Standard Life Investments, the fund-management unit of Scotland’s biggest insurer, is buying shares of Canadian lenders including Toronto-Dominion Bank (TD) for low-risk dividend growth even as the economy slows.
Toronto-Dominion, Royal Bank of Canada and other banks in the Standard & Poor’s/TSX Composite Commercial Banks Industry Index (STCBNK) will continue to raise payouts over the next year, according to Bloomberg dividend forecasts. Increases since the 2008 financial crisis have pushed the dividend yield on the bank index to 4.1 percent, trailing only utilities, real estate investment trusts and telecommunications among major industry groups.
“We’re really looking for self-help stories and things that are driving a share price which we think will override any sector issue or macro issue,” Kevin Troup, 47, investment director for global equities for the Edinburgh-based unit of Standard Life Plc (SL/), said in an April 15 interview in Calgary. Standard Life has about $246 billion in assets under management globally, including C$33.4 billion in Canada. “We still see the scope for those opportunities,” he said.
Banks are raising dividends after business lending, wealth management and international earnings boosted first-quarter profit even as the country is forecast by the International Monetary Fund to post growth of 1.5 percent this year, the lowest in the Group of 20 outside Europe.
The ratio of Canadian household debt to disposable income rose to a record 165 percent in the fourth quarter while sales of existing homes dropped 15 percent in March from the same month in 2012.
TD fell 20 cents to C$80.64 at 9:37 a.m. in Toronto. The S&P/TSX Composite Index (SPTSX) gained 40 points to 11,987.41.
“Banks are such a great source of dividends in Canadian markets,” Steve Belisle, who helps manage the Standard Life Canadian Dividend Growth Fund, said in a phone interview from Montreal. The fund’s holdings include Bank of Nova Scotia and Suncor Energy Inc. (SU)
Toronto-Dominion is expected to raise its dividend 23 percent to C$1 a share two years from now, according to Bloomberg dividend forecasts. Royal Bank may boost its payout by 16 percent over the same period, while Scotiabank is seen boosting the dividend by 18 percent. Bank of Montreal may raise the payout by 11 percent, while Canadian Imperial Bank of Commerce is seen boosting it by 20 percent.
“We’re more interested in the banks that have growth opportunities outside of consumer banking in Canada because we know this is slowing down because of the housing market and household leverage.” Belisle said. Banks will also benefit from rising interest rates, Belisle said.
Standard Life’s Dividend Growth fund has risen 3.7 percent this year compared with with a 3.9 percent decline for the S&P/TSX Composite Index (SPTSX). The fund’s top five holdings include Toronto-Dominion, Royal Bank, Scotiabank, Canadian National Railway Co (CNR) and Cenovus Energy Inc. (CVE)
Amid slower economic growth, Canadian companies have become more responsive to investor demand for dividend growth, said Belisle. Canadian companies have also come under the scrutiny of activist investors, including hedge funds like William Ackman’s Pershing Square GP LLC.
“The companies are conscious that their stock is going to be valued more if they bump up their dividend policy,” said Belisle. “The trend is there to stay because it’s demographic driven. As the population ages in Canada, people are seeking income and over the past 10, 20, 30 years, dividend-oriented stocks have outperformed the rest of the market pretty significantly.”
Some Canadian energy companies including Bonavista Energy Corp. (BNP) have the potential to benefit from rising natural gas prices, Belisle said.
Among large oil producers listed on the broad index, Cenovus has posted the highest growth in dividend per share over the past three years at 30 percent, with Suncor following at 14 percent, according to data compiled by Bloomberg.
Suncor on April 15 sold natural gas fields in Alberta to Centrica Plc. for C$1 billion. The sale may mean dividend increases for Suncor shareholders, said Nick Sellmer, an analyst at Macquarie Capital Markets.
The Calgary-based company last month paid shareholders 13 cents for each share held and is projected to boost its payout to 20 cents a share by 2016, according to Bloomberg analysis.
“We think in the case of Suncor you’re going to see very good dividend growth overall and the stock is so cheap,” said Belisle. “This is partly why we like the stock. The other reason is that it’s such a good producer that over the long run it’s going to do well.”
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