Four sustainable stocks to make your portfolio ‘responsible’

These names rank high on ESG parameters, can grow profit, and are trading at a discount!

Vikram Barhat 25 September, 2019 | 1:39AM

Windmill

This article is a part of Morningstar Canada’s ESG Special Report week

Common misperception that socially responsible investing comes at the cost of performance has for long prevented retail investors from buying into sustainable stocks. As more studies indicate that’s not the case, the outdated notion appears to be making way for the proliferation of sustainable investing which incorporates environmental, social, and governance (ESG) factors to assess investing options.

Over the past few years, a growing interest among institutional investors has been the driving force behind the mainstreaming of ESG investing. Now, the asset class has started to see an uptick in individual investors. Morningstar research bears out the fact that investors across ages and genders, favour ESG investments.

“Investors should, in fact, demand financial performance alongside the idea that they are putting their money towards companies that are going to contribute to a more sustainable future,” says Jon Hale, Morningstar’s  global head of sustainability research, adding that ESG as an investment theme is going to be exceedingly important going forward.

Instead of being a drag on performance, ESG investing serves as a positive force to propel returns. Long-term investors may want to take a look at these companies. They rank high on ESG parameters and have the ability to grow profit and investor portfolio performance.

Nokia Oyj ADR

 

Ticker

NOK

 

Current yield

4.39%

 

Forward P/E

12.64

 

Price

US$5.16

 

Fair value

US$7.80

 

Value

34% discount

 

Moat

None

 

Moat Trend

Stable

 

Star rating

****

Data as of September 17, 2019

Nokia (NOK), a dominant player in the telecommunications equipment industry, derives revenue from selling wireless and fixed-line hardware, software, and services. The Finnish telecom giant also licenses its patent portfolio to handset manufacturers and makes royalties from Nokia-branded cellphones.

“Finland takes the title of the world’s most sustainable stock market thanks to holdings like Nokia, an ESG leader within the global technology hardware industry,” according to a Morningstar report. Nokia recently took out a €1.5 billion loan to achieve its goals of reducing greenhouse gas emissions, as part of its commitment to sustainability, says a Financial Times report. 

The company has a robust strategy to stay ahead of its competition, particularly its networks business. “Nokia’s core operation should benefit from 5G network infrastructures requiring more hardware to cover the increased quantity of spectrums bands,” says Morningstar equity analyst, Mark Cash, who pegs the stock’s fair value at US$7.80.        

Enbridge Inc

 

Ticker

ENB

 

Current yield

6.33%

 

Forward P/E

16.69

 

Price

$46.7

 

Fair value

$62

 

Value

25% discount

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

****

Data as of September 17, 2019

Canadian energy giant, Enbridge (ENB) generates, distributes, and transports energy in the U.S. and Canada. It operates crude and natural gas pipelines, including the Canadian Mainline system, and owns and operates Canada’s largest natural gas distribution company. Additionally, Enbridge produces renewable and alternative energy.

According to the company’s 2018 ESG and sustainability performance report, its energy conservation programs, in place since 1995, have “reduced energy consumption and CO2 emissions equal to taking nine million cars off the road for a year.”

The firm’s environment conservation efforts have eared it a place on the Dow Jones Sustainability North America Index, and it also has a place on Bloomberg’s 2019 Gender-Equality Index, for advancing gender parity in the workplace, the report says.

Thanks to its Mainline system and regional oil sands pipelines, Enbridge is well positioned to benefit from growing oil sands supply dynamics. “The regulated Mainline system generates attractive tolls and represents approximately 70% of Canada’s pipeline takeaway capacity,” says Morningstar equity analyst, Joe Gemino, who puts the wide-moat stock’s fair value at $62.

Air Canada Class B

 

Ticker

AC

 

Current yield:

-

 

Forward P/E:

8.67

 

Price

$44.09

 

Fair value:

$44

 

Value

Fairly valued

 

Moat

None

 

Moat Trend

Stable

 

Star rating

***

Data as of September 17, 2019

Canada’s largest airline, Air Canada (AC) serves nearly 50 million passengers each year through over 1,500 daily flights to around 200 destinations. In 2018, the company generated $18 billion in revenue and posted 6.5% operating margins.

The Canadian carrier’s commitment to sustainability is reflected in many awards that recognize corporations’ achievements in the ESG space. More recently, Air Canada bagged awards for Best Sustainability Contribution in 2018 and was adjudged the 2018 Eco-Airline of the Year by Air Transport World, according to Air Canada’s 2018 corporate sustainability performance report.

To offset Canadian market’s limitations, the company has embarked on global expansion, “ordering widebody aircraft and capitalizing on sixth freedom traffic (flying U.S. passengers internationally from Canadian airports),” says Morningstar equity analyst, Brian Bernard, who recently upped the stock’s fair value from $33 to $44.

The Toronto-Dominion Bank 

 

Ticker

TD

 

Current yield:

3.75%

 

Forward P/E:

11.95

 

Price

$75.73

 

Fair value:

$81

 

Value

7% discount

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

***

Data as of September 17, 2019

One of Canada’s two largest banks, Toronto-Dominion (TD) operates three business segments: Canadian retail banking, U.S. retail banking, and wholesale banking.

TD Bank Group is a member of the Responsible Investment Association (RIA), an organization committed to responsible investment through the incorporation of ESG factors into the selection and management of investments. The bank was also adjudged one of Canada’s greenest employers for the 10th consecutive year by Mediacorp Canada.

The lender derives approximately 60% of its revenue from Canada, 35% from the U.S., and the rest from other countries. “Toronto-Dominion has done an admirable job of focusing on its Canadian retail operations and growing into number-one or -two market share for most key products in this segment,” says a Morningstar equity report.

On the Canadian side, the bank has a whopping $390 billion in assets under management and ranks as the number-one card issuer in the country. “Toronto-Dominion should remain one of the dominant Canadian banks for years to come,” asserts Morningstar equity analyst, Eric Compton, who estimates the stock’s fair value to be $81.

You can find our page on Sustainability here

 

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Air Canada Class B45.38 CAD-0.55
Enbridge Inc47.15 CAD0.11
Nokia Oyj ADR5.09 USD1.60
The Toronto-Dominion Bank74.35 CAD0.04

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.