Equity-income roundtable: Part 3

Jason Gibbs is vice-president and portfolio manager at 1832 Asset Management LP. Gibbs is a senior member of the firm's equity-income team, which has a wide range of mandates including Scotia Canadian Dividend, Scotia Diversified Monthly Income and Scotia Income Advantage.

Michele Robitaille, managing director and equity-income specialist at Guardian LP, a sub-advisor to the BMO family of funds. The Guardian equity team's mandates include BMO Growth & Income and BMO Monthly Income II.

The earlier installments of this three-part series were published on Monday and Wednesday.

Q: Time to talk about energy, an important weighting for the three of you.

Gibbs: Scotia Canadian Dividend had 21% in energy at the end of September, of which 12% was in energy-infrastructure stocks including pipelines, and 9% in exploration and development companies. In a dividend fund, you want to be overweight the pipelines, which are like the toll roads for the energy business. Recently Suncor Energy Inc. SU announced that it's going through with its Fort Hills oil-sands project. Enbridge Inc. ENB is going to build a big pipeline for this. We own Enbridge, TransCanada Corp. TRP, Pembina Pipeline Corp. PPL and Gibson Energy Inc. GEI.

The big picture for these energy-infrastructure companies remains the same. They represent a great income and growth story over the long term. The entire North American energy-infrastructure map is being redrawn. Dividend growth is a key investing theme and this is where you are going to find excellent dividend growth.

Jason Gibbs

Q: What about valuations?

Gibbs: When I look at infrastructure, utilities and pipeline companies, there are three things that I analyze: free-cash-flow yield, growth and private-market valuation. The pipelines' free-cash-flow yields are still reasonable. There is a misconception that these companies don't grow. They do. Price/earnings multiples on these stocks are elevated versus their historic multiples. But there's a reason for this. They are high-quality businesses. Furthermore, the P/E multiples are not excessive when you look at the other three metrics.

Q: Michele, you had 30.1% of BMO Monthly High Income in energy at the end of September.

Robitaille: We own TransCanada, Pembina, Keyera Corp. KEY and AltaGas Ltd. ALA. We break our energy exposure into energy infrastructure and the commodity-related production companies. We've been overweight energy infrastructure for a long time and continue to like this space. We are now double our benchmark. Our exposure to energy producers was neutral for the better part of last year, but we've been gradually increasing that and have gone to a slight overweight position.

		Enbridge Inc.	Pembina Pipeline Corp.	TransCanada Corp.
	Nov.13 close	$45.10	$34.14	$46.98
	52-week high/low	$49.17-$37.74	$35.64-$27.01	$51.21-$43.64
	Market cap	$37.4 billion	$10.7 billion	$33.2 billion
	Total % return 1Y*	19.2	30.9	8.2
	Total % return 3Y*	21.1	23.0	12.4
	Total % return 5Y*	20.1	22.9	9.2
	*As of Nov.13, 2013 Source: Morningstar

Frost: I own Pembina in AGF Monthly High Income, which had a weighting of 32% in the energy sector at the end of September. I own Enbridge and Gibson in AGF Traditional Income. This fund had 26.5% in energy at the end of September. Most of the focus is on energy services and energy infrastructure. We want to be leveraged to the activity rather than the commodity price.

Q: What about the high-profile challenges to the proposed Keystone XL and Northern Gateway pipeline projects?

Gibbs: They are major projects. But these infrastructure companies are building pipelines all over the place that don't make the newspapers.

Michele Robitaille

Robitaille: The list of projects that all of these companies have is substantial. Enbridge has some $36 billion of projects between now and 2017. Because of the need to transport oil and gas, the companies are able to get good contracts and to lock in their returns on capital.

Frost: We also own some of the service companies: Trican Well Service Ltd. TCW and Calfrac Well Services Ltd. CFW.

Q: Energy producers, briefly please?

Robitaille: Our traditional bigger holdings are Baytex Energy Corp. BTE, ARC Resources Ltd. ARX and Crescent Point Energy Corp. CPG. We also own Cenovus Energy Inc. CVE in this fund. We are more heavily weighted to oil than natural gas.

Gibbs: So are we. Scotia Canadian Dividend has Suncor, Baytex, Crescent Point and Cenovus.

Frost: In AGF Monthly High Income, I have Baytex, Crescent Point and ARC. I have a number of big-cap energy names in AGF Traditional Income, including Suncor.

Q: Telecommunications-services stocks?

Gibbs: I've always liked telecoms. They own the infrastructure. The industry is a classic oligopoly. The companies have free cash flow and they are growing this -- not a lot, but they are growing. The stocks offer both high dividend yields and dividend growth. They are not the cheapest companies. Earlier this year, there was the prospect of the entry of Verizon Communications Inc. VZ into the Canadian market, and the Canadian telecom stocks sold off. They have rebounded since and are near all-time highs. I own TELUS Corp. T, Rogers Communications Inc. RCI.B and BCE Inc. BCE and I added Verizon.

Robitaille : Of that list, we own TELUS. We like that it is predominantly focused on Western Canada. We are underweight telcos and have been so for about 18 months. We thought that valuations were getting ahead of the fundamentals and that, as the industry matures, the growth was going to slow. Also, the Canadian government is seeking to reduce prices for telecom consumers. The regulatory uncertainty surrounding this industry has increased.

Frost: We've been underweight telcos. We're concerned that average revenue per user is slowing. The companies' growth will be challenged. I share Michele's concern that the federal government is looking to be tougher on them.

Gibbs: Regulatory risk is increasing in the Canadian names and growth will not be what it once was. It's a mature industry. But I like that free cash flow, even if it grows 3-4-5% a year. As a shareholder, you're going to get most of that free cash flow back in dividends and stock buy-backs. I would call them more holds, at this stage, like a lot of the market.

Q: Utilities?

Frost: I have only one Canadian holding, Brookfield Infrastructure Partners L.P. BIP.UN. I own it in both funds.

Gibbs: I own it too. It's a long-time holding. It owns infrastructure assets in North and South America, Australia and Europe.

Frost: It has great long-term assets. It has a global focus with long-term, utility-like contracts. Governments in a lot of countries are financially stretched and there will probably be more publicly owned infrastructure assets for sale. This will provide opportunities for the likes of Brookfield Infrastructure.

Gibbs: It recently raised its dividend-growth guidance.

Peter Frost, Michele Robitaille and Jason Gibbs

Robitaille: We own Brookfield Renewable Energy Partners L.P. BEP.UN. It's green energy, primarily hydroelectric. It has high-quality assets with good contracted revenue streams. It has stronger growth than some of the other utilities. As part of the Brookfield group, it tends to identify good acquisition opportunities.

Frost: I am more positive on utilities stocks since their sell-off earlier this year. Most continue to produce solid and growing cash flow.

Gibbs: Similar to the pipelines, that growth is underestimated.

Q: We have discussed four of the leading sectors in the Canadian equity-income universe. Time to sum up.

Robitaille: The dividend space remains attractive. Given the volatility that we've seen in the market year-to-date and that we would expect to see going forward, investors will continue to see good opportunities.

Gibbs: The demand for income continues stronger than ever. The companies are getting the message. The macro backdrop remains positive. Interest rates are going to remain relatively low for the long term.

Frost: Some sectors in the equity-income universe, which sold off sharply in the wake of the increase in bond yields, are now more attractive.

Photos: paullawrencephotography.com