TD Dividend Growth manager looks beyond market malaise

Doug Warwick adds to holdings of energy and pipeline stocks.

Michael Ryval 7 June, 2018 | 5:00PM

The Canadian market malaise since the start of the year is partly attributable to the impression that Canada is a poor place to invest, says Doug Warwick, managing director of Toronto-based TD Asset Management, and a 38-year industry veteran who is responsible for about $25.5 billion in assets.

"Last fall and into early January, markets were quite excited by President Trump's tax reform, and economic growth was strong around the world," says Warwick, lead manager of the $7.2-billion TD Dividend Growth. "All the good news was out there and there's been a pause. But with Canada specifically, and talking to people that go to the U.S. and Europe and even at home, there is a sense that Canada can't get things done. Such as the pipelines. Even things that are fully approved and sanctioned are held up by the vocal minority. That has hurt our pipeline and energy stocks."

The way to get over the malaise is to "get shovels in the ground," says Warwick, "and show everyone that Canada is open for business." Unfortunately, the ongoing and unresolved talks over the North American Free Trade Agreement have only added a layer of uncertainty. Warwick believes that President Donald Trump is using it to push his America First policy and nudge local and offshore investors to invest in the U.S. rather than in NAFTA's other two partners. "That's all part of Trump's strategy."

Launched in April 1987, the Morningstar 4-star-rated TD Dividend Growth was originally offered by Central Guaranty Trust and was acquired by Canada Trust, which later merged with Toronto-Dominion Bank. Warwick joined TD's investment department in 1984, (which later became TDAM), and has been lead manager of the fund since October 1993. Back then, the fund had about $7 million in assets. Besides TD Dividend Growth, Warwick is also responsible for TD Dividend Income and TD Monthly Income, and is co-manager of TD Tactical Monthly Income.

In managing TD Dividend Growth, which holds about 42 names, Warwick takes a longer-term view and focuses on companies that have a track record of dividend growth. "I'm trying to buy a stream of income that will grow every year. My thought is that valuations can get knocked around by events, but they should roughly follow the increase in the income stream that I've bought," says Warwick, who shares duties with Michael Lough and Benjamin Gossack. "We buy dividends that hopefully grow and are targeting 7% to 9% returns, including capital appreciation, over time." The yield on the portfolio is about 3.4%, or about half the total return.

Meanwhile, Warwick's strategy is to take advantage of the market slump to add to existing energy stocks such as  Suncor Energy (SU) and pipeline names such as  Enbridge (ENB). Referring to Suncor, Warwick says "it is just coining cash. The Fort Hills project is coming on ahead of schedule. It has the pipeline space so there is no issue with getting the crude down to the Gulf of Mexico. And it's getting its costs down."

The move into energy names was driven by declining global oil inventories. "They were falling over the last 15 months and declined by 850,000 barrels a day. So the once huge surplus of oil was back down to average levels," Warwick says. "That has pushed the price up. And you never know what might happen with Venezuela or Iran. That could squeeze a few more barrels out of the market."

The rising price of crude oil has been a boon to the industry. The shipping differential between Western Canada and West Texas crude has narrowed considerably in the last few months, although it may start to widen as plant turnarounds come back on stream. "But a higher oil price, even with a wider differential, is flowing a lot more money into Canada."

Warwick continues to favour Enbridge even though the stock has been beaten up badly by investors who have dumped the company on fears that it will have trouble accessing debt and equity markets. "Eighty-five percent of its business is stable and regulated," Warwick notes. "And 95% of its earnings are with investment-grade producers who are committed for years in advance. About $20 billion worth of new pipeline projects are approved. As they are completed, they will help to grow Enbridge's dividends."

Currently, Enbridge pays a 6.6% dividend yield, has a 62% payout ratio and has shown annual dividend growth over the last three years of about 10%. "It is trading at 17 times 2018 earnings and 16.6 times 2019 earnings. We like it."

A big supporter of Canadian banks, which account for almost 40% of the portfolio, Warwick cites  Royal Bank of Canada (RY) as a favourite. "It pays a 3.7% dividend and has a 44.7% payout ratio," says Warwick.

"It is one of the best banks in Canada and has grown its dividend over time," says Warwick. "Its return on equity is 18% and its capital ratio is 10.9%. This means it is lending about $9 for every dollar of equity, which is much better than the lending ratio might have been 30 years ago. I just look at RBC and say, 'It's trading at 11.4 times forecast 2019 earnings. Its dividend is growing at 5% or more every year. It's a cheap stock.'"

Looking ahead, Warwick is generally optimistic, citing low inflation rates, central banks that are taking a measured and cautious approach to raising interest rates, and a strong employment picture at home and in the U.S. And valuations are generally in line, with some exceptions.

But as a seasoned veteran Warwick is cautious about making a market call. He says Trump is taking a hard line with Iran by issuing a new set of demands concerning nuclear weapons. "I understand what he's doing. But something like that could hurt markets."

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Enbridge Inc51.10 CAD0.73
Royal Bank of Canada104.99 CAD0.22
Suncor Energy Inc42.35 CAD3.75

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Michael Ryval

Michael Ryval