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A Rate-Resistant Portfolio of Canadian Stocks
05/04/2018 5:00 am EST
Gordon Pape is an industry-leading expert on investing in Canada. Here, the editor of Internet Weal Builder highlights a model portfolio of Canada-based stocks that are positioned to "buck the trend" of rising interest rates.
Rising interest rates are generally bad news for dividend-paying stocks. As returns on safe government bonds rise, investors tend to shift more money into fixed-income assets, depressing the price of interest-sensitive securities.
Of course, this is nothing new to our readers. I have dealt with the implications of rising rates on several occasions, so by now, everyone should know what to expect.
However, it is worth noting that some of our recommendations have resisted the downward pressures and have held up quite well so far this year. Here are some of them.
Morneau Sheppell (TSX: MSI, OTC: MSIXF)
The shares of this human resources consulting company have been moving steadily higher for several months and are currently trading near their all-time high. The company reported solid financial results for 2017, with an increase of 6.6% in revenue, to $631.2 million, and a profit gain of 33%, to $34.6 million.
Free cash flow increased by $1.4 million, to $72.3 million. The only negative was that the dividend is unchanged at $0.065 per month ($0.78 per year). The increase in the share price means the yield is down to 3.1%.
Premium Brands (TSX: PBH, OTC: PRBZF)
This food services company keeps rocketing higher. At the start of this year, the shares were trading in the $100 range. Earlier this month they topped $120, and they don't seem to be slowing down.
The company posted a record year in 2017 with revenue of $2.2 billion and earnings of $80.5 million ($2.70 per share) compared with $68.8 million ($2.39 per share) in 2016. The company passed some of those gains on to shareholders by increasing the quarterly dividend by 13.1%, to $0.475 per share ($1.90 annually) from $0.420 per share ($1.68 annually).
The company's deal to provide sandwiches to Starbucks is one of the main drivers of this success story, but the firm also continues to grow by acquisition with four new transactions recently announced: Concord Premium Meats; The Meat Factory; Country Prime Meats; and Frandon Seafood.
AirBoss of America (TSX: BOS, OTC: ABSSF)
After bouncing along at around the $10 level for the first couple of months of this year, this stock took off and hit a new 52-week high last week. The impetus was a year-end financial report that was very positive plus a dividend increase of 9.8%.
For the fourth quarter, sales were $74.2 million compared with $63 million the year before (the company reports in U.S. dollars). Net income was $3.8 million ($0.16 per share, fully diluted), up from $1.4 million ($0.06 per share) in 2016. Full-year net income was down slightly, but investors were encouraged by the final quarter results, the dividend hike, and strong balance sheet.
ZCL Composites (TSX: ZCL, OTC: ZCLCF)
This is another company that is trending higher this year thanks to decent year-end results and a dividend increase. This manufacturer of underground fibreglass storage tanks reported record revenue of $188.2 million for 2017.
Net income from continuing operations was down slightly to $18.4 million ($0.59 per share), but that did not stop the directors from approving a 13% dividend hike, to $0.135 per quarter ($0.54 per year). The stock yields 4.5% at the current price.
Student Transportation (TSX, NDQ: STB)
The share price spiked sharply in late February after the company announced it has agreed to a takeover by an investor group headed by Quebec's Caisse de dépôt and Ullico Inc. The offer represented a 27% premium to the average trading price of the stock over the previous 20 days. The deal is expected to close by the end of this quarter; in the meantime, the stock continues to trade.
Norbord Inc. (TSX, NYSE: OSB). These are good times for the U.S. housing industry, and this manufacturer of oriented strand board (OSB) is benefitting as a result. The company reported record production at nine of its 15 mills in 2017, and profits more than doubled, to $4.49 per share (figures in U.S. dollars). The company also reported strong demand in all of its core markets entering 2018. The quarterly dividend is now up to $0.60 per share ($2.40 per year) to yield 4.7%.
Valero Energy Partners (NYSE: VLO). The shares of this big U.S. refiner took a dip in late January but have since moved steadily higher since the release of the 2017 financial results. The company reported net income of $64 million for the fourth quarter and $268 million for the full year (figures in U.S. dollars).
Both amounts were significantly higher than in 2016. The quarterly dividend was increased to $0.80 per share ($3.20 per year) effective with the February payment. Canadian investors should keep in mind this is a limited partnership and discuss the tax implications with a financial advisor before investing.
Dream Global REIT (TSX: DRG.UN, OTC: DUNDF)
Most REITs have edged lower this year, but this one, which invests in office buildings in Europe, has been climbing steadily higher. The trust reported strong growth in 2017 with fully diluted funds from operations (FFO) up by $0.15, or 19%, to $0.95 per unit from $0.80 per unit in 2016. FFO is the key indicator of the financial performance of a REIT.
On the balance sheet side, the trust decreased its level of debt to 46% from 48% the year before. However, there has been no change to the distribution, which continues to be $0.066 per month ($0.7992 per year) to yield 5.8%.
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