MOOSE MARKETS

INVESTING THE CANADIAN WAY

Mike

Buy List Stock for January 2024: Stella-Jones (SJ.TO)

A new Canadian buy list stock on my list for January 2024 is Stella-Jones (SJ.TO), a special beast in the materials sector. While its business model revolves around lumber prices, most of its revenue comes from products essential to infrastructure projects: utility poles and railway ties. SJ.TO’s business is less affected by price fluctuations than if it was all about residential lumber. Find out more about why I bought shares of SJ.TO in December 2023.

See my U.S. buy list stock pick for this month here.

Stella-Jones Business Model

Stella-Jones Inc. is a Canada-based producer of pressure-treated wood products. It supplies various electrical utilities and telecommunication companies with wood utility poles and North America’s short line and commercial railroad operators with railway ties and timbers. SJ.TO also provides industrial products including wood for railway bridges and crossings, marine and foundation pilings, construction timbers, and coal tar-based products.

Additionally, the Company manufactures and distributes premium treated residential lumber and accessories to Canadian and American retailers for outdoor applications, with a significant portion of the business devoted to servicing Canadian customers through its national manufacturing and distribution network. The Company operates 45 wood treating plants and a coal tar distillery across Canada and the United States, complemented by a procurement and distribution network.

Discover other great picks in our 2024 Top Stocks booklet. Download it now.

Investment Thesis for SJ.TO 

With utilities and railroads as its main customers, Stella-Jones will keep getting sizable orders and getting paid. SJ.TO’s revenue surged between 2017 and 2021 because demand for its products was strong from both sides of the border. Business has slowed since the second half of 2021, but SJ.TO continues to grow. In 2023, it reported impressive numbers as demand for infrastructure products is surging. With 15 facilities in Canada and 25 on U.S. soil, Stella-Jones can deliver its products promptly.

The company has proven to be a defensive pick during the pandemic. The “lumber COVID-hype” is over, but SJ.TO remains a solid business benefiting from multiple growth vectors. While residential construction may slow down due to higher interest rates, the need for more infrastructure and major projects continue to drive sales higher.

A portion of the company’s growth in recent quarters was fueled by recent acquisitions and margin expansion. Management mentioned it was seeking acquisition targets – we like that!

Buy list stock. Graphs showing 5-year evolution of Stella-Jones's stock price, revenue, EPS, and dividend payment

SJ.TO Last Quarter and Recent Activities

Recently, Stella-Jones impressed the market and analysts with a killer quarter; revenue up 13%, and EPS up 79%! Excluding the acquisition of utility pole manufacturer Texas Electric and the positive currency impact, sales were still up 7%. Despite understandable lower sales for residential lumber, the company saw an organic growth of 17% from its infrastructure-related businesses. Utility sales were up 32.3%, Railway ties +15.6%. Earnings jumped on expanding margins in SJ.TO infrastructure-related businesses, helped by businesses acquired in late 2022 and 2023.

Potential Risks for Stella-Jones

SJ.TO is highly dependent on macroeconomic factors. Although the company enjoys a stable replacement business for railway ties and utility poles, those segments do not always grow at a fast pace. The residential lumber division depends on the health of the housing market. Fueled by strong results, SJ.TO’s stock price skyrocketed in 2023. It’s always an additional risk to buy when a stock almost doubles in value.

Going forward, Stella-Jones will remain dependent on lumber pricing. If demand is strong, it will seem to be a robust business. Like any commodity producer, it experiences uptrends and downtrends. This seems to be a good deal with a forward PE ratio below 14.

Discover other great picks in our 2024 Top Stocks booklet. Download it now.

SJ.TO Dividend Growth Perspective

Another reason I chose SJ.TO as a buy list stock is that it’s dividend has almost doubled over the past 5 years, yet the company exhibits a very low payout ratio. Unfortunately, as is the case with many low-yielding stocks, the combination of a low payout ratio and low yield makes the DDM calculation inadequate. Going forward, shareholders can expect mid single-digit dividend growth. The latest dividend increases were more than generous (going from $0.15/share to $0.18/share in 2021 and then to $0.20/share in 2022, and now to $0.23/share in 2023), but for planning and valuation purposes, we would rather stick with a more conservative scenario.

