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5 Cheap Moat-y Dividend Stocks

These income opportunities are trading at a discount to our fair value estimates and have a competitive advantage

Ruth Saldanha 14 April, 2021 | 4:38AM
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Enbridge oil tank

Everyone’s looking for new investments. In the past quarter, we’ve talked about Canadian stocks that mutual funds like, the most expensive stocks in Canada, and cheap sector stocks, among others.

With the run-up in markets from the lows of last year, however, there aren’t very many bargains to be had. In our overall coverage universe, only around 25 stocks are currently trading below our fair value estimates (FVEs). Four of the top five cheapest are in Cannabis. And four more in the top 10 are in oil and gas. Only two in the top 10 cheapest have an ‘economic moat’.

A company with an economic moat can fend off competition and earn high returns on capital for many years to come. The Morningstar Economic Moat Rating represents a company's sustainable competitive advantage. A company whose competitive advantages we expect to last more than 20 years has a wide moat; one that can fend off their rivals for 10 years has a narrow moat; while a firm with either no advantage or one that we think will quickly dissipate has no moat.

Today, we are looking for companies that are cheap according to our fair value estimates, also have an economic moat, and offer dividends for investors who want income. These companies have an expected dividend yield of at least around 4%. Here is the list:

Company

Economic Moat

Expected Dividend Yield (%)

Trailing Dividend Yield (%)

Morningstar Star Rating

Enbridge

Wide

7.2

7.0

4

BCE

Narrow

6.1

5.8

4

TC Energy Corporation

Narrow

5.9

5.5

4

TELUS Corporation

Narrow

4.9

4.6

4

CI Financial Corp

Narrow

3.9

3.9

4

Source: Morningstar Direct Data as of April 7, 2021

The cheapest of the five is rare triple threat Enbridge – undervalued, with a wide moat, and with a high dividend yield.  

The other energy company on the list is TC Energy. Morningstar analysts believe the company will meet 5% annual dividend growth for the next five years, driven by a healthy pipeline of growth opportunities. We believe the company has strong growth prospects with its highly secured and highly profitable NGTL system that will drive significant incremental cash flow for years to come while supporting the planned dividend growth.

Two are telecom companies, BCE and Telus. Morningstar analyst Matthew Dolgin says that BCE is his top pick, and is the most undervalued relative to his fair value estimate. “We really like both the wireline and the wireless business for BCE. Wireline is where they've really made some inroads. They've been building fiber-to-the-home, and it's allowed them to take some market share from Rogers where they compete head-to-head in wireline business in many places, and it's allowing them to price better, reduce their costs,” he says.

Finally, asset manager CI Financial. Morningstar sector strategist Greggory Waren increased his fair value estimate from $20 per share to $22 per share to account for the continued recovery in the equity, credit, and currency markets following the steep COVID-19-induced sell-off in the March quarter of 2020. “CI Financial continues to struggle with outflows from its fund operations, losing another $8.8 billion in AUM to outflows during 2020--reflective of a negative 6.7% rate of organic AUM growth (similar to what we saw during 2019). While positive wealth-management flows, market gains, and the acquisition of additional wealth-management operations have led to a dramatic increase in assets under advisement, fee pressures continue to be a drag on the firm's top-line growth, with the net result being a positive 2.8% CAGR for revenue during 2021-25,” he says.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
BCE Inc57.84 CAD-1.47Rating
CI Financial Corp13.17 CAD2.33Rating
Enbridge Inc51.89 CAD0.41Rating
TC Energy Corp56.63 CAD0.28Rating
TELUS Corp27.40 CAD-1.12Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Senior Editor at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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