Brazilian novelist Paulo Coelho observed: “Sometimes you have to travel a long way to find what is near.” Northland Wealth Management portfolio manager David Cockfield must concur. He names a financial stock and an oil and gas stock as the two best stocks to buy now because, unlike their peers, they mostly stay closer to home.
In recent months, Canada’s big 5 banks have attracted considerable buzz in the media and among investors searching for the next big sector. However, David Cockfield suggests that the best financial stock to buy now may actually lie in another corner of the industry, namely insurance.
Mr. Cockfield is managing director and portfolio manager at Northland Wealth Management. The longtime investing professional touts Sun Life Financial Inc. (TSX─SLF; NYSE─SLF) as a good alternative financial stock to the major banks.
Hiding in broad daylight
Sun Life was founded in Montreal in1865 and started out solely as an insurance vendor. Over time, the company branched out into a larger range of wealth management and insurance offerings to companies as well as individuals, including mutual funds, retirement plans, health and dental plans, and pensions.
Mr. Cockfield notes the decline in the market at the beginning of 2016 hit Sun Life stock hard; he says its trading price dropped sharply from around $45 a share to about $40 more recently.
However, the decline means that the company now trades at a relatively low price-to-earnings ratio (P/E) of 11.5. Mr. Cockfield says $48 a share is a reasonable price expectation for Sun Life. The trading price has already somewhat rebounded.
Even though share prices fell, Sun Life increased sales and improved profit margins in the last quarter ended Dec. 31, 2015, Mr. Cockfield points out. The company’s total assets under management rose to $891 billion as of last year’s end, he adds. Sun Life expects to earn $3.80 a share in 2016.
Sun Life’s current dividend of $1.56 per share annually yields about four per cent. According to the analyst, Sun Life boasts a modest payout ratio of just 40 per cent based on its $0.39-per-share quarterly dividend for the fourth quarter of 2015.
Mr. Cockfield also underlines the company’s strong record of dividend increases. He says a dividend hike in 2016 “would not be surprising”. Sun Life last raised its dividend in 2015’s fourth quarter, from $0.38 per share to $0.39. The firm had increased its dividend from $0.36 a share to $0.38 in the first quarter of 2015.
The portfolio manager says that although many investors interested in insurance stocks might think of buying Manulife Financial Corp. shares, “I have always argued Sun Life is a better bet.”
He touts the latter’s focus on business in Canada and the U.S. as another positive; only eight per cent of its business is in Asia. “While Asia provides good growth prospects, I consider the risk there higher. The record has shown those offshore markets can be chancy.”
Oil sands too costly to abandon
Similarly, the analyst argues that Inter Pipeline Ltd. (TSX─IPL) is a safer bet than its larger peers because it stays closer to home. The company’s oil and gas pipelines network is mainly located in B.C., Alberta, and Saskatchewan.
As such, it faces fewer political and environmental hurdles, unlike projects like Keystone XL and Northern Gateway, says Mr. Cockfield. “It’s an entirely different environment,” he says. “It operates as a collection system for the larger pipelines.”
Calgary-based Inter Pipeline serves as a major collector, transporter, and storage system for petroleum and natural gas liquids. Somewhat unusually, according to Mr. Cockfield, the company also operates major storage facilities in Canada and in Europe. Inter Pipeline also owns stakes in three Alberta natural gas extraction facilities.
Mr. Cockfield says Inter Pipeline stock has suffered from the energy sector’s general collapse, even though it is mainly a utility in his view. “It is not operating in the extraction of petroleum or gas but simply in the transportation,” he says. Nevertheless, its contracts with major energy producers have endured and will remain into the future, he adds.
The analyst also notes that petroleum production continues expanding in Alberta and predicts a lasting trend, particularly in the oil sands. He says, “Once you’ve got a couple billion dollars invested, you don’t turn around and abandon it.”
Mr. Cockfield argues that depressed oil prices are unsustainable and predicts it could reach $50 or $60 by 2017. Inter will find itself in a perfect storm once prices and oil sands production rise, he says.
Investor’s Digest of Canada , MPL Communications Inc.
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