Final Thoughts on Stella-Jones

In 2023, the company reported impressive numbers with demand for infrastructure products surging; despite a surging stock price in 2023, it still trades at an attractive forward PE of 14; infrastructure and major projects should continue to drive sales higher; the company is on the lookout for more acquisition targets. So, lots of growth vectors on its dashboard.

What’s not to like? Stella-Jones is fully deserving of a spot as a buy list stock for many dividend growth investors.

What to Expect for 2024

It’s hard for investors to know what to expect for 2024. Recession or a soft landing? Interest rates cut? What about bonds? And politics and wars? Here’s some insight.

Currently, a contrast exists between the resilient U.S. economy, driven by enthusiastic consumers, and a Canadian economy showing fatigue due to the strain of continuous spending. Long fixed-rate mortgage contracts in the U.S. versus the 5-year contracts in Canada contribute to this contrast.

Despite the S&P 500’s impressive double-digit growth in 2023, this surge was primarily propelled by a select few mega-cap stocks, known as the “magnificent 7,” contributing two-thirds of it.

See part of our best dividend stocks selection for 2024, download our Top Stocks booklet now!

Recession – Are We There Yet?

Predictions of a 2023 recession, including mine, were wrong. However, we saw the first signs of a slowdown in Canada in late 2023. Not calling it a recession…yet. I’m still convinced the economy will suffer from the combination of high inflation and high interest rates.

Graphs showing GDP is flattening in Canada while it is still growing in the U.S.
Flattening in Canada; still growing in the U.S.

Although a slowdown might loom in 2024, robust job markets in the U.S. and Canada, coupled with demographics where more people retire than join the workforce, might help the soft landing wished for by central banks.

Graph showing unemployment rates that have been quite low in Canada and the U.S. since early in 2022, but inching up a bit in Canada in late 2023
Low unemployment rates in Canada and the U.S., but inching up a bit in Canada late in 2023.

Recession or not, current interest rates will significantly affect 2024.

Lower earnings

Expect weaker corporate earnings, especially in the industrials, automotive, and consumer discretionary sectors, affected by restrained consumer spending. Canadian Tire (CTC.A.TO) sold fewer discretionary items as consumers focus on essential purchases; U.S. Home Depot (HD) consumers take on smaller projects; car sales will barely go up; and so on.

Chart of global car sales in units rebounding in 2023 but still at lower levels that pre-pandemic in 2019

Holdings in such cyclical companies are in for a few poor quarters. Should you jump ship? Short answer: no.

Zombie companies, interest rates

The number of Zombie companies, unprofitable businesses that survive by taking on new debt, went from roughly 500 to over 700 in 5 years.

Despite possible rate cuts for 2024, we won’t be going back to a cheap money era. Interest rates will stay relatively high as companies renew their debt. We’ll see zombie companies die and interest charges rise for capital-intensive businesses, including telcos, utilities, and REITs. This lagging effect will last the year and beyond. Brace for impact.

See part of our best dividend stocks selection for 2024, download our booklet now!

Market liquidity

This paints a pretty bleak future for your investments.  However, there’s $6 trillion sitting in cash on the sidelines, the highest level ever seen in U.S. money market funds. If the Fed announces rate cuts, that money won’t go into bonds or in declining high-interest savings accounts; it’ll likely return to the market. Another reason to stay invested in holdings you’re confident about.

Graph showing very steep growth of total assets in U.S. Money Market Funds ro a record high

Bond rally?

The current inverted bond yield curve shows short-term bonds offering higher yields than long-term bonds, a sure sign that the market thinks interest rates will decline.

Bond yield curves for 3-month to 30-year terms in 2023

I’m not a fan of jumping from one strategy or asset allocation to another, and I’m not recommending that you do so. However, income-seeking investors might want to look to bonds. Short-term bonds tied interest rates should do well in 2024 as opposed to long-term bonds.

AI for Cost Savings?

Suffering from the slowdown, higher interest charges, inflation, what will companies do? Lower their costs to improve their margins. Using artificial intelligence (AI) is a way to enhance productivity.

A sound strategy for investors is finding companies that will profit from the AI wave, no matter what; there are even dividend payers among them!

