Editor's note: Our coverage of Morningstar's manager roundtable on equity-income investing in Canada concludes today with a discussion of picks in the energy, utilities and telecommunications sectors. Our panellists: Jason Gibbs, vice-president and portfolio manager at Goodman & Co. Investment Counsel Ltd., which manages the Dynamic stable of mutual funds; Michael Lough, vice-president and director, TD Asset Management Inc.; and Michele Robitaille, senior portfolio manager at Guardian Capital LP, a sub-adviser to the BMO Guardian family of funds. The moderator was Morningstar columnist Sonita Horvitch, whose three-part series began on Monday.
Q: Time to discuss energy, which is a big weighting in most major Canadian equity indexes.
Robitaille: Some energy trusts have done a good job migrating to become the new intermediate exploration and development companies. They are benefitting from the new technologies -- horizontal drilling and multi-staged fraccing -- that are being used in the Western Sedimentary Basin.
It has increased production growth prospects for them. A lot of the ex-energy trusts had significant land holdings and strong technical teams and they are in a position to harvest energy in what is a mature basin.
Companies like ARC Resources Ltd. ARX, Bonavista Energy Corp. BNP and Baytex Energy Corp. BTE have attractive long-term outlooks.
Gibbs: Of the energy-infrastructure companies, high-dividend-paying Pembina Pipeline Corp. PPL is a good example of a company enjoying growth. This energy transportation and service provider is announcing new pipeline-construction projects almost every week. There are also increased mid-stream opportunities for the company. I own the stock.
Lough: I also own Pembina. These are not big projects, but there are a lot of them.
Robitaille: There are two dynamics in the oil patch. One is the advent of the new technologies. The other is the shift in the market toward liquids-rich gas. Some of the projects that Pembina is bringing on, and many growth opportunities for pipeline and midstream companies in general, are related to this shift.
Lough: The energy space is quite attractive, not only for the production growth prospects. We are optimistic about the commodity prices longer-term. The holdings that we have in TD Diversified Monthly Income include Suncor Energy Inc. SU and Canadian Natural Resources Ltd. CNQ. We also own Canadian Oil Sands Ltd. COS, which will undertake quite extensive capital expenditure in the next couple of years. This has put a cap on the dividend and on the stock. Investors buy it for its yield. The company has tremendous leverage to higher oil prices. It is a good long-term holding. Right now the stock price is depressed because of these capital expenditures, and it could represent a buy opportunity.
Q: Michele?
Robitaille: We sold our position in Canadian Oil Sands. The first part was sold in April- May and the rest in July. We were concerned about the sustainability of the dividend. But I agree with Michael's comments that given where it is trading now, it probably represents good long-term value.
Q: Jason?
Gibbs: There is a better demand-supply picture for oil than for natural gas. We are flooded with natural gas and there you want to be more on the infrastructure side than the commodity side. We favour the old energy trusts, Crescent Point Energy Corp. CPG, Bonavista, and Enerplus Corp. ERF. Like Michele, we sold our holding in Canadian Oil Sands. We were also concerned about distribution sustainability.
Q: Further comments on pipelines?
Lough: They are ideal dividend-paying stocks. For example, Enbridge Inc. ENB, which is in TD Diversified Monthly Income, has a lot of exposure to the oil sands, where there is a lot of new development. Enbridge has a number of new pipelines that it will be putting into service over the next number of years. This will give it growth.
Gibbs: Enbridge is a core holding in Dynamic Equity Income. We also own Veresen Inc. VSN. Its key asset is the natural-gas pipeline, Alliance Pipeline, which it owns jointly with Enbridge. It is a bit controversial because the contracts on that pipeline are coming up in 2015. But I think that there is enough demand to ensure that it gets decent returns on Alliance.
Lough: I own a modest amount of Veresen.
Robitaille: We are quite overweight the energy-infrastructure part of the business in BMO Guardian Monthly High Income II. Names include AltaGas Ltd. ALA, Keyera Corp. KEY, Veresen and TransCanada Corp. TRP.
Q: What of TransCanada's proposed Keystone XL oil sands pipeline, which is causing such a fuss in the United States?
Robitaille: The majority of its businesses are working fine. Of Keystone XL, we recognize that we are going into a U.S. election year and there is a significant amount of environmental opposition. So, you have to handicap it a little, but our view is that it will likely go ahead.
Gibbs: We own TransCanada. What keeps me awake at night with some of these companies is that matters can get very political. If the United States prevents Keystone XL, then that sends a message that it does not want any of our oil.
Q: What about utilities?
Lough: Utilities tend to be focused on electricity producers and distributors.
Gibbs: They are essential services and are regulated. You have a stable earnings profile and the earnings tend to grow depending on what the companies spend on their regulated assets. The larger-cap regulated utilities give you a core 4% to 5% dividend yield and the good ones will give you some 4% to 6% earnings growth.
The biggest risk is regulatory. With interest rates so low, the regulators could reduce the companies' returns on equity. Also, where you are dealing with electricity bills into people's homes, it can get political. In the portfolio, holdings include Innergex Renewable Energy Inc. INE, which is mostly hydro and some wind plants, and Northland Power Inc. NPI, which operates mostly natural-gas plants. These power companies deliver electricity to a government-related entity under long-term contracts.
Robitaille: We have a reasonable weighting in utilities. We own Northland Power, for example.
Lough: We own Emera Inc. EMA and Fortis Inc. FTS. They are good, solid investments and are far less volatile than the market as a whole.
Q: Telecommunications-services companies?
Gibbs: There is not a lot of growth, but they generate so much free cash flow. Rogers Communications Inc. RCI.B, BCE Inc. BCE and Telus Corp. T have free-cash-flow yields in the 7% to 8% range. We own all three.
Rogers, for example, has a 4% dividend yield. BCE does not have a lot of growth, but a decent dividend yield. Telus has more growth. It is in Western Canada. Telus has said it will increase its dividend by 10% a year over the next three years. The challenge to these established companies is the new entrants. We see margin pressure in parts of their business as a result and pressure on landlines, with consumers opting for cell phones. The small entrants want to take on the incumbents, but it is tough for them.Lough: Telus and BCE have spent a lot of money in the last few years on infrastructure to get it where they want it to be. That will be positive for their cash-flow generation going forward. The cable/telecom companies such as Rogers still have to do a lot of spending. We own all three stocks, but we are a little more overweight Telus and BCE.
Robitaille: We own these three big names as well. We are slightly overweight Telus and BCE relative to Rogers. The new entrants' end game is likely to be that they get taken out. I agree that telecom services stocks are a great space to invest in. They have attractive and sustainable dividend yields.
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| Michele Robitaille, Michael Lough and Jason Gibbs | |
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