Ryan Bushell, president and portfolio manager, Newhaven Asset Management

FOCUS: Canadian dividend stocks 

MARKET OUTLOOK:

Overall, despite some significant turmoil in financial markets, the first quarter ended on a relatively stable and positive note. The banking crisis has been contained, at least temporarily, and markets seem satisfied that the resulting restrictive lending environment will allow central banks to eventually reduce interest rates later this year providing a boost to stock prices. We disagree with the consensus view as it relates to where equities are priced, as we believe that there would need to be a significant downside in the economy, and thus stock markets, to warrant interest rate cuts.

 In short, we do not believe we will see materially lower rates without materially lower share prices. Additionally, the potential for a negative surprise in areas like real estate, private equity, hedge funds and other leveraged investment strategies cannot be ruled out, nor can the prospect of it spreading to the broader financial system (contagion). As such, we will remain cautiously invested while this extended period of unsettled market conditions passes by. We have capital to deploy in the event of a market downturn and we can be confident that our interest and dividend payments will arrive at the regularly scheduled intervals.

 We do not own “the market” and we remain confident in our core positioning. This is driven by the demand for all forms of energy on this continent and abroad, as well as the infrastructure investment required to produce, process, transport, and deliver energy for domestic use and export. We strongly feel that the best combination of risk and reward lies in dividend-paying infrastructure investments at present.

 Going forward, everything hinges on the path of interest rates and inflation. Central banks may be forced to decouple interest rate policy from inflation given ongoing banking stress, adding complexity given they are currently fighting two fires with one hose (interest rates). Investors have been conditioned to purchase long-duration assets (tech shares, long bonds) whenever economic news turned sour in recent memory as bad news has consistently resulted in a drop in interest rates and a boost to asset prices (stocks, bonds, real estate). This time it is shaping up to be different as a decade of such behaviour has left long-duration assets overvalued at a time when inflation leaves little room to drop rates without inflationary consequences.   

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TOP PICKS:

Pembina Pipeline (PPL TSX)

Pembina Pipeline is mispriced in our opinion given the go-forward outlook for Western Canadian natural gas volumes over the next decade or more. With the completion of LNG Canada, phase one in late 2025 to early 2026, natural gas volumes will increase throughout the basin where Pembina is a dominant infrastructure provider. Additionally, opportunities to develop a floating LNG facility alongside First Nations partners and potentially purchase the Transmountain system from the federal government provide significant transformative growth optionality for the company. In the meantime, you collect a nearly six per cent dividend yield with consistent growth at a share price in the middle of its 52-week range.

Altagas (ALA TSX)

 Keeping with the theme of Western Canadian natural gas infrastructure, Altagas is also well off 52-week highs and has significant volume exposure to LNG Canada through its gas processing plants in northeast British Columbia. Counterparties have improved dramatically and LPG export volumes are poised to grow as well. This says nothing about its very stable us utility business which provides an above-average return on equity with a well below-average multiple. Finally, Altagas will be able to sell its interest in the Mountain Valley Pipeline over the next 12-18 months providing further improvement to the balance sheet. The company continues to be misunderstood so investors can purchase today near 52-week lows at a nearly five per cent dividend yield with mid-single-digit dividend growth and very little downside risk while value is surfaced in the years to come.

Aecon (ARE TSX)

 Aecon was our best performer in the first quarter, up 50 per cent but there is still room for the company to run. The company recently sold its low-margin road-building division and a minority interest in the Bermuda Airport at well above carrying value and still has the prospect of significant recoveries on fixed price contracts written down last year that were the source of the downside in 2022. Additionally, the company has a rapidly growing backlog including a multi-year project with Metrolinx and the new Small Modular Reactor (SMR) project award at Darlington. The shares currently yield more than 5.5 per cent and fundamentals should hold up well or even be helped by a downturn (less labour inflation/tightness). We topped up our holdings below $9 in late December but there is still upside from these levels on a medium to long-term basis and we are happily purchasing shares with new client capital that is flowing into our firm.

PAST PICSK: March 24, 2022

CAE (CAE TSX)

• Then: $31.94
• Now: $32.09
• Return: 0.5%
• Total Return: 0.5%

Enbridge (ENB TSX)

• Then: $56.91
• Now: $52.73
• Return: -7%
• Total Return: -1%

K-Bro Linen (KBL TSX)

• Then: $32.15
• Now: $28.29
• Return: -12%
• Total Return: -8%

Total Return Average: -3%