  • Chip markers: Nvidia and AMD are obvious winners. Other semiconductors companies (TSM, Broadcom or Intel) could also benefit from the quantity of chips AI needs. Semiconductor equipment providers (Lam Research or ASML) could see their backlog grow.
  • Software enterprises: Companies could use AI to improve their software products; others, like Accenture, to boost their consulting and strategy services.
  • Healthcare: Healthcare companies like Abbott Laboratories, Medtronic, and McKesson already invest in AI to improve productivity.

See part of our best dividend stocks selection for 2024, download our booklet now!

Renewables & Infrastructure Investment

Relying heavily on debt to fund projects and government investment, renewable utilities have been on a rollercoaster for two years, with the wind energy industry the most affected.

Setting up wind farms is complex and costly, as is connecting them to the grid. Vast quantities of raw materials are needed, and inflation made construction costs explode. Wind energy a less performant energy solution for now when compared with the ease of installing solar panels on rooftops!

Solar energy is a cheap way to generate electricity. Like wind, it’s an intermittent energy source but more predictable.

The solution for reducing carbon emissions is a combination of hydro electricity, wind & solar energy, natural gas, and potentially nuclear energy. Governments will spend billions in renewable projects, leading to major infrastructure spending. My favorites are Brookfield (Renewable and Infrastructure), NextEra Energy (the parent company) and Xcel (regulated/green energy mix). But utilities aren’t the only ones to benefit from this wave of money…

Alternative asset managers

Infrastructure projects don’t generate cash flow immediately, far from it. To invest and manage them, you need specialists called alternative asset managers.

Investing in alternative asset managers is a great way to diversify your portfolio. Usually, their returns aren’t determined by what’s happening on the market, and they can be about 5-7% above inflation over long periods. My favorites? Brookfield (BN or BAM) and Blackstone (BX).

Short-Term vs. Long-Term

The short-term view of the market might be cloudy, but long-term looks much brighter:

Total Return evolution for Canadian and U.S. market over the last 20 years

Staying on the sidelines after the tech bubble crash, 9/11, the financial crisis, the European debt crisis, Brexit, or COVID-19 would have meant missing 20 magical years on the market! Conclusions:

  1. Staying invested is the best solution, always.
  2. The market might not give you much for several years. Be patient and focus on your growing dividends.

2024 Playbook 

Don’t overhaul your investing strategy and start over. Adjust your portfolio to ensure you are well-invested and poised for what’s coming. A potential long bear market affects investors who are invested and those with cash on the side. Here’s the playbook.

Invested investors

  1. Review your portfolio; ensure it’s well-diversified across several sectors
  2. Identify weaker looking stocks; re-examine if you still want to hold them
  3. Trim overweight positions
  4. Optimize your holdings with better stocks (strong metrics, growth potential)
  5. Build a cash reserve if you’re retired and depend on your portfolio to generate income

Cash on the side investors

You could wait for years and never get today’s price again. Instead:

  1. Build a list of stocks to buy now
  2. Invest 33% of your money now
  3. Wait for a quarter, review earnings, invest another 33%.
  4. Rinse & repeat for another quarter to fully invest your money.

The goal is to make sure your portfolio thrives no matter what happens on the market:

  • You invest 33% just days before a crash starts. Major market crashes are intense, but the down trend doesn’t last very long. Therefore, three and six months down the line, you’ll have bought during the dip, averaging down with cheaper prices.
  • Alternatively, you invest 33% just the market begins a 5-year bull run. You’ll slowly build a profit cushion with an average price below the market.

Wars & political tensions

Ongoing geopolitical tensions and conflicts make headlines, scare the market, and cause tragedies, but their long-term impact on investments is limited. Think about how fast natural gas prices returned to pre-war levels while the Russia-Ukraine war still rages. Companies carry on and adapt quickly to new circumstances.

Quality income investments

Don’t just go exclusively for yield. It’s okay to have higher yield-stocks, but find companies that won’t let you down and that keep increasing their generous dividends. To safeguard your portfolio, focus on dividend safety.

Reduce your exposure to stocks you’re not 100% convinced about to prevent a huge hole in your portfolio if they crash.

