I can’t emphasize enough that a stock looks cheap because of how its price relates to its earnings, not because of how low its price per share is trading right now. In other words, investors should look at the multiple of a stock and compare the multiple with the company’s historical multiple to see if it’s priced cheaply.
The companies that are cheap today include Enbridge Inc. (TSX: ENB)(NYSE: ENB), Canadian Western Bank (TSX: CWB), and Northwest Healthcare Properties REIT (TSX:NWH.UN).
| Ticker | Price | Yield | Industry | Market Cap | Debt to Capital |
| ENB | $59 | 3.2% | Oil & Gas Storage and Transportation | 50.5B | 60% |
| CWB | $28 | 3.1% | Regional Banks | 2.26B | 0% |
| NWH.UN | $7.8 | 10.2% | Healthcare REIT | 414.9M | 59% |
Enbridge
Low oil prices have had less effect on Enbridge because it makes money as long as the demand exists for storage and transportation of oil and gas.
For Enbridge, it makes sense to use the price-to-cash flow ratio (P/CFL) to value the company because it generates a stable, increasing cash flow from its assets. With a P/CFL of 13.2, Enbridge is priced at a discount, with the estimated growth in the next few years in mind.
Because Enbridge is investing $40 billion throughout the next few years and has projects coming online, that cash flow is expected to increase, thereby supporting a growing dividend. Enbridge expects dividends to increase by a compounded annual growth rate of 14-16% in the next few years. The dividend growth should help Enbridge get to the $70 level in the next couple of years, while it starts you off with a 3.2% yield today.
Canadian Western Bank
Canadian Western Bank is my favourite bank today. Because of low oil price, its price is depressed. Even with 42% of loans in Alberta, the bank’s earnings per share has held its ground with a growth of 4% so far this year. After all, the bank has 33% loans in British Columbia and 15% in Ontario and the other eastern provinces.
The price depression results in a compelling opportunity for you. It is priced at a price-to-earnings ratio (P/E) of 10.5, while historically it has reached a multiple of 15. Even if it only reaches a P/E of 13.5, that still implies a price of $36-38 in the next couple of years, or capital gains of 28-36%.
The bank has increased dividends for 23 years in a row, and its most recent increase was in June, with an annualized increase of 10%.
Northwest Healthcare Properties REIT
After combining with its international counterpart, Northwest Healthcare has gone down in price. Perhaps the market doesn’t know how to value the company after the merge; perhaps the market is afraid of any interest rate hikes; or it could be a combination of both.
The merge increased the diversification of the real estate investment trust. It now has about $2.4 billion in total assets. That is 122 properties with about 6.6 million square feet of gross leasable area.
In terms of net operating income (NOI), 60% is coming from Canada, 23% from Brazil, 10% from Australasia, and 7% from Germany. With an occupancy rate of close to 94%, its juicy yield of 10.2% looks safe. As well, 68% of NOI is coming from medical office buildings and 32% is coming from hospitals.
Historically, most of its yield consists of return of capital. That means you can defer the taxes on that portion by owning the shares in a non-registered account.
The price-to-funds-from-operations (P/FFO) ratio is used to value REITs. Today the shares are priced around a P/FFO of eight, while historically it has traded at a P/FFO of 11, indicating a price around $10.50 in the next couple of years, or capital gains of 35%.
In conclusion
In my opinion, all three companies offer great yields at great prices. You can start a diversified portfolio with these companies today.
Enbridge offers a safe 3.2% yield that’s growing around 14% per year in the next few years. Canadian Western’s shares are cheap compared with historical levels, and offers a safe 3.1% dividend with potential for double-digit gains. Finally, Northwest Healthcare’s shares are cheap with potential for double-digit gains as well as a double-digit income for the wait!
