Michael Sprung, president, Sprung Investment Management

FOCUS: Canadian large-cap stocks 

MARKET OUTLOOK:

Thus far in the first quarter of 2024, the financial markets have continued to forge ahead stretching the already excessive valuations higher. News on the inflation front has been mixed and the likelihood of rate cuts in the near term is anything but certain. Geopolitical tensions have advanced as the wars in the Middle East and Ukraine escalate. As the year moves ahead, more attention will be focused on the U.S. presidential elections where it is becoming apparent that the voters will be facing a choice between two less-than-stellar choices. All of this will serve to increase investors' uncertainty and volatility in the markets will remain high as investors react to conflicting signals. Attention to fundamentals is going to be more important to investors seeking to insulate their portfolios from downside risk.

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TOP PICKS:

Royal Bank of Canada (RY TSX)

The Royal Bank is Canada's largest bank by market capitalization and the second largest in terms of assets. Management has taken steps to put City National Bank (CNB) in the U.S. on a more solid and compliant footing enhancing governance and risk controls. CNB has returned to profitability in the most recent quarter and further progress is anticipated. The more recent purchase of HSBC Canada has expanded Royal's Canadian footprint and synergies should become evident over the next few years. The Royal Bank has a very strong capital position. At current prices, the stock is yielding 4.1 per cent.

Vermilion Energy (VET TSX)

Vermillion Energy has had its challenges over the past few years but now appears to be on the road to recovery and higher profitability. Going forward, VET intends to return 50 per cent of free cash flow to shareholders with the remainder going to deleverage the balance sheet. In the most recent quarter, net debt decreased by $164 million to $1.1 billion while $45 million was returned to shareholders in the form of $16 million in dividends and $29 million in share buybacks. The dividend has been increased by 20 per cent to $0.48 per year. The stock is trading at a compelling valuation of around 2.5 times cash flow with a dividend yield of 3.2 per cent. 

Telus (T TSX)

Telus is one of Canada's largest telecom companies with increasing prospects through Telus Health, Telus Agriculture and Consumer Goods and Telus International. The company's fibre build-out is near completion taking some pressure off of future capital expenditures and improving growth in free cash flow. While the operating environment has become more competitive with the Rogers-Shaw and Quebecor-Freedom Mobile transactions, management has a solid track record of sustaining and enhancing its competitive position. We anticipate that dividends will continue to increase over the next few years in the range of 7-10 per cent per annum. At current levels, the stock yields a very attractive 6.5 per cent.