Final Thoughts

As always, navigating the uncertainties of 2024 requires that you remain loyal to a straightforward strategy, echoed by Peter Lynch: know what you own and why you own it.

Common Investing Mistakes: Waiting for Market Pullback & More

Among common investing mistakes is waiting for market pullback hoping to buy stocks at a cheap price. Another is holding on to loser stocks hoping their price goes back up. These mistakes put your retirement at risk and keep you from sleeping well at night. Learn what you can do about it.

Learn about the other three frequent mistakes investors make here.

Download our Recession-Proof Portfolio Workbook to learn more about building a resilient portfolio.

Waiting for a Pullback

Buy low, sell high, basic and sound investing advice for anyone starting their investing journey. So, what do you do when the stock market keeps climbing higher? You’re not going to buy high, are you? When the market’s trading close to an all-time high, it’s very tempting to wait for the next crash before investing

Why you do this

History is full of investing horror stories. Over the last 25 years alone, we’ve seen the tech bubble, the Twin Towers terrorist attack, the 2008 financial crisis, the oil bust in 2015, the 2018 quick bear market, and the 2020 pandemic crash. Inexplicably, many investors think of the events of went up 145% while the U.S. market tripled!

Graph of total returns for ETFs of TSX 60 and S&P 500 from 2008 to 2023

Hoarding cash until the next crash seemingly makes sense; you’ll buy shares at an incredibly low price and enjoy strong returns when they go back up. Why buy now if you can get it cheaper later? And, while you wait, you won’t lose any money on the chunk you hold in cash. A win-win situation; earn interest on your cash now and bargains in the market later. Wrong!

How it hurts your portfolio

It’s true that investors who invested in 2009 show impressive results today. If the events of 2009 occurred every 5 or even every 10 years, waiting for a major pullback would be a defendable strategy. The opportunity to invest after a major stock market correction is quite rare. Since 1970, there have only been three pullbacks that would’ve been worth the wait (1973-74, 2000-01-02 and 2008-09).

Bar chart showing yearly market variation since the 1928. Only three major market crashes since 1970.
A long wait – Only three major market crashes since 1970

Most often, you’d wait nine years for the next major crash. Who can afford to wait a decade to invest? An insidious effect of waiting is that it makes you doubt your investing plan. Case in point: on December 26th, 2018, both markets had just decreased double-digit from their peak levels. Did you invest all your available money then? This was a major pullback. You probably didn’t invest more money in December 2018 because you were thinking about the possibility of another 2008 or 2000-2002. None of us knew it was the start of yet another bullish segment. Nobody waives a flag to tell us it’s time to buy.

Fixing it

In 2013-2014, most financial analysts and the media said the market was overvalued, be it Forbes, Goldman Sachs, or Motley fool. Everybody agreed the market was way overvalued again in 2017, and again in 2022.

Stock Buying Process: child following instructions to assemble Legos
Build according to plan

In 2017, I didn’t care where the market was from a valuation standpoint. Selecting from the finest dividend growers at that time, I built my portfolio. Even if a pullback happened 3 months after I invested, I knew my dividend payments would continue to increase during the correction. Sooner or later, share values would go back up… because this is what happens, repeatedly.

Despite 2018, a terrible year, I was better off fully invested during that time than if I had kept 30% to 50% of my portfolio in cash to invest on boxing day. The capital appreciation from early fall 2017 to summer of 2018 combined with the dividends paid exceeded temporary losses incurred during the rest of 2018. None of the calculations I made showed that waiting would have been better.

So, when you think you shouldn’t invest money, focus on your dividend growth plan instead of the stock value. To add in some protection, you can plan to invest at intervals over a 6- to 9- month period. See How to invest a lump sum.

Investing with confidence prevents waiting for a pullback. Our DSR portfolio returns show that even during the market correction of 2018, the focus on dividend growing stocks minimized losses. The best protection against a market crash is a solid portfolio, holding robust dividend growth.

Download our Recession-Proof Portfolio Workbook to learn more about building a resilient portfolio.

