) and sustainability measures continue to stack up favourably amongst peers. Whitecap traded higher by 7% on Thursday, following the results. Whitecap Resources Inc.
All Cap Basket
CCL Industries (CCL.b) – Geoffrey Martin, President & Chief Executive Officer, CCL Industries joined BNN’s The Street for a look at the company’s latest quarter – and how the company is expecting weaker sales for the back to school period -especially for its Avery division.
Colliers International (CIG) – Colliers moved higher by 13% on Wednesday/Thursday following their announcement of Q2 results. “Colliers International Reports Strong Financial Results for Inaugural Second Quarter” Revenue Up 11% (22% in Local Currency); Adjusted EBITDA Up 30% (46% in Local Currency) and Adjusted EPS Up 32%
Fiera Capital (FSZ) – Fiera announced Q2 results this week, along with an 8% dividend increase. NBF analyst Shubha Khan commented that “Fiera remains well positioned to drive superior growth given its access to bank-owned distribution, its U.S. platform, solid fund performance and additional acquisitions. Moreover, we expect comparatively robust investment returns as FSZ has a significantly higher mix of fixed income funds, which have benefited from the “flight-to-safety” trade. (full report attached) Fiera Capital Corp.
1) “Why the issue of inflation is critical for retirement income planning” (Globe and Mail)
2) “A simple method to help plan your legacy capital for the kids” (Globe and Mail)
Week at a Glance
(See attached Week at a Glance report)
Reads of the Week
- Canada: Employment rose modestly in July Canada’s July employment report looks fine on the surface but a closer look reveals some weaknesses. The overall increase was entirely due to self-employment with paid employment down a massive 34K, the worst drop in a year. Full time employment was also down sharply but note that the pullback follow an outsized gain of 65K in June. Also disappointing are declines in cyclical sectors like manufacturing and construction. Western provinces continue to struggle in light of the oil shock. The picture is better when looking at the more-reliable longer-term trend. In fact, year-to-date job gains average a decent 15K/month, with Central Canada and British Columbia offsetting weakness on the oil patch (Alberta, Saskatchewan, and Newfoundland/Labrador). So far this year, public sector related jobs represents 2/3 of job gains while goods-producing industries are posting a cumulative loss of 50K (middle chart). Despite this month’s drop, total hours worked remain in an upward trend (bottom chart) which support our view that Canada is set for a rebound in economic activity as soon as Q3. (full note attached) Economic News
- “Sometimes the old ways are not always the best for investors” (Financial Post)
Monday Aug 10th – None
Tuesday Aug 11th – Canadian Housing Starts, U.S. Nonfarm Productivity
Wednesday Aug 12th – None
Thursday Aug 13th – Canadian New Housing Price Index, U.S. Initial Jobless Claims, U.S. Business Inventories
Friday Aug 14th – Canadian Manufacturing Sales, U.S. Industrial Production MoM
Monday Aug 10th – Vermilion Energy, Canadian Apartment Properties REIT, Enercare
Tuesday Aug 11th – Pason Systems, Cisco Systems
Wednesday Aug 12th – Air Canada, Element Financial, Metro Inc, Raging River Exploration
Thursday Aug 13th – Crescent Point Energy, Canadian Tire Corp, Badger Daylighting, Just Energy Group, Cineplex Inc.
Friday Aug 14th – None
Have a good weekend!