Market Call: Rebecca Teltscher's outlook on Canadian Dividend Stocks

Key Concepts

• Market Optimism: The current market sentiment is characterized by what the guest describes as "blind optimism," where positive economic news is interpreted favorably, and even negative news (like poor payroll reports) is seen as a catalyst for interest rate cuts.
• Interest Rate Sensitivity: The market is heavily reliant on expectations of interest rate cuts, particularly from the US Federal Reserve, as a primary driver of momentum.
• Canadian Rate Cuts: Canada has been consistently cutting rates for the past year, but this has not necessarily stimulated the economy, highlighting that rate cuts are a tool, not a complete solution for economic downturns.
• Valuation: The guest emphasizes the importance of valuation, noting that high valuations can pose a risk of multiple compression even for fundamentally strong companies.
• Credit Cycle: The current phase of the credit cycle is considered cautious, with a preference for larger, more diversified banks over alternative lenders.
• Dividend Cuts: A dividend cut is viewed as a breach of trust with shareholders, and a less desirable option compared to issuing equity or selling assets.
• Long-Term Thesis: For investments, the long-term thesis remains crucial, even if short-term blips or challenges occur.
• Demographic Trends: Ageing demographics are identified as a significant long-term trend that can be leveraged through specific investment plays.
• M&A in Alternative Lending: There is ongoing merger and acquisition activity in the alternative lending space, with examples like Laurentian Bank and National Bank.
• Capital Markets and Wealth Management: Recent bank earnings beats were primarily driven by performance in capital markets and wealth management, rather than traditional banking metrics.
• Serial Acquirers: Companies that grow primarily through acquisitions can face challenges as they become larger, requiring bigger acquisitions and facing increased competition.
• Defensive Sectors: Companies in sectors like utilities and laundry services are considered defensive due to their stable revenue streams and essential services.

Market Momentum and Economic Disconnect

The TSX has reached new intraday highs, with several record closes recently. Rebecca Teltscher, Portfolio Manager at New Haven Asset Management, describes the current market momentum as driven by "blind optimism." She observes a disconnect between market performance and economic fundamentals, where "good news is good news and bad news is also good news." For instance, a poor ADP payrolls report led to a market rally on the expectation of an interest rate cut, while positive jobless claims data also fueled optimism about the economy's resilience. Teltscher has been noting this disconnect for over a year, and it appears to be widening.

A brief period of volatility three weeks prior was attributed to skepticism around tech and AI, but the primary driver of the current market is the expectation of an interest rate cut, which is already priced in. Teltscher questions what will happen after this anticipated cut. She also points out that while the US Federal Reserve is expected to cut rates, Canada has been cutting rates for the past year without significant economic stimulation, suggesting that rate cuts are a component of economic stimulus but not a sole solution.

Investment Analysis of Specific Canadian Stocks

ARC Resources (ARX)

Teltscher views ARC Resources as a good long-term buy despite recent underperformance, which she attributes to low natural gas prices in Canada. The disparity in natural gas prices compared to the US is due to fewer LNG export facilities in Canada. However, with projects like LNG Canada and Cedar LNG progressing, increased export capabilities are expected to drive up natural gas prices. The delay in the Apache project due to flooding is seen as a short-term issue. ARC Resources possesses high-quality assets, a strong balance sheet, and a drilling inventory exceeding 15 years, meaning they don't need constant acquisitions to maintain production. Teltscher considers it her favorite natural gas holding and has been adding to it around the $24 mark.

Northland Power (NPI)

Northland Power has experienced a significant decline following a dividend cut and issues with its Hai Long project in Taiwan, which is taking longer to commission and requires additional capital injection. The company cut its dividend by 40%. Teltscher expresses disappointment, stating she was "blindsided" by the events. While she acknowledges that project delays happen, she is particularly unhappy with the dividend cut, viewing it as a breach of long-term commitment to shareholders. She would have preferred equity issuance when the stock was higher or asset sales. Although she hasn't sold her shares yet, she is not buying more and is still analyzing the situation after a recent meeting with management. She believes the company's assets are undervalued, but the stock price drop is due to a lack of trust and transparency from management.

EQ Bank (EQB)

EQ Bank's acquisition of PC Financial has been well-received by the market, with the stock seeing a significant bump. Teltscher notes that this is part of a trend of M&A in the alternative lending space, citing the sale of Laurentian Bank. While not owning EQ Bank, she doesn't "hate the name." However, given her cautious view on the credit cycle, she prefers larger, more diversified banks over alternative lenders. She points out that EQ Bank's recent earnings were not strong, with higher-than-expected provisions for credit losses, and the stock price seems to be ignoring this fundamental weakness in favor of the acquisition news. She advises keeping an eye on the credit cycle when considering alternative lenders.

