While the TSX may be down 10% year-to-date, Canada’s dividends outside of the oil and gas sector are just as healthy as ever. Despite the weak stock market and negative GDP growth, many Canadian companies announced single- and double-digit dividend increases earlier in the year.
This confirms a key fact of investing—that buying high-quality dividend payers is a winning strategy in all market conditions. This is even truer for companies that have a record of growing dividends annually. Research has shown that not only do these companies outperform the market during bull markets, but they also lose less during market crashes.
If you’re looking for dividend growth in Canada, there are three names that stand out. Agrium Inc. (TSX:AGU)(NYSE:AGU), Enbridge Inc. (TSX:ENB)(NYSE:ENB), and Magna International Inc. (TSX:MG)(NYSE:MGA) all are expected to post strong double-digit dividend growth for the next several years.
Agrium Inc. kicked off the year with a 12% dividend increase
The start of 2015 brought a major shift in dividend policy for agricultural-player Agrium. The company traditionally had a policy of paying out 25-35% of free cash flow (which Agrium defines as cash flow from operations minus sustaining capital expenses). In January they boosted this target ratio up to 40-50% of free cash flow.
Not only is Agrium boosting its payout, but its free cash flow is also set to explode, and a rising payout ratio combined with rising free cash flow is a recipe for high dividend growth. Agrium’s free cash flow is set to grow largely because the company is close to completing several expensive production capacity expansion projects. Agrium will see its capital expenses fall dramatically by over 50% as it finishes these capital projects.
Rising sales and declining capital expenses from finishing these projects will lead to free cash flow between $1 and $1.2 billion in 2016, which would lead to dividends between $3.92 and $4.34 per share, assuming half of free cash flow is paid out. The current dividend is $3.50, and Agrium’s dividend will continue to rise after 2016 as production volumes continue to increase and capital expenditures continue to decline.
Enbridge is committed to 14-16% annual dividend growth through to 2018
Enbridge has always been one of Canada’s top dividend payers. It has been paying out dividends every year for 62 years and growing its dividend by an average of 14% over the past 10 years.
Enbridge is now entering a new stage of growth, where it can commit to historically high dividend growth for the next four years. Enbridge can do this because it is currently in the midst of constructing $44 billion worth of new projects, and $34 billion of these are expected to be in service by 2018.
These projects coming into service will lead to Enbridge growing its adjusted cash flow from operations by 18% annually from 2015-2018, according to Enbridge. This growing cash flow allows Enbridge to comfortably grow its dividend.
As of Q2 2015, Enbridge only pays out about 47% of its adjusted cash flow from operations, meaning Enbridge’s dividend is not only growing quickly, but it is also incredibly secure.
Magna International could see substantial dividend growth going forward
Auto-parts manufacturer Magna International has all the ingredients for substantial dividend increases. The company recently made a series of strategic moves to both increase its margins and its growth profile by acquiring leading transmission producer Getrag and divesting its low-margin interiors business.
The company is expecting strong cash generation going forward and, in addition, has significant cash on its balance sheet ($1.1 billion for Q2 2015), which it is ready to deploy. The company currently has a very conservative policy to pay out 20% of earnings as dividends, and with earnings expected to grow by 14.5% annually through to 2018, investors can expect a dividend that grows at least at this rate in order to maintain the current payout ratio.
Magna’s expected payout ratio for this year is about 19%, which means not only will Magna’s dividend grow with earnings, but it also has room to grow beyond that to reach its target level of 20% of earnings. Magna could also boost its target payout ratio above the very low 20%, which would result in even more significant growth.
