By SHIRLEY WON
Special to The Globe and Mail
Wednesday, September 19, 2018
Buying beaten-up dividend stocks can be a rewarding strategy: Investors get paid while waiting for their share prices to gain momentum.
Some dividend payers have taken a hit recently amid rising interest rates. Others have been hurt by rising or falling commodity prices. And some names have sold off due to political uncertainty or company-specific concerns, such as rising debt.
We asked three dividend fund managers for their top picks from the bargain bin.
STEPHEN GROFF, PORTFOLIO MANAGER, CAMBRIDGE GLOBAL ASSET MANAGEMENT His fund: Cambridge Canadian Dividend The pick: Emera Inc. (EMA-TSX) 52-week range: $39.08 to $49.48 a share Shares of the Halifax-based utility offer "an attractive entry point" after a broad selloff among stocks sensitive to rising interest rates, says Mr. Groff. Emera's stock, which offers about a 5.5-per-cent yield, trades reasonably at about 14 times 2019 earnings, he adds.
Most of its operations are in the United States in addition to Canada and the Caribbean.
Investor concern grew after its debt rose following the 2016 acquisition of Florida-based TECO Energy Inc., but Emera is "actively working to reduce that leverage," he notes.
Emera has reduced its dividend-growth-rate target to 4 to 5 per cent, he says. "We think that is a smart thing to do." The big risk to Emera is not continuing to reduce debt, but that is unlikely, he suggests. "Their balance-sheet leverage is manageable ... and they have an intelligent capital allocation plan."
The pick: Black Stone Minerals LP (BSM-NYSE) 52-week range: US$16.36 to US$19.29 a share This Houston-based royalty company, which mainly owns oil and natural-gas mineral rights in the United States, has an attractive business model and offers a robust yield of more than 7 per cent, says Mr. Groff.
Black Stone is appealing because it requires limited capital to operate, and benefits from spending by oil and gas producers on its lands, he says. "It gives upside exposure to the commodity, but also provides a level of downside protection because there is less inherent operating leverage," he says.
The firm, which has impressive cash-flow growth, knows how to buy assets at good prices, he adds.
Its stock has struggled since going public in 2015 at US$19 a share, but that's partly because of its exposure to the depressed gas sector, he says. "I am less concerned because you get a really healthy dividend while they continue to compound free cash flow per share." BRIAN TIDD, PORTFOLIO MANAGER, INVESCO CANADA LTD.
His fund: Invesco Canadian Plus Dividend The pick: Intertape Polymer Group Inc. (ITP-TSX) 52-week range: $16.63 to $22.84 a share Montreal-based Intertape Polymer, the second-largest tape producer in North America after 3M Co., is poised to benefit from the growing e-commerce trend, says Mr. Tidd.
Intertape, the leader in wateractivated tapes used in box shipping, counts Amazon.com Inc.
among its largest customers and recently acquired protectivepackaging materials maker Polyair Inter Pack Inc. Intertape's five-year average return on equity of 24 per cent is a "testament to its ability to create value in its acquisitions and within its operations," he says.
Its stock is off this year on worries about rising raw materials costs hurting profitability, but a strong second quarter has allayed some concerns.
Its stock, which has a dividend yield of more than 3 per cent, trades at a discount to its peers, he notes. An aggressive entry by 3M into the water-activated tape niche is a risk, but unlikely, he suggests.
The pick: Delphi Technologies PLC (DLPH-NYSE) 52-week range: US$33.08 to US$60.39 a share This maker of powertrain technologies, which was spun off from Aptiv PLC (formerly Delphi Automotive PLC), should profit from a trend toward vehicle electrification, higher fuel efficiency and lower emissions, says Mr.
Tidd. With expected stronger growth in content value per vehicle, the capital appreciation opportunity for London-based Delphi Technologies "is significant even if global vehicle unit sales stall out over the medium term," he adds.
Its shares have retreated this year on concerns about U.S. President Donald Trump's call for auto tariffs, and a possible recession sparked by a trade war. While Delphi reported weaker secondquarter results than expected, its order book is "very strong," he says. Its stock trades attractively at less than seven times forward earnings and below its main peers, he notes. Its dividend, which yields about 2 per cent, should grow longer term, he adds.
ROBERT LAUZON, PORTFOLIO MANAGER, MIDDLEFIELD CAPITAL CORP.
His fund: Middlefield Canadian Dividend Growers The pick: Brookfield Property Partners LP (BPY.UN-TSX) 52-week range: $23.28 to $31.10 a share The Bermuda-based real estate company's struggling shares offer an appealing entry point for investors, says Mr. Lauzon. "You get a top-quality global management team overseeing some of the best retail locations and office buildings around the world.
Their goal is to grow its dividend [now yielding more than 6 per cent] by 5 to 8 per cent a year."
Shares of Brookfield Property Partners, which owns offices in London, have been hurt by Britain's vote to exit from the European Union and uncertainty about its foray into retail malls hit hard by e-commerce.
Its stock trades at about a 35per-cent discount to net asset value, but that should narrow to about 15 per cent over 18 months, he says. "That implies a target of $32.60 a share." Brookfield Property Partners, which recently acquired the U.S. mall operator GGP Inc., has a high debt load, which is a risk, but "I think it's manageable," he says.
The pick: Enbridge Inc. (ENBTSX) 52-week range: $37.36 to $52.59 a share Shares of the Calgary-based pipeline operator are poised to climb now that some headwinds have become tailwinds, says Mr. Lauzon. Investor concern about its profitability rose when oil traded at US$40 a barrel, but it's less of an issue at nearly US$70, he says.
Pipeline and other dividend stocks have been hurt by rising interest rates, but "the adjustment has happened, so interest-sensitive stocks are no longer out of favour," he suggests.
Minnesota regulators recently approved Enbridge's bid to replace its Line 3 oil pipeline despite opposition by environmentalists.
A welcome move is Enbridge's plans to buy out its four public subsidiaries to undo its complex structure, he adds. Enbridge shares, which offer a yield of nearly 6 per cent, has cut its dividendgrowth-rate forecast to an achievable 10 per cent, he notes. "My one-year target is $53.60 a share."
Brookfield Property Partners's struggling shares offer an appealing entry point for investors. Pictured is Brookfield Place in Manhattan.
CHRIS TROTMAN/GETTY IMAGES
Delphi Technologies should profit from a trend toward vehicle electrification.