Royal Bank (RY) and TD Bank (TD)

Teltscher likes both Royal Bank and TD Bank for the long term and owns both in her portfolio. However, she is hesitant to add new capital at current prices due to their recent strong performance. She notes that TD was a "no-brainer" to buy a year ago when it was under $100, but Royal Bank has moved up the least this year, narrowing its premium over other large banks. She finds it difficult to buy RBC over $200. She highlights that both banks' recent earnings beats were driven by capital markets and wealth management, which is expected in a rising market but not indicative of traditional banking strength like loan growth or provisions for credit losses. If forced to add to one, she would lean towards Royal Bank due to its lower premium, but believes there are better places to deploy capital with higher, growing dividend yields.

Canadian Apartment Properties REIT (CAR.UN)

Teltscher's initial assessment of Canadian Apartment Properties REIT (CAP REIT) a year ago was not impressed with management, who were planning to sell older apartments and buy newer ones, leading to a shrinking portfolio. She questioned the value-add in such a strategy. However, the stock's valuation has since come down, offering an almost 4% yield, making it more attractive. She also notes distress in other private rental businesses, creating an opportunity to acquire newer buildings. While she wouldn't buy more if a 5% position already exists due to concentration, she wouldn't sell it either. She doesn't expect a quick recovery but sees it as interesting for the long term and is now considering it more seriously.

TFI International (TFII)

Teltscher does not own TFI International and it's not on her radar, primarily because it is too cyclical and risky for her investment strategy. She acknowledges that the stock's valuation is likely attractive given its recent drop due to a prolonged recession and tariffs. However, she sees more opportunity in the rails, specifically CN Rail, which she recently met with. Both TFI and CN Rail have faced challenges from tariffs and a freight recession. Teltscher prefers CN Rail due to its "irreplaceable assets" (existing rail infrastructure), which present higher barriers to entry compared to trucking businesses like TFI. For those with a stronger risk appetite, TFI could present an opportunity.

Dollarama (DOL)

Dollarama holds a special place for Teltscher as her first stock purchase. She acknowledges being wrong about her initial concerns regarding market saturation. The company has defied expectations by expanding into other jurisdictions and benefiting from the "trade-down" effect due to inflation, where consumers shift to more affordable options. She praises Dollarama's simple, replicable business model and short payback periods for new stores. However, she finds its current valuation very high, with significant gains over the past year. She warns of the risk of multiple compression if growth slows, even for a great company. While she would continue to hold it if already owned, she would trim the position if it became too large a percentage of the portfolio to maintain diversification. She would not be adding more at current valuations.

Canadian Natural Resources (CNQ)

Teltscher considers Canadian Natural Resources a "buy and hold forever" stock, provided management remains disciplined. She highlights its impressive 11% total return in an environment where oil prices have declined. She believes CNQ is best-in-class among large-cap oil companies, with low decline rates, strong management, and premium assets. She would buy it if it's under $50 or the yield is over 50%. The company's discipline in returning capital to shareholders through buybacks and dividend increases makes it a favorite. She sees an opportunity to buy more if the price drops below $45.

Savaria (SV)

Savaria is Teltscher's play on the aging demographic, offering mobility equipment like stairlifts and elevators for people who wish to age in place. She chose Savaria over senior housing options like Chartwell because of the desire for individuals to remain in their homes. While Savaria had tariff issues due to its manufacturing in China and sales to the US, she notes that the company has made changes and its products are FDA-regulated and KUSMA compliant, meaning they do not face tariffs. The stock experienced a scare and dropped from $20 to $16 but has since recovered. She expects it to continue growing.

NFI Group (NFI)

NFI Group, a bus manufacturer, has experienced a downside of 5% since Teltscher's recommendation. The company has faced challenges including supply chain issues (the bankruptcy of its seat manufacturer, which NFI subsequently purchased) and a battery recall. These issues have caused delays in getting buses on the road. Despite these setbacks, Teltscher believes the underlying fundamentals remain strong, with demand for hybrid and electric buses and stable government municipal contracts. She has remained invested in NFI.

Algonquin Power (AQN)

Teltscher likes the utility space and owns Algonquin Power, finding it to be the cheapest way to access distribution assets, particularly in the US, compared to other utilities like Fortis and Emera which are trading at higher multiples. She notes that Algonquin has performed well, up 30% this year, and is still considered cheap from a valuation perspective. The company has sold off its renewables to focus on a pure-play utility model with 4-7% rate base growth. With a new management team and CFO joining, she believes Algonquin is well-positioned. She also sees potential for it to be a takeout candidate due to the need for distribution utilities.

