Nick Majendie is a portfolio advisor at ScotiaMcLeod's Anchor Managed Funds. His focus is on Canadian large caps.
Baytex Energy Corp.
Our cash flow forecasts are unchanged for Baytex from when we repurchased the units this March although the price for West Texas Intermediate is lower and the differential is higher. Predictable production growth over the next five years should allow healthy double-digit annual returns for a stock that has been caught in the recent general energy downdraft. The yield is over 7 per cent and the dividend sustainable.
H&R Real Estate Investment Trust
Primaris's assets purchased in conjunction with Kingsett Capital will contribute an estimated fifth of H&R's pro forma cash flow. H&R's AFFO (adjusted funds from operations) multiple should ultimately benefit from the stock's greater liquidity, but short-term pressure on the units from former Primaris holders reducing their overexposure to the new combined entity presents a short-term opportunity. The yield is 5.8 per cent.
Shoppers Drug Mart Corp.
SC's P/E multiple has been hit over the past few years by regulatory reform on generics across many provinces (the latest being Alberta). However, this incremental hit should be behind the company within the next year and EPS should accelerate and the multiple increase. Strong cash flow should allow regular dividend increases in this leader in its industry.
Past picks: Jan. 29, 2013
Brookfield Infrastructure Partners LP
Total return: +5.79 per cent
Canadian Imperial Bank of Commerce
Total return: –6.24 per cent
Baytex Energy Corp.
Total return: –15.64 per cent
Total return average: –5.36 per cent
We believe there is some potential for further gains for North American equity markets over the next couple of quarters. We have to recognize, however, that this cyclical bull market started in March 2009 and thus, because of its longevity, we are likely in the latter innings of this cycle.
Regardless, we think the strategy we have pursued with success since 2000 of emphasizing quality bonds and stocks and, in particular, equities with strong balance sheets and predictable free cash flow and dividend growth, will continue to be a winning formula, combining decent upside with moderate risk. Dividend-paying stocks in Canada are not immune to any further market correction but, on an income basis at least, are cheaper relative to government bonds than at any time since the 1950s.