One fund manager sees opportunity in mid-size stocks that have the potential to grow their payouts, writes John Heinzl, reporter and columnist for Globe Investor.
April has been a rough month for Canadian investors, with the S&P/TSX composite index tumbling 2.1%. But Renato Anzovino, manager of the Heward Canadian Dividend Growth Fund, isn’t complaining.
“I’m one of those weird people that likes it when the markets go down,” Anzovino says. “I always keep a little cash on the side and wait for these [buying] opportunities.”
That approach has worked out well for the vice-president and portfolio manager with Montreal-based Heward Investment Management. For the three years ended March 31, his fund posted a compound annual return of 10.5%, before management fees, compared with about 4.9% for the S&P/TSX Total Return Index.
Heward Canadian Dividend Growth posts returns before fees because it’s a pooled fund—essentially a private mutual fund—available to clients who invest a minimum of $150,000 or otherwise qualify as “accredited investors.”
The management fee ranges from 1 to 2%, depending on the amount invested and whether the fund was purchased directly or through an advisor, he says. Keep that in mind if you’re comparing its returns with regular mutual funds, which report performance after fees.
Another important distinction is the fund’s size. With about $27 million in assets under management, it’s tiny relative to the big dividend mutual funds and ETFs that have hundreds of millions or billions in assets.
According to Anzovino, that’s an advantage because he can look for stocks that might fly under the radar of the big players. While the fund holds many of the usual dividend suspects—big banks, pipelines, and telecoms, for example—he also sees a lot of opportunity in mid-capitalization companies.
When choosing stocks, he looks for minimal debt, predictable earnings, an easily understandable business, a history of dividend increases, and growing cash flow to support future dividend hikes. He’s less concerned with the initial yield than with the dividend’s growth potential.
Here are six dividend stocks among his current holdings that he considers “hidden gems.” Remember to do your own due diligence before investing in any company.
Canadian Western Bank (Toronto: CWB)
Three-year dividend growth: 14.5%
Edmonton-based Canadian Western Bank trades at a similar valuation to the Big Five, but it has better growth potential thanks to its presence in the four western provinces, he says.
Despite strong dividend growth, the payout ratio is conservative. The stock is well off its February peak, and “now that it’s getting to the lower end of its valuation range, I have been adding to this position,” he says.
Constellation Software (Toronto: CSU)
Three-year dividend growth: 147%
Founded in 1995, Toronto-based Constellation provides software and services to thousands of customers—both commercial and government—in more than 30 countries.
“This is more of an acquisition story. They buy a lot of small mom-and-pop software companies and...make them a lot more efficient,” he says. Earnings and dividends have been growing rapidly and there’s more to come, he says.
Intact Financial (Toronto: IFC)
Three-year dividend growth: 8%
Intact sells home, auto, and business insurance through its Intact, belairdirect, Grey Power, BrokerLink, and Jevco subsidiaries. At less than ten times next year’s estimated earnings, the valuation is reasonable for a company that has good growth potential, he says.
Stantec (Toronto: STN)
Three-year dividend growth: n/a
After initiating a dividend in 2012, the engineering, architecture, and environmental sciences firm raised it by 10% in February. Stantec has exposure to the recovering US housing market, and its environmental services division is growing quickly, he says.
“The stock is at the higher end of its valuation range, so I wouldn’t be rushing to buy it today. But with this market, you might get a little sell-off, and then I would definitely consider adding to my position,” he says.
MacDonald Dettwiler (Toronto: MDA)
Three-year dividend growth: n/a
As a leader in information technology, aerospace, and satellites, MDA stands to capitalize on huge growth in global communications, says Anzovino, who also likes the stable revenue from its service contracts.
The company initiated a dividend in 2011 and raised it by 30% in 2012, and he expects another double-digit increase in the next year, or “I’ll be making a few phone calls.”
TransForce (Toronto: TFI)
Three-year dividend growth: 9.1%
TransForce owns a portfolio of trucking, package delivery, logistics, waste management, and energy services companies. The courier division—whose operating companies include Loomis, ICS, and Canpar—is TransForce’s fastest-growing business and is benefiting from e-commerce growth. “When you buy something online, you have to get it delivered.”
With a forward price-to-earnings multiple of less than 10, the stock recently pulled back and is “starting to create a nice buying opportunity.”