2 days ago
This $4.6-billion money manager used the April downturn to buy Canadian dividend stocks on sale
While the U.S.-led trade war hasn't been as catastrophic for Canada as originally feared, at least so far, money manager Scott Lysakowski is still cautious about the impact the ongoing uncertainty is having on the economy.
'It hasn't really materialized in the numbers yet,' says Mr. Lysakowski, managing director and a senior portfolio manager at RBC Global Asset Management in Vancouver. He's also head of the Phillips, Hager & North (PH&N) Canadian equity team.
While he's 'not overly defensive' right now, Mr. Lysakowski says he's 'mindful' of the pullback in business spending and impact on jobs that could weigh on economic growth in the coming months.
'And of course, when you've had the markets recover like they have, the risk-reward today is a lot less compelling than it was during the depths of the market volatility in April,' he says.
Mr. Lysakowski, who manages the $4.6-billion PH&N Dividend Income Fund, used the April downturn to buy companies he felt were on sale, including Canadian dividend-paying stocks.
The fund returned 16.7 per cent over the past 12 months, as of April 30, and has a three- and five-year annualized return of 8.5 per cent and 15.1 per cent, respectively. The performance is based on total returns, net of fees.
The Globe spoke with Mr. Lysakowski recently about what he's been buying and selling.
Name three stocks you own today and why.
Arc Resources Ltd. ARX-T, the mid-sized natural gas producer, is a long-time core holding and a stock we've been adding to recently. It has assets in some of the best acreage in the Montney region of northeast B.C. and northwest Alberta.
Arc is a low-cost producer that's disciplined with its production growth and capital allocation. And despite natural gas being a volatile commodity, it has done a good job of maintaining and growing its cash flow. Its strong balance sheet has allowed it to acquire more assets to help it build inventory for long-term growth. The company has also sustained and grown its dividend over time, which is an important feature for us.
Canadian National Railway Co. CNR-T and Canadian Pacific Kansas City Ltd. CP-T are both core holdings and stocks we added to in April. Before the tariff threats, railroad stocks faced freight recessions, which are characterized by declining volumes, pricing pressure and operational challenges such as labour unrest and wildfires. We're about three years into this freight recession, a follow-on from the pandemic, which meant lagging performance. We believe railway stocks are high-quality growth cyclicals that will be impacted by economic activity but will survive.
CP has been the clear outperformer in recent years and continues to drive synergies thanks to its merger with Kansas City Southern, and we expect those results to continue.
There's a particular opportunity for CN to make up some lost ground. CN has lagged its peers in North America with declining volumes and operational outages. The company is focused on returning to its historical growth trend in terms of volumes, getting some of these operational issues behind it and focusing on productivity. We have been adding more CN than CP recently because we see more growth potential ahead.
Telus Corp. T-T is a stock we've owned for several years and bought more of recently. All telecoms have faced several headwinds, including increased wireless competition, decreasing population growth and rising interest rates.
All of the telecom stocks have underperformed the market significantly, but Telus has done slightly better than its peers. It has delivered slightly better than average revenue and EBITDA [earnings before interest, taxes, depreciation and amortization] growth. Its capital spending has peaked and is now being reduced, which enabled it to recently increase its dividend, which is quite different than some of its peers. Telus has also signalled to the market that it aims to deliver some dividend growth over the next few years.
Name a stock you sold recently.
Northland Power Inc. NPI-T, the offshore wind generation company, is a stock we recently exited after owning it since the fall of 2023. Investor sentiment toward renewable stocks has soured lately with the new U.S. administration removing some of the tax incentives in the industry. That led us to reduce our exposure to that group as a whole, but specifically to Northland Power.
The company is developing two large-scale offshore wind projects. It has a reasonable track record of delivering projects like this and does its best to de-risk them, but as it moves through the construction phase, it will experience an elevated payout ratio – the dividends it pays out as a percentage of cash flow will be high.
The market is concerned about the payout ratio and the potential risk of a dividend cut. So, as a dividend manager focused on dividend growth, I don't want to be invested in companies that are cutting their dividends. We decided to step aside during this period of uncertainty.
This interview has been edited and condensed.
