Rebecca Teltscher, portfolio manager, Newhaven Asset Management
FOCUS: Canadian dividend stocks
Top Picks: Canadian Natural Resources, K-Bro Linen, Pembina Pipelines
MARKET OUTLOOK:
The markets have been nothing short of a roller coaster ride since the beginning of the year. Despite the economy showing signs of weakness, markets in Canada and the U.S. continue to gain back almost all the losses that occurred since the infamous “liberation day” on April 2. Markets soared on Monday as there was significant progress made over the weekend with U.S./China on the trade front with a reduction in tariffs for a 90-day reset period.
We feel the market once again has disconnected from its fundamentals as misplaced market confidence overshadows the underlying economic reality. In Canada, we’ve seen declining consumer confidence, home sales hitting the lowest levels since 2029, gross domestic product (GDP) contracting in February, a loss of jobs and rising unemployment. In the U.S., we’ve seen plummeting consumer confidence, ISM manufacturing in contraction territory, shrinking GDP for the first quarter along with slowing government spending from U.S. Department of Government Efficiency (DOGE) related pressure. In addition to economic pressure, geopolitical tensions continue to rise and tariff risk, while temporarily muted, is not over. Despite market action the past few days, we feel that now is not the time to be owning highly inflated growth stocks that are trading at unsustainable valuations. We continue to seek out stable areas of the Canadian market with a focus on consistent dividends backed by predictable and growing cash flow.
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TOP PICKS:
Canadian Natural Resources (CNQ TSX)
Despite the possibility of weakening oil prices, Canadian Natural Resources remains the best-in-class oil producer and the name to own over the longer term. In its latest quarterly earnings, CNQ posted record production coupled with lower operating costs. With one of the strongest management teams in the world, it managed to keep costs low, maintain premium low decline assets and make accretive long-term acquisitions at extremely attractive prices. CNQ is the largest crude oil producer in Canada and the second largest natural gas producer in Canada with an approximate 60 per cent oil/40 per cent gas production mix. We believe there is a rare opportunity to own a Canadian success story at a discounted valuation while you continue to collect 5.5 per cent dividend yield along the way.
K-Bro Linen (KBL TSX)
K-Bro is the largest owner and operator of laundry and linen processing in Canada. Its two main distribution channels are healthcare and hospitality. In addition to regular linen washing and drying services, its hospitality segment provides rental services while the healthcare segment provides on-site services for sterilization and surgical packs. It is an essential service provider in a niche market generating consistent and recurring cash flows. K-Bro’s existing facilities have additional capacity available to facilitate organic growth opportunities. As hotels and hospitals look to reduce overhead costs, outsourcing laundry is a shift the is continuing in today’s market. In addition, K-bro operates in a highly fragmented industry with several small tuck-in acquisitions available for future growth opportunities. While on the smaller end in terms of its market capitalization, we think K-bro adds diversification and stability to our portfolio while also paying a 3.4 per cent dividend yield.
Pembina Pipelines (PPL TSX)
Pembina is in a strategic position to continue to capture volume growth out of Western Canada. Over 80 per cent of Pembina’s cash flows are contracted or fee for service resulting in limited commodity exposure. Current fee-based EBITDA covers the dividend which continues to grow annually including a three per cent increase in 2025. Pembina has a strong history of project execution, and we expect that trend to continue with current capex projects such as the Cedar LNG expected to be in-service in 2028. We like Pembina’s assets and positioning in the Western Canadian Sedimentary Basin, its attractive valuation as well as their significant dividend yield of 5.5 per cent. After announcing their earnings last week, the stock dropped six per cent amid concerns over weaker commodity prices impacting its marketing segment as well as lower tolls expected on the alliance pipeline. However, we view this as an attractive entry point for a longer-term hold.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CNQ TSX | Y | Y | Y |
| KBL TSX | Y | Y | Y |
| PPL TSX | Y | Y | Y |
PAST PICKS: February 5, 2024
CAE (CAE TSX)
- Then: $26.45
- Now: $35.54
- Return: 34%
- Total Return: 34%
Brookfield Infrastructure (BIP.UN TSX)
- Then: $42.03
- Now: $44.70
- Return: 6%
- Total Return: 13%
Emera (EMA TSX)
- Then: $47.67
- Now: $60.25
- Return: 26%
- Total Return: 34%
Total Return Average: 27%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CAE TSX | Y | Y | Y |
| BIP.UN TSX | Y | Y | Y |
| EMA TSX | Y | Y | Y |
