Focus on the survivors

TD Dividend Growth’s Doug Warwick focuses on companies that have high barriers to entry in good industries, with good balance sheets

Diana Cawfield 23 April, 2020 | 1:23AM
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In these volatile times, veteran asset manager Doug Warwick favours a buy-and-hold philosophy, and maintains an approximate 40% weighting in Canadian banks in his bronze-rated TD Dividend Growth mandate.

“What’s happened in the last month was not on my radar screen, but the banks had return on equity of mid-to-high teens, which is better than most industries, and they trade at fairly low multiples relative to other stocks. These banks are great, the balance sheets are strong, but they’re going to have a tougher year or two going forward,” says Warwick, managing director at TD Asset Management in Toronto. He holds approximately 50% in the financial sector. 

Historically, the mandate was one of only seven funds among Canadian equity managers who were able to outperform the S&P/TSX Composite Index during the 2008-2009 financial crises.

Following his long-term strategy, the overall portfolio turnover is characteristically close to zero, currently 5%. “You want to buy things that you don’t think you ever have to sell,” says Warwick, who has four-decades of experience. “I’m a bottom-up, fundamental guy, and I try and buy a stream of dividends that will grow every year.”

When it comes to dividend-paying companies, Warwick agreed they go up and down through cycles. “I mean we’re down on everything right now. But if you have a company with high barriers to entry in a good industry, with a good balance sheet, that pays a pretty decent dividend, it will fluctuate but in a less volatile way.” Over time, free cash flow is important and companies that can consistently maintain that tend to be the larger, blue-cap companies. “They’re the survivors.”

Using stringent investment guidelines and an independent risk-management team of over 25 members, the average annual dividend yield in the portfolio is generally always higher than the TSX. According to Warwick, the average weighted dividend yield in the portfolio is 5.4% and 70% of the holdings yield over 4%. “If you’re a retiree with 80% of your money in bonds, I guess it won’t go down 30% like equities did, but it’s a little hard to live off the income unless you’ve got millions.”

He warns that it’s very dangerous to go around and reach for the highest yields in the market. “Sometimes they’re highest before they’re cut,” he says.  

The deals on dividend-paying companies
Along with five Canadian banks among the top 10 holdings, [The Royal Bank of Canada (RY), The Toronto-Dominion Bank (TD), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CM), and Bank of Nova Scotia (BNS)], the holding Canadian National Railway (CNR) meets the investment criteria.

“We like Canadian National Railway because it’s a Canadian duopoly, and as far as costs go, they’re really far ahead of trucks, they have a huge advantage there.” As well, Warwick says that CN is probably the most efficient and most profitable in North America, with a strong balance sheet and good free cash flows, along with providing dividend payments.

Brookfield Asset Management (BAM.A) is another favoured holding with its broad diversification across businesses and its global scope. “The company feels that they have a lot of runway to get even bigger, and it’s remarkable just how good the management is at that firm.” He also likes the fact that the managers are heavily invested in the company themselves, adding significant personal incentive.

Within the approximate 15% weighting in the energy sector, also prone to cyclical swings, about 11% is invested in pipelines, including Enbridge (ENB), and a 4% position in Suncor Energy (SU) whose “stock has just been hammered.”

“I do worry with this whole virus pandemic. The price of oil could go lower in the short term, and with storage filling up, companies might have to reduce dividends or defer them completely until things right themselves,” Warwick says.

In positioning the fully-invested fund, additional risk measures include diversification among 72 holdings and some exposure to U.S. and international stocks.

“Some portfolio managers went 20% into cash before all this coronavirus happened, but timing is very tricky. Market wise, I don’t think we’re through this, we might have seen the lows, maybe not. I think people will look through that and 2021 will be a recovery year, but it might not be until ’22 or ’23 before we’re kind of back to where we were. But for the longer-term, I’m just fine with this strategy,” he says. 

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Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.

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