Gibson Energy (GEI)

Teltscher does not own Gibson Energy directly but notes that a partner in her firm does and likes it. She finds it trades cheaper than other midstream companies. However, her firm prefers Pembina for its midstream exposure due to a greater focus on gas infrastructure (LNG exports and natural gas processing for power consumption) compared to Gibson's primary focus on oil infrastructure. She believes Gibson's dividend is safe at almost 7%, and one could do well owning it. She suggests owning both Gibson and Pembina if possible, noting Pembina's dividend yield is lower but still sizable.

Bank of Montreal (BMO)

Teltscher views Bank of Montreal's earnings beat as the "lowest quality" among the banks that have reported. She explains that the beat was achieved by releasing provisions back into earnings, signaling a recovery in the US commercial banking sector. However, she believes it is premature to release these provisions, as she sees the credit cycle as just beginning, not nearing its tail end. She feels banks should be more conservative and take more provisions at this stage. She has never owned BMO because it traded at a premium similar to Royal Bank but lacked the same quality of assets. She also points to past issues with loan quality in the US. She is not buying BMO at this time.

Brookfield Infrastructure Partners (BIP)

Teltscher's firm owns Brookfield Infrastructure Partners (BIP) and likes it, noting its 5% dividend yield. She advises against setting short-term price targets for long-term investments. She also owns Brookfield Renewables and has been buying more of BIP as it has only appreciated 10% while Brookfield Renewables has taken off. She sees significant growth potential due to the diversification of its assets (toll roads, infrastructure, utilities, data centers) and geographic reach. Their capital recycling strategy, buying at low valuations and selling at a premium, is also a strong point. She believes it is currently at a good valuation.

Bank of Nova Scotia (BNS)

Teltscher owns Bank of Nova Scotia and believes it will be fine in the long term, but is hesitant to put new capital into it at current valuations. She notes that Scotiabank has the lowest valuation and highest dividend yield (around 4.6-4.7%) among the big banks, which is attractive. However, she reiterates that all banks are trading at a premium relative to historical levels. She also points out that Scotiabank's earnings beat was driven by capital markets and wealth management, not underlying banking fundamentals like loan growth, which is stagnant. Provisions for credit losses are slightly increasing on the international side. While she doesn't like buying it here, she expects it to be fine long-term.

Constellation Software (CSU)

Teltscher does not own Constellation Software and is not surprised by its recent decline. She describes it as a former "tech darling" that experienced rapid valuation growth. She believes that such high valuations are unsustainable, especially for serial acquirers. As the company grows, future acquisitions need to be larger, leading to increased competition and premium prices. She suggests that growth-by-acquisition stories often don't end well. She also notes that Constellation does not pay a dividend and she prefers to see organic growth alongside acquisitions. She believes the multiple compression is a result of these factors and that Shopify has now become the new "tech darling" in Canada.

Rebecca's New Top Picks

Teltscher found it challenging to select three top picks due to high market valuations.

Enbridge (ENB)

Enbridge is her first pick, described as the largest energy infrastructure company in North America. It recently raised its dividend by 3% and targets 4% organic growth, with $10 billion in capital deployment planned for next year. Teltscher highlights that Enbridge does not need to pursue large, new greenfield projects with significant political and regulatory risk, as it has $35 billion in CAPEX over the next few years for brownfield projects and expansions on existing infrastructure. This approach minimizes regulatory risk. The company offers a dividend yield of over 5%, which is growing with earnings and cash flow. A significant portion of its earnings are regulated or under take-or-pay contracts, minimizing commodity price risk.

KBL (KBL) - K-Bro Linen Inc.

K-Bro Linen Inc. is her second pick, a smaller market cap company that she typically avoids but finds compelling due to its stability, long-term contracts, and potential for both organic and M&A growth. The stock has declined this year due to a transformational acquisition in the UK. Teltscher believes the synergies from this acquisition are understated and expects them to be achieved over the next 24 months. The company has a strong management team, including Rona Ambrose on its board. K-Bro provides laundry services to hospitals and hotels, making it a diversified and defensive business. She views the stock's dip as an opportunity to buy more for the long term.

Premium Brands Holdings (PBH)

Premium Brands Holdings is her third pick, a company she is very enthusiastic about. She notes that the company has been expanding its US facilities to take on US projects, such as supplying Costco nationwide. This expansion is now complete, and they are beginning to take on US orders, including a new organic, sugar-free meat stick product that is expected to contribute to earnings going forward and will launch in Canada in January. Teltscher highlights the growing consumer demand for higher-quality, organic, and less processed food items, which aligns with Premium Brands' product offerings. She points out that while consumers may not recognize all their brands, they are prevalent in stores like Costco and grocery outlets, and they also supply products for companies like Starbucks. She anticipates continued success from their US expansion.