Hello, we'll be ready to go in about 5 minutes.
Just to start off, Craig, I’d like to ask you about dividend investing in general right now. 10-year bond yields today are again at 14-month highs, and that’s bound to continue to hurt sentiment for competing income-producing investments. What’s a dividend investor to do right now – lighten up on our exposure, or just be very selective in the names we choose?
I would suggest that investors stay in the dividend sector. We feel that rates won't continue to climb significantly in the near term. The stocks that will get hurt the most are the interest sensitive sectors like REITs and pipelines.
What about, from a broad perspective, buying dividend stocks in the commodity sector right now? It's not a great day (or year, for that matter) for most commodities, either.
We feel that investors must change their thinking on the resource sector. It's no longer just about growth in emerging markets and the demand that it creates. There's a dramatic change going on in North America in how energy is being found, produced and transported. New technology is sharply bringing down the cost to find energy in NA, giving us a significant cost advantage over the rest of the world.
Let's go to Mark now, who has a follow-up question:
Yes, we do feel that there is potential for further dividend gains in the sector. Companies like Crescent Point, Enerplus Corp., and ARC Resources will all benefit from a declining cost structure, which should lead to greater profitability and potential for increased dividends.
Should investors then hunt down the smaller cap names in the energy sector?
Not necessarily. Small cap names are quite out of favour currently, so investors must be very selective in these names. There are some great undervalued smaller companies, but they typically won't pay dividends. Having said that, there is a place for them in your portfolio for longer-term appreciation. They simply carry a different risk tolerance for investors.
Yes, we feel it is sustainable. We own it in the Front Street Resource Class. The company was hurt earlier this year when they had some production problems at their Primate Field. Those problems seem to be behind the company now. The market will still wait for a quarter or two to confirm production has settled before valuing it higher. The company also produces heavier oil, which was out of favour earlier this spring but pricing has been improving. We like the management team and the assets.
Of course. We like the stock and it's owned in a number of Front Street funds. The company is currently awaiting approval for one of their projects that should be coming this summer. Once the approval is received, the company has an agreement to sell their portion of the project for $1.2 Billion in cash. This cash will go to development of their other assets. We feel it's extremely cheap based on the number of barrels of oil they own in the oil sands as well as the land they are developing in the Deep Basin.
It's one of the largest holdings in our resource fund. We've invested in this mgt team for the past 15 years through a number of companies that have been successfully operated and sold. This time around they have developed great long-term assets and it is one of the companies that we feel most confident about in the maintenance of their distribution.
Craig, we’ve focused on energy so far, but what about metal stocks, either base or precious. Is this a sector to consider as well right now when looking for yield?
At present, there are not a lot of mining names that pay significant dividends. Some of the gold names would appear to be high-yielding companies, but this is just due to the fall in their share price this year. As the price of gold has fallen sharply, we would expect dividend pay-outs to fall as well. Elsewhere, the forestry sector is starting to offer some good returns as the NA housing recovery takes hold. We recently saw Norboard re-introduce a significant dividend.
What about two dividend-paying Canadian mining stocks many of us have in our portfolios. The first is HudBay Minerals, which is a stock I own and is very close to a 52-week low. It’s just announced a debt offering worth $150 million. I just read a research report (which we’ll have details of later at Inside the Market’s analyst round up) that says this confirms the temporary dividend cut expected in the fall. What’s the outlook for this stock?
HudBay will still need to raise another $300-400 million to develop a South American copper mine. I think that there will be an over-hang on the stock with the market expecting another equity issue this summer. The company does have good assets and management, but the dividend is likely to be cut.
The second stock I’m wondering about is Teck Resources. I see that Dundee Securities has downgraded it today to neutral because of unexpectedly low met coal prices. What’s your outlook on this stock?
Teck is suffering from weaker than expected economic data coming out of China. The two main commodities that they produce are coal and copper, which are used extensively in infrastructure building. This is a case where we have to get away from looking for growth strictly in emerging markets. Here at home over the next decade there's a massive opportunity in the development of our natural gas assets for export as LNG....
Currently there are 6 LNG facilities being planned on the west coast. Tens of billions of dollars will go into the construction of these facilities, construction of pipelines as well as the drilling that must take place to find the gas to fill them. This will provide massive employment opportunities for BC and Alberta.
At this point, probably the natgas producers will benefit as the owners of the LNG facilities must acquire gas assets to operate them. Similar to how Petronas took out Progress Energy last year for $5.5 Billion, we feel companies such as Tourmaline, NuVista and Paramount Resources are likely to be acquired in the next few years. As well, we are currently seeing a rebound in the oil services sector as companies are starting to plan exploration programs to drill for the significant quantities of gas that will be required over the next decade.
We've been saying for the past few years that we expect oil to stay in a $80-100 price range. Currently world supply/demand of oil remains fairly well balanced. Most OPEC countries are currently producing at their limit and the only real growth outside of them is happening in NA. So, we don't see a big drop in oil coming any time soon.
Many of these Canadian mid-stream companies have seen their share prices driven up by those seeking safety and yield - and are getting a little pricey. We would add to these names if there was a large pull back because there will be significant demand for their services as the LNG build-out takes place. For those who are seeking mid-stream exposure, we might suggest looking at U.S. Master Limited Partnerships (MLPs). Front Street has a fund that focuses on this sector.
We own and like Crescent Point and Baytex. We feel that now is a good time to buy Crescent Point below $40. Baytex we like as a longer-term hold. They have suffered this year due to the heavy oil differentials, but have great assets for the dividend model. We don't hold Cenovus.
The dividend is too high and we don't feel it's sustainable. We feel that the Board may reduce the dividend slightly this year.
And, just for a moment, let's switch back to precious metals...
No, unlikely. The gold price has dropped quite dramatically since the last distribution. Capital costs continue to rise at their Pascua Lama mine. There are also fears that their debt rating will be further downgraded if gold continues to weaken. Their 4% dividend yield is more of a reflection of their share price falling this year.
Yes, we own Norboard and continue to see moderate growth in the U.S. housing sector. Other names we like, although they pay minimal dividends, are West Fraser Timber and Canfor. These companies are also levered to a fall in the Canadian dollar as their costs are domestic and they sell mainly into the U.S.
Thanks Craig, time for just one more question, this one from Steve
Sorry. It's not a name we follow.
OK, thanks Craig. We have to wrap things up, but a very interesting chat for investing ideas. Any final thoughts you'd like to leave with us today?
We feel that the changing demographics and the desire for yield are two trends that are not changing any time soon. The opportunity being provided in NA resource stocks currently will ensure that we have a number of companies to meet these needs going forward. Thanks everyone.
OK, thanks to all for joining us. Sorry to those who left questions we didn't get around to - we had a very high participation today. Next week though, you'll have another chance to gain insight on the energy sector, when Eric Nuttall with Sprott joins us again.
That's next Tuesday at 1pm ET, the usual time for our weekly live discussion here at Inside the Market.