Market pullbacks always create opportunities for those willing to take the plunge, but they don’t necessarily desire to make risky bets, particularly by purchasing high-quality businesses that might be misunderstood or less sensitive to the economic slowdown.
Renato Anzovino, portfolio manager at Heward Investment Management, takes advantage of market volatility by targeting firms that should boost their dividends moving forward.
“There are a lot of questions in Canada, but people have wrote this off as though it’s the end of the world,” he explained. “We don’t think that as there are opportunities, particularly given how horribly the market has been doing in the past few years.”
Looking within the rear-view mirror isn’t necessarily the easiest method to invest.
Anzovino noted that even high-quality names are seeing share price fluctuations within the 10 to 20 per cent range. He is using these up and downs to both add and reduce positions in the Heward Canadian Dividend Growth Fund, that is up 8.3 per cent on a five-year annualized basis as of Jan. 31, 2016.
“There is lots of panic in the market, the fundamentals of many companies look rock-solid,” Anzovino said. “In the dividend growth environment, the marketplace hasn’t done an excellent job analyzing companies.”
He highlighted the S&P/TSX Canadian Dividend Aristocrats Index, which includes companies that have raised their dividends every year not less than 5 years.
Many energy companies that Anzovino noted should not have high dividend payouts made the cut. That is a big reason the index is down a lot more than 15 percent previously year.
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“Looking within the rear-view mirror isn’t necessarily the best way to invest,” the portfolio manager said, adding he concentrates on names with recurring revenue, earnings visibility, free cash flow, not to mention, those that will probably increase their dividend in this environment.
Despite an underweight position in financials, Anzovino still likes the Canadian banks, with holdings like Toronto-Dominion Bank due to its relatively low energy exposure and assets in the U.S.
He noted the sector does face more energy-related loan losses moving forward, to ensure that could put pressure on share prices when the next round of earnings rolls in.
But that may present another buying opportunity, as Anzovino believes their fundamental companies are still good and additional dividend increases are required.
“They’ve done so partly to appease investors, and that’s why you have to be careful, but in the medium to long-term, they ought to do okay because valuations are inexpensive,” he said.
More so than the banks, Anzovino likes names like top five holding Intact Financial Corp. (IFC/TSX). The property and casualty insurer is a market leader in Canada, and the fragmented industry sets the stage for further acquisition opportunities.
“It pays a good dividend, but they’re constantly increasing it,” he explained. “The company also offers earnings predictability and visibility, and its valuation is below where it ought to be.”
The market usually doesn’t like it when Intact takes a catastrophe-related write-off, but Anzovino noted that the company has adjusted lots of its premiums. Also, he noted it isn’t economically sensitive.
While the fund is very underweight energy because of the profit challenges and weak dividend outlook for the sector, Anzovino does have a situation in Suncor Energy Inc. It really increased its dividend last year, due in large part to the health of its refining business.
The portfolio manager also is constantly on the like TransCanada Corp., calling it the “right kind” of one’s company given its long-life projects to limit the risk of a dividend cut.
However, he’s much more optimistic on the prospects for another top holding, Canadian satellite maker Macdonald Dettwiler & Associates Ltd. (MDA/TSX).
“It’s a misunderstood stock and individuals don’t know it,” Anzovino said. “It’s done more than time, but it’s still undervalued given the level of growth ahead.”
He pointed to the development in demand for communication satellites, and surveillance equipment that essentially serves as video security cameras on countries.
Five years ago, MDA didn’t pay a dividend, but it has now grown about 20 per cent annually since.
Anzovino also thinks Cineplex Inc. (CGX/TSX), another top holding, is misunderstood, with investors viewing it as a movie theatre chain, instead of a more diverse entertainment company. That includes eSports offerings and also the Rec Room, which offers gaming, live entertainment and dining.
“The movie business is still doing well, even just in tough economic times, and the company increased the dividend this season, therefore the yield is attractive,” Anzovino said. “It is a name you are able to sleep during the night with and purchase on any pullback. When markets realize that it is no longer just a movie company, the stock could bust out.”