Thinking it’ll Bounce Back

Many people invest in the wrong companies. Making poor investment decisions happens to all of us. My positions in Lassonde (LAS.A.TO) and Andrew Peller (ADW.A.TO) were in the red, about 30 months after I bought them. For a while, I waited, but eventually sold my shares of both as they didn’t fit my investment thesis.

Why you do this

Hourglass
How long do we wait?

None of us want to buy high and sell low. We’ll justify the first 10-20% loss as a temporary setback, the market doesn’t get it, or investors will realize it’s a good company. It’s hard to admit mistakes. It hurts our ego, and our brain does all it can to protect that ego. So, we patiently wait for our losers to come back on track and prove us right.

We also tell ourselves that selling at a loss is acting on fear, and we don’t let our emotions drive our transactions. It’s good reflex to have, but we must analyze our losers to decide to keep or sell them.

How it hurts your portfolio

Investors keep their losers because they focus on the money lost. After making a bad investment that’s trading 40% lower than what you paid, not much else can go wrong. How can you possibly lose more? So, you keep your shares thinking one day it’ll bounce back, and you could recover your money.

In doing so, you leave a lot on the table; there’s an opportunity cost when keeping your money invested in a bad place. What if you cut your losses and bought shares of a strong dividend grower instead? Worried you’ll make another mistake? It could happen, but since you already made one, you learned from it and will make better choices.

Some years ago, I held shares of Black Diamond Group (BDI.TO). The company faced challenges after the oil bust of 2014-2016 and cut its dividend. Sticking with my investing principles, I sold my shares right away and took the loss. I wasn’t happy to lose money and felt a bit dumb for having bought it in the first place. I was wrong with my investment thesis, and I wasn’t fast enough to see the dividend cut coming. Instead of whining about my bad investment, I moved on. With the proceeds, I bought shares of Canadian National Railway (CNR.TO / CNI). The rest is history:

Graph showing CNR's total return from 2016 to 2023 far outpacing those from the Black Diamond Group

Had I waited for better days with Black Diamond, I’d have suffered a second dividend cut and lost even more money. Meanwhile, my new shares of CNR appreciated in value substantially and the dividend kept increasing.

Fixing it

Investigate why your loser stocks are losers; perhaps they suffered a one-time event or temporary setback? Or perhaps metrics over 5 years show more serious problems with the company, like lack of growth, absence of dividend increase, a dividend cut, ballooning debt, etc. To avoid future mistakes, find where you went wrong; were you blinded by the company narrative, seduced by a high yield, in denial about the risks the company faced? See 7 Reasons we end up With Loser Stocks, What to do About it.

Build a list of replacement stocks; those you’ve researched and would like to own. The best way to get over selling a loser at a loss is to get a shiny new thing!

 

 

2023 Year-End Review

Our 2023 year-end review in four words:  Different Investors, Different Returns. Some investors had a great year and are happy that the market is “finally back”. Others saw their portfolio value decline. What explains these discrepancies in returns in 2023?

Asset and Sector Allocation

Asset and sector allocation is what made the difference between happy and disappointed investors in 2023.

As you can see in this graph, the year was quite different depending on whether you were invested in Canada, the U.S., or heavily in the technology sector…

Graph showing total returns for the U.S. and Canadian markets, and those of the information technology sector

Excluding the latest mini bull run provoked by hints that interest rate hikes are over, the Canadian market was heading toward a flat year or worse. Across sectors, the performance in Canada and the U.S. was quite different for 2023. Next, we look at the total returns for each sector in 2023.

Learn how to create your own paycheck with our Dividend Income for Life guide!

Total Returns by Sector

Below are the year’s total returns per sector in the U.S.

Graph of 2023 total returns by sector on the U.S. market

We see the surging technology sector leading the way, followed by the communication services sector. It wasn’t the AT&T’s and Verizon’s of this sector that pushed it to such heights but rather tech-focused communications stocks such as Meta (META), Alphabet (GOOG) and Netflix (NFLX). I must add the communication services ETF in the graph is a isn’t really a good representation; it skews the results favorable because it’s 47% invested in Meta and Alphabet.

While the energy sector was the savior in 2022, it was flat in 2023. The utility sector is the biggest loser, hurt by higher interest rates and poor performance from all renewable energy stocks. For more on that, see What’s Happening with Renewables?

