High-Yield(ish) Canadian Buys from Gordon Pape

By Travis Johnson, Stock Gumshoe, September 15, 2010

I often find myself getting stuck in a rut writing about the same folks over and over — the Motley Fool guys, the various Agora offspring (Stansberry, Angel, etc.), Robert Hsu and Louis Navellier and their Investorplace colleagues come up over and over, largely because they’re the ones who push the most aggressive teasers … and therefore, the ones who my readers ask about all the time.

But today we’re going with something a bit more placid — a teaser from a newish Forbes newsletter edited by Gordon Pape, a dean of the Canadian investing punditocracy. The letter is called The Canada Report, and it seems to basically take some of the strategies he’s been talking up for Canadian investors for years and package them for US investors.

First, they pitch the idea of investing in Canada:

“What may astound you are the huge returns U.S. investors have been earning in Canada…not some ’emerging economy’ with loads of political and institutional risk, but a stable and loyal friend to the United States almost since the founding of the Republic–and a country rich in natural resources like oil and gold that with the emergence of countries like China and India, are in more demand today than ever.

“From March 9, 2009 through September 13th, 2010, Americans could have earned 100% on the blue chip stocks (iShares MSCI Canada Index ETF) that trade on the Toronto Stock Exchange when you adjust for currency effects!”

All true, though a bit of that did come from the currency impact of the appreciating Loonie (or depreciating Greenback, if you prefer) — and March 9, 2009 was the absolute low point of the global crash, so everything has done great since then (to be fair, the S&P 500 is up roughly 70% since then, so not quite as good as the Canadian large caps — and Canada has outperformed far more dramatically if you go back five years, thanks in large part to the huge oil runup in 2006-2008).

So let’s assume we’re sold on the idea of investing in Canada, with the backdrop of their relative friendliness and openness and their resource riches. How about more on Pape’s strategies?

“The Canada Report offers investors some of the excitement of emerging markets like Brazil and China. But it allows them to sleep at night, too, knowing that the high-yielding blue chips Gordon Pape and his contributing editors carefully watch are unlikely to implode.

“The way Pape describes it, some of the picks in his newsletter are the stock market’s equivalent of ‘grinders’ in hockey – hard workers that get little credit but produce sound results, year after year, while protecting your hard-earned money. Others are prospective high-flyers, with the potential for large capital gains in a relatively short time when market conditions are right.”

Ah, the hockey reference … so we know he’s a real-deal Canuck, I’m always ready for more blue-line metaphors and fewer baseball metaphors, so that’s one point in his favor. If someone else tells me that we’re in the fourth inning of the recovery I’m going to want to hip check him.

The ad teases that he has some Canadian trust survivors that he likes, too, but he doesn’t actually really hint at which of those are his favorites — we do, however, learn about three recommendations Pape is making for his subscribers. Or at least, we get a few clues … let’s look at ’em one at a time:

So what is Gordon Pape advising his subscribers to do now?

“From a recent Canada Report issue, here are three of the stocks that he is recommending:

“Pick #1: One of the biggest corporations in North America and the biggest telecommunications company in Canada reported quarterly earnings up 61.3% from last year, plus the stock yields 5.7%.”

That would have to be BCE (BCE in NY and Toronto), the granddaddy of Canadian telecom (formerly Bell Canada). This is indeed a big company by any standard, though at a market cap of about $25 billion it’s dwarfed by similar US companies like Verizon and AT&T. BCE is somewhat more diversified than those two, though it’s quite similar overall — they are a leader in wireline telecom, including telephone and internet access, and in pay TV and wireless, and they just spent a bit over a billion bucks to buy full control (again — they had owned it in the past) of the leading Canadian TV content company, CTVglobemedia, which owns the CTV networks and the sports channel TSN, among other content creation engines.

If you compare them to Verizon or AT&T, BCE has better margins and better growth, so that’s interesting, though like VZ and T they’ve got plenty of competition — in BCE’s case, largely from Rogers Communications (RCI) and Telus (TU), though there are also plenty of smaller players, including US affiliates. The yield is down to about 5.6% now, and despite the big deal to buy CTV the stock hasn’t taken a hit, it’s right around the 52-week high right now.

Analyst comments I’ve seen indicate that they expect the dividend to continue to grow, though at a slower pace (maybe 3-5% per year, it has grown far more rapidly over the last couple years), but the company is committed to a high dividend policy, aiming to pay out roughly 70% of “adjusted earnings” (the current dividend rate is about 66% of their earnings over the last 12 months, so they’re on track for that). I don’t have any complaints about BCE, I imagine they’ll probably continue to be an appealing utility-style pick that will do well if you reinvest the dividends and let them compound, though personally I prefer (and own shares of) Verizon.

Next?

“Pick #2: A power producer that operates regulated utilities in Nova Scotia and in places like Barbados. “Priced at $24.30, the stock pays a $1.13 dividend and yields 4.65%,” says Pape. “Bay Street expects it to trade at around $26 over the next year or so. We originally recommended it at $22.47.”

