Gluskin Sheff & Associates Inc. (GS), the second-best performing publicly traded money manager in Canada this year, bought stakes in Suncor (SU) Energy Inc., Whitecap Resources Inc. and other oil providers as it focuses on high-yielding dividend stocks.
Oil and gas producers and services companies have begun to clamp down on costs and return cash to shareholders, William Webb, chief investment officer with the Toronto-based money manager and hedge fund, said in an interview at Bloomberg’s Toronto office May 30. Likely approval of TransCanada Corp. (TRP)’s Keystone XL pipeline is added allure, he said.
“When Suncor got religion on dividends, we added right away, almost doubled our position,” said Webb, 49, who leads management of about C$6 billion ($5.8 billion) across several equity, fixed income and hedge fund portfolios. “To entice investors to add exposure, they want to know they’ll see some of that free cash returned to their pocket. And you’re seeing companies start to transition towards a sustainable dividend model.”
Calgary-based Suncor, Canada’s largest energy company by market value, said on April 29 it had boosted its dividend 54 percent to 20 Canadian cents and planned to buy back an additional C$2 billion worth of shares. The stock has climbed 7.3 percent since then.
Suncor slipped 0.7 percent to C$31.55 at 4 p.m. in Toronto today. Whitecap Resources lost 0.2 percent to C$10.64.
U.S. approval of TransCanada’s $5.3-billion Keystone XL pipeline connecting the Canadian oil sands to the Gulf Coast could help oil shares, Webb said. U.S. President Barack Obama said he would decide on the pipeline this year, Republican North Dakota Senator and Keystone XL supporter John Hoeven said in March, after a meeting with the president and other Republican lawmakers.
“I’m in the camp that it will get approved,” Webb said. “I wouldn’t make a huge bet on that, but the market has not priced it in and that is what really matters to us.”
Pipeline congestion has helped push Western Canadian Select heavy crude $17.25 below West Texas Intermediate crude as of yesterday. The Standard & Poor’s/TSX Energy Index has risen 13 percent in the past year, the third-worst performing industry in the benchmark S&P/TSX Composite (SPTSX) as of yesterday. The S&P 500 Energy Sector Index is up 27 percent in the same period.
Gluskin also owns Whitecap Resources (WCP), an oil and gas explorer that’s gained 23 percent this year, as well as Vermillion Energy Inc. (VET), Bonterra Energy Corp., and infrastructure companies such as Gibson Energy Inc. and Keyera Corp.
Gluskin Sheff’s Resource Strategy Fund holds 64 percent energy stocks and 10 percent in precious metals. All of its top 10 holdings are energy stocks, including Trilogy Energy Corp., Canadian Natural Resources Ltd. and Tourmaline Oil Corp., according to company documents.
The firm recently sold its gold equities before a 31 percent decline in Canadian gold producers this year.
“In the resource space, we’ve really downplayed our gold mining and base metal plays,” Webb said.
Gluskin, which is traded in the Toronto Stock Exchange but not in the broad S&P/TSX Composite Index, has surged 26 percent this year. That’s the second-best performance after Fiera Capital Corp. among 17 publicly traded asset managers, according to data compiled by Bloomberg.
Gluskin earlier this year explored “shareholder value maximization alternatives” at the request of founding shareholders Ira Gluskin and Gerald Sheff. In April, it concluded its search without finding a buyer and said “the current platform remained an excellent way to serve clients and enhance shareholder value.”
According to company documents, Gluskin’s Canadian Equity fund has posted an annualized return of 10.9 percent since its inception in 1991, compared with an 8.7 percent return for the S&P/TSX Total Return Index, the fund’s benchmark.
Gluskin’s Resource Strategy fund, founded in 2009, has reported an annual return of 6.9 percent, compared with a 1.1 percent loss for its benchmark, a combination of the S&P/TSX Materials and Energy indexes.
David Rosenberg, 52, chief economist and strategist at Gluskin Sheff, said he sees inflation approaching in the U.S. as the economy improves and wages increase.
“If there’s stagflation what do you screen for?,” he said. “You want to screen for high fixed costs, low variable costs, high capital ratios, and companies that have relatively low demand elasticities.”
Inflation hedges would include energy infrastructure, royalty firms, as well as life insurance companies, which can use higher rates to pay out annuities, Webb said. Gluskin has invested in Manulife Financial Corp. (MFC), Sun Life Financial Inc. and Industrial Alliance Insurance and Financial Services Inc. in the past three or four months as global equities have rallied, turning away from pipelines and telecommunications stocks, which have become expensive, Webb said.
Gluskin Sheff is also keeping its stakes in Canadian banks as higher rates increase the margin between what they borrow and lend, Webb said. Their largest holdings are in Bank of Nova Scotia, Toronto-Dominion Bank and Royal Bank of Canada, the nation’s largest.
In an inflationary environment, companies such as satellite maker MacDonald Dettwiler & Associates Ltd. (MDA) that are become more attractive, Webb said.
“The question becomes which companies are able to continue growing their dividends,” Webb said. “Dividend growth will attract a higher premium if and when interest rates really do back up.”
MDA, maker of the International Space Station’s Canadarm2 robotic arm, is the second-best performing technology stock in Canada over the past year, rising 57 percent. The Richmond, British Columbia-based company completed an $875 million acquisition of Space Systems/Loral Inc. last year.
“It’s a terrific business, this is a company where I don’t care if inflation is 4 percent or zero percent,” Webb said. “It’s a growing business, a global leader that makes acquisitions and has a high return on capital, implemented a dividend.”
Looking ahead to the rest of the year, Rosenberg doesn’t expect U.S. stocks to fall into a bear market, even as investors anticipate a summer sell-off.
“It’s completely normal to have a correction, and it opens up an opportunity for entry into stocks,” he said.
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