On the Canadian side, shown in the next graph, we see similar trends, but with a stronger performance from the energy sector than in the U.S. Take the BMO’s technology, communications, and consumer discretionary ETFs with a grain of salt because each includes several U.S. stocks. Banks and telecommunications companies disappointed in 2023 as did utilities and REITs.

Graph of 2023 total returns by sector on the Canadian market

The investment year 2023 could be summarized as follows:

  • If you focused on low-yield, high dividend growth stocks, it was a success.
  • If you focused on income and high yield, it was a bad year.

What’s next?

We have been spoiled over the past twelve years. In general, an economic cycle lasts about 5 to 8 years. That includes a bear market and a bull market and everything in between. The last real bear market we had began in 2008 and ended in 2009. That was 14 years ago.

Currently, we live in a strange world: inflation hurts consumers’ budgets forcing them to tighten their belt with high interest rates putting even more pressure on them and yet, the unemployment rate remains low. Why? Demographics: as our population ages, many retire, and we don’t have enough babies to take those jobs.

During the second part of 2023, we saw signs that higher interest rates were finally catching up with the economy and slowing it down. Inflation has lowered, GDP isn’t as strong (Canada even reported a negative GDP late in 2023), and unemployment rates on both sides of the border are going up by a bit.

Learn how to create your own paycheck with our Dividend Income for Life guide!

If you focus on your portfolio yield, you were unhappy with your results in 2023 and my guess is that it won’t be easy in 2024 either.

New inflation data hints at a pause in interest rates. We might even talk about rate decreases later in 2024. However, as the steak price won’t get back to 2021 levels, we are not going to see 2% mortgages or debentures in 2024. Companies will have to deal with higher interest rates when refinancing.

I said it over and over; we will continue to feel the lagging impact of those interest rate increases for many years.

Different Year, Same Plan

A picture of a compass Studies show that most individual investors like you and me lag the market… big time. Think of famous investor Peter Lynch who managed the Fidelity Magellan Fund from 1977 to 1990 generating an annualized return of 29%. Fidelity later revealed that the average Magellan Fund investor lost money during this period. How is that possible? Investors were simply not investing with conviction, and they didn’t stick to their plan, especially at times when the market dropped.

In 2022, I was overconfident, and I drifted away from my investment rules and process. As a result, I suffered from three bad investment decisions, Algonquin (AQN.TO), Sylogist (SYZ.TO), and VF Corp (VFC), in a brief period of time, which is never good for the investor’s ego.

In early 2023, I quickly got back into the driver’s seat and acted. I sold the three dividend cutters, took the loss of roughly 50% on each stock, and moved on by focusing on dividend growers with strong dividend triangle.

I could have prevented part of those losses by following my own rules, but I didn’t. Fortunately, my investment structure protects me from major negative impacts from bad investments as they are limited in size in my portfolio. Again, this highlights the importance of following your plan and sticking to your investment strategy.

For 2024, I intend to follow the same plan. My investment strategy stays the same: have a strong investment thesis backed with numbers and select companies with minimal downside.

Wishing you a successful investing year in 2024!

Buy List Stock – December 2023: Brookfield Corporation (BN.TO)

Still number one buy list stock on the Canadian market for December is Brookfield Corporation (BN.TO / BN). The engine behind the Brookfield family of businesses, BN is a core holding, one that investors can hold for a long time. Have a look.

You can have a look at my buy list stock pick of the month on the U.S. market.

BN.TO Business Model

Brookfield Corporation is an alternative asset manager, meaning that its assets are not liquid like conventional assets such as stocks, bonds, cash, ETFs. It owns and operates these real assets with a focus on compounding capital over the long term to earn attractive total returns for its shareholders. Managing alternative assets requires a high level of expertise and patience.

Brookfield logo surrounded by 7 boxes naming the company's business categoriesBN is the parent company of the other Brookfield companies; through them BN focuses on long-life, high-quality assets  including: Renewable Power & Transition assets in hydro, wind, solar, distributed energy and sustainable solutions; Infrastructure assets in transport, data, utilities and midstream sector; Asset Management, managing funds coming from pension plans and other investors; Private Equity, businesses that provide essential industrial, infrastructure, and business services; Real Estate with a diversified portfolio across many industries and spread across five continents; Credit, through its majority interest in Oaktree; and Insurance Solutions across the life, annuity, and property and casualty industries.