This one is Emera Inc. (EMA in Toronto, EMRAF on the pink sheets, where volume is extremely low but the price looks like a reasonable match with Toronto). I don’t think I’ve ever looked at this one before, they are a major utility player in Nova Scotia, with growth into New England through pipelines and electricity transmission, major subsidiaries include Nova Scotia Power, Bangor Hydroelectric, and the Brunswick Pipeline, but they do also have non-controlling interest in a lot of other companies and projects in that area as well as in the Caribbean, where they own pieces of electric companies in the Bahamas and St. Lucia as well as Barbados … which is no surprise, if I lived in Nova Scotia I’d want a good excuse to visit Barbados in February, too.

This one has grown more popular in a hurry since Pape wrote those comments, the stock is now up to C$28 or so, which means the yield has suffered a bit — the quarterly dividend is 28 cents and change, for an annual payout of C$1.13 and a yield of almost exactly 4% today. The dividend has risen over the years, though at a relatively sedate pace (not surprising for a regulated utility), I do like their general strategy of growing with new assets, particularly pipelines and hydropower generation capacity, and the yield seems right in line with what you’d expect from a quality utility with some growth potential, but I don’t know a lot more about the company beyond that.

One more?

“Pick #3: A spinoff from Encana, this Canadian oil company reported first-quarter results that beat analysts’ expectations in terms of both profits and production. The Foster Lake oil sands operation was a major contributor to the strong numbers, boosting production by 79% on a year-over-year basis, and this company has one of the lowest costs of crude production in the Alberta Oil Sands.”

This one must be Cenovus (CVE in NY and Toronto), which did indeed get spun off from Encana a year or so ago. And yes, they do have oil sands production, including at Foster Lake and Christina Lake, both of which are joint ventures with ConocoPhilips which use the relatively new Steam-Assisted Gravity Drainage (SAGD) recovery technique (as opposed to oil sand mining) as well as a couple of others, and they also own half of two ConocoPhilips refineries that turn that bitumen into something useful, one in Texas and one in Illinois.

This is a pretty big integrated energy company, they also have some natural gas and conventional oil resources (though the firm is certainly oil sands-focused). The stock has a decent dividend yield of 2.8% and currently trades at a small PE premium to other major oil sands firms like Suncor (SU), though analysts project SU having a significantly higher growth rate (CVE has a better profit margin, perhaps because the SAGD process is less expensive than SU’s more traditional oilsand mining and processing, and does have some new projects coming on line — and fewer analysts, for whatever that’s worth).

So there you have it, a few ideas from Gordon Pape in Canada — nothing shocking, I suppose, but some solid companies with decent dividends, and if Canada continues to ride higher commodity prices and a relatively strong currency US investors might continue to enjoy solid returns from picks like these. If you’ve got an opinion on any of Pape’s picks (or on the man himself, or any other Canadian investments), please feel free to chime in with a comment below.

And if you’ve tried Pape’s Canada Report, by all means, click here to be the first to review it for your fellow investors. Thanks!

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8 Comments on "High-Yield(ish) Canadian Buys from Gordon Pape"

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Mary Ann Cluggish
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Mary Ann Cluggish
September 15, 2010 2:12 pm

Insorfar as Canadian Energy Trusts go, I still like ERF and ARC Energy Trust the best.

bill
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bill
September 15, 2010 3:41 pm

check out PNG on tse PACIFIC NORTHERN GAS be a key part of the kitimat lng project

Joshua
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Joshua
September 15, 2010 5:39 pm

Is now a good time, in your opinion to get involved with Canadian companies or because of the upcoming changes in tax policies (to Income Trusts in Canada) is it better to wait and see what happens once the dividends go down and the stocks get reavaluated ? If so, which Canroy stock is the best ?

ken
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ken
September 15, 2010 8:43 pm

watch the telcoms in canada as they will have to pay back lots of cash to customers re overcharges as the government has stated re energy trust all will go back to corpoation so tthe dividend will be smaller such as pwt.un has reduced to 9 cents from 15 cent live in canada and invest mostly in us compnaies more action

Derek
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Derek
September 16, 2010 2:56 pm

Just a quick note on Canadian trusts, not all have to convert. Some REITs are exempt. Also watch for some trusts who have already converted but were able to maintain the dividend.PMT and STB are two examples. Many more have given guidance that they will not have to reduce their dividend when they convert.

arlyn57
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arlyn57
September 17, 2010 2:37 pm

i like Travis enough that I may become a friday special in the near future!

Rod
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Rod
September 18, 2010 1:46 pm

PEYTO the way to go. low cost production with high results check out peyto.com

Ingy
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Ingy
September 19, 2010 6:36 pm

Derek,
Do you have a few good Canadian REITS you would share – or know where to find a list? As a US investor, they are very favorable for us from a tax perspective!! Thank You in advance.

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