Ryan Bushell, president and portfolio manager, Newhaven Asset Management

FOCUS: Canadian dividend stocks 

MARKET OUTLOOK:

Markets continue to search for tangible signs of stability which are proving elusive. Economic data remains stubbornly strong despite every indication that a significant slowdown is imminent. Central banks remain at the forefront of investors’ minds as restrictive policies have dropped values significantly across asset classes. The magnitude of the change, from extremely loose to very restrictive, has caused an immediate valuation reset, however, credit impacts are only just beginning in my opinion. Absent an outright policy reversal (greater than two per cent drop in rates) in 2023, I believe that there will be more downside for broad market indexes and the economy in the next 12 months.

Newhaven portfolios have had a great year in 2023. We have seen aggregate dividend growth of greater than seven per cent and that does not include the increased interest we are now earning on our five 10 per cent cash positions. Our focus on infrastructure, specifically the infrastructure that supports the power grid, has performed admirably in 2022 and we feel the short, medium and long-term prospects remain solid for these investments. We did not abandon energy producers at the bottom in 2020 like many of our peers, instead, we added to positions in late 2020 and into 2021 when it became evident that society would eventually live with COVID-19. Similarly, we did not lose our discipline with regard to technology investments, whose valuations, exposed investors to risk of significant and permanent drawdowns in capital if or when the interest rate environment changed. Bonds have been a terrible risk and reward proposition for a decade and were absent from our portfolios as well. The result for our clients is flat performance so far this year in the worst multi-asset class valuation drawdown on record, evidence of our discipline to preserve capital above all else.

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TOP PICKS:

Altagas (ALA TSX)

 Altagas is one of our largest positions and has performed extremely well until recently when a messy quarter sent the shares down another 10 per cent from already depressed levels. The underappreciated part of the company is the distribution utilities, which have above-average growth ahead due to accelerated capital investment in its WGL utility following years of underinvestment prior to and during the regulatory delay from the merger. The LPG export business was the reason for the dislocation in third-quarter, however, this appears to be a one-off and the fundamentals for that business remain incredibly strong. Bottom line this is a combination of better-than-average midstream and utility growth with a multiple that trades below average for the midstream companies with little credit for the 60 per cent+ utility weighting. (Utilities trade at significantly higher multiples than midstream companies). Five to six per cent dividend growth for the foreseeable future and a 4.5 per cent current dividend yield.

TC Energy (TRP TSX)

TC Energy has been dogged by significant cost overruns with the Coastal Gaslink project which caused them to reinitiate its at-the-market (ATM) equity offering program in combination with an outright equity issue to fund growth in Mexico. Suffice it to say that recent equity issuance has placed an overhang on the shares, creating a buying opportunity. Longer-term, TC Energy is the most attractive natural gas infrastructure company in North America with an unparalleled network of pipelines and related infrastructure that will produce steady cash flows decades into the future. Although dividend growth has slowed to < four per cent annually, investors are well compensated by the six per cent current dividend yield to be patient while the company embarks on another cycle of capital deployment.

Brookfield Renewable Partners (BEP.UN TSX)

Brookfield Renewable’s shares have round-tripped ~25 per cent back to the January lows following a run north of $50 this summer. The recent acquisition of Westinghouse was a key development that has positive long-term implications in my view, despite a high price tag. I like to see the companies we own looking through the windshield and in this case acquiring an interest in the nuclear sector which seems to be in the process of a revival. When combined with Brookfield Renewable’s existing combination of attractive assets and expertise I have a hard time finding a better long-term investment for my clients. The four per cent dividend yield with ~ five per cent annual dividend growth is almost a bonus.