Investment Thesis for Brookfield Corporation 

The company has access to billions of dollars in liquidity to finance its projects and has built impressive expertise in various industries. BN is present in countries that show potential for high growth for years to come. Its diversified businesses are a solid source of permanent capital. Over the last few years, BN has seen an increase in both the number and size of average client commitments. BN is well-positioned to expand its private fund investor base in Europe and parts of Asia.

Brookfield Corporation doesn’t only do the asset-light manager’s job consisting of strategy and earning fees on assets under management (AUM); it also contributes with its own assets. Therefore, it benefits from its own strategies to recycle its assets; in other words, it can sell assets it considers to be at a high value and reallocate the proceeds into new projects or undervalued assets. It’s the classic “buy low, sell high” concept.

For more great stock ideas, download our Rock Stars list, updated monthly.

BN.TO Last Quarter and Recent Activities

Brookfield Corporation reported decent results for its most recent quarter with revenue increasing 5%, but distributable earnings per share remained flat. Insurance solutions distributable earnings were up 14% as insurance assets increased to ~$50B. The average investment portfolio yield was 5.5%, about 200 basis points higher than the average cost of capital. It continues to track towards reaching $800M of annualized earnings by the end of 2023.

Evolution of Brookfield Corporation revenues over 10 years.
Steady revenue growth for Brookfield Corporation over 10 years.

Operating businesses earnings declined by 8% but funds from operations were supported by a stronger performance from the renewables and infrastructure segments. The asset management segment was up 13% and BN ended the quarter with $120B to invest.

The bigger news about Brookfield of late was its offer to BN shareholders to exchange their shares for shares of Brookfield Reinsurance (BNRE), one for one. There was no share dilution, and the company did it to improve equity base and market capitalization of BNRE.

Potential Risks for BN.TO

BN’s growth depends on investors’ confidence in long-term projects. When panic arises, it becomes difficult for companies like BN to increase their AUM. We had another example of this phenomenon in 2022, when the stock price dropped along with the market.

BN is well-managed and has the ability to navigate the current crisis. Investors must simply remain patient. Its operational complexity can leave many investors wondering how money is managed within the business; it’s easy to get lost in the pile of financial statements throughout the multiple companies and the many stock classes.

Contrary to BAM, which is asset-light, BN’s success relies on management’s ability to manage its assets; in short, making money selling at the right time, and reallocating capital into the right assets at the right time. This adds to the complexity of its business model and requires a larger cash reserve.

Want to find more great stock ideas? Download our Rock Stars list, updated monthly.

BN.TO Dividend Growth Perspective

Following the spin-off of BAM, it’s clear that BN is a low-yield, high-growth stock. The company kept a low yield by paying a $0.07/share dividend. We expect this dividend to increase each year. However, if you’re looking for a more generous yield, BAM is the better option.

Line graph showing BN.TO's dividend payments over 10 years
BN.TO: a low yield high growth stock after Following the spin off of BAM

BN has the advantage of owning a stake in various assets across the Brookfield family, while BAM has the advantage of simply managing the money and earning revenue on a fee charged on the assets under management.

Final Thoughts on Brookfield Corporation

It’s virtually impossible to buy a piece of a bridge or a railroad. This is where Brookfield comes into play as investing in Brookfield Corp is like investing in your own “alternative asset fund”.

As an asset manager, you can expect BN.TO to go through some difficult times with the higher interest rates and possible recession. However, its depth of assets, expertise, and geographic distribution make it a worthwhile buy list stock for investors seeking long-term dividend growth.

Investing in alternative assets is a great way to diversify a portfolio. Usually, the investment returns on such investments are decided by what’s happening on the stock market. You can expect them to generate about 5-7% above inflation over long periods of time. Interest in alternative assets is increasing, especially for institutional investors.

See also the list of Canadian Dividend Aristocrats for other great stock pick ideas.

 

 

 

25 Most Popular Canadian Stocks at DSR

Looking at the 25 most popular Canadian stocks among members of DSR Pro is not only fun, but it can reveal opportunities we might have overlooked. Last week, we covered the top 5. If you missed it, read it here. This article provides the investment thesis for the stocks that are the 6th to 10th most popular, and list those in the 11th to 25th positions along with their respective sectors.

I pulled the most popular stocks from the DSR database based of the number of times they appear across the 2,289 DSR PRO members’ portfolios, not by looking at individual portfolios. This is strictly based on how frequently each stock appears in the database, not on the value invested (which I don’t know).

See also the U.S. stocks most popular with DSR Pro members.

Discover even more great dividend growth stocks. Download our Rock Stars list, updated monthly!

Royal Bank (RY.TO / RY)

6th place – 1165 members

Royal Bank plays a similar role as TD in a portfolio. I prefer RY for its greater diversification. I like its business distribution across classic banking operations (40.4%), wealth management (29.8%), capital markets (18.3%), insurance (7%) and investor & treasury services (4.4%) as per the 2022 annual report. Capital market operations are more volatile and sometimes crash a quarter (we saw this with BMO in 2020). However, it’s also an amazing source of growth. Once again, TD and RY are close in term of assets, popularity, and yield!

Alimentation Couche-Tard (ATD.TO / ANCUF)

7th place – 968 members

You know I love Couche-Tard and it was part of the favorites last year. It’s back to the 7th place after being out of the top 10 last year. Couche-Tard has proven quite resilient over the past few years. The company rewards shareholders with constant growth across all business segments. If you think ATD is expensive today, remember that it’s trading at the same PE ratio it was in 2018. The only difference is that ATD has more than doubled its EPS in the past 5 years.

Brookfield Infrastructure (BIP.UN.TO/BIPC.TO)

8th place – 898 members

I like BIPC for its wide diversification across multiple utility businesses: Utilities (30% of FFO) includes gas pipelines, electricity distribution and transmission lines, and smart meters. Transport (30%) includes railroads, terminals (ports), and toll roads. Midstream (30%) includes transmission pipelines, natural gas storage, and processing plants and polypropylene production capacity. Finally, Data (10%) consists of telecom towers, fiber optic cables and 50+ data centers. Keep in mind BIPC’s a complex business with opaque financial statements. It’s not for everyone.

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Brookfield Renewable (BEP.UN.TO/BEPC.TO)

9th place – 866 members

BEPC took a big hit on the market this year, with its stock showing a double-digit decline in 2023 and down over 40% over the past 3 years. You’re probably wondering why you bought it if you focus on short-term returns. I feel your pain. I hold shares too, I’m down 20%, but I don’t mind much though since I intend to hold BEPC for a very long time.  Brookfield is all about “patient capital”.

Scotiabank (BNS.TO / BNS)

10th place – 845 members

I’m still not a fan of BNS. While it offers a juicy yield, it has lagged its peers for over 10 years now. Turns out its exposure to Central and South America hasn’t paid off as anticipated. It’s a source of volatility rather than one of consistently higher profits.

11th to 25th Most Popular

Many of “usual suspects” in this list. I own shares of many of them.

COMPANY NAME TICKER SECTOR
Canadian National Railway CNR.TO / CNI Industrial
National Bank NA.TO Financial services
Emera EMA.TO Utilities
TC Energy TRP.TO / TRP Energy
Canadian National Resources CNQ.TO / CNQ Energy
Algonquin Power AQN.TO / AQN Utilities
CIBC CM.TO / CM Financial services
Granite REIT GRT.UN.TO REIT
BMO BMO.TO / BMO Financial services
Power Corp. POW.TO Financial services
Manulife MFC.TO / MFC Financial services
Magna International MG.TO / MGA Consumer Discretionary
Canadian Tire CTC.A.TO Consumer Discretionary
Suncor SU.TO / SU Energy
Brookfield Corp. BN.TO / BN Financial services

Final Thought

While it’s always fun to feed your curiosity, never let a list like this replace your investment process. It won’t do much good to just pile up others’ ideas in your portfolio without the conviction that they fit with your strategy. I see this list as a good group of stocks to start a research project. But that’s definitely just the beginning. There is a lot more digging required before pulling the trigger…