The pullback in the market is producing a wide range of stocks with attractive valuations, but investors have to be careful when chasing the walking wounded.
New investors should look for top-quality names with leadership positions in sectors that have few competitors and huge barriers to entry. If you can pick up these names at a bit of a discount, it’s a bonus.
Here are the reasons why I think Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and BCE Inc. (TSX:BCE)(NYSE:BCE) are smart choices in the current environment.
TD
TD holds a dominant position in a market with few serious competitors, and that is a big reason why the stock is a favourite among buy-and-hold investors.
All of the Canadian banks have pulled back in recent weeks as investors fret about the crisis in the oil patch. Energy companies are at risk of defaulting on loans, and the broader economy is starting to look a bit shaky, which could lead to higher unemployment and a downturn in the housing market.
TD has less than 1% of its loan book exposed to oil and gas companies, so there is little reason to be concerned on that front.
As for the mortgage market, only 44% of TD’s Canadian residential mortgage portfolio is uninsured, and the loan-to-value ratio on that component is 61%. This means house prices would have to fall off a cliff before TD sees any material impact. That might well happen, but most analysts expect the market to deflate gradually. If it doesn’t, TD is capable of riding out the storm.
TD’s large retail operation in the United States is another reason to own the stock. The company actually has more branches south of the border than it does in Canada, and every U.S. dollar of earnings now translates into more than CAD$1.40.
Despite the economic headwinds, management is forecasting 7-10% adjusted earnings-per-share growth over the medium term. That’s not too shabby considering the state of the economy.
TD raised its dividend by 9% in 2015 and has produced a 12% annual growth rate in the distribution since 1995. The current dividend offers a yield of 4%.
BCE
It’s hard to believe, but BCE faces even less competition than TD. Consumers might not be happy about that, but it’s a wonderful thing for the company’s investors.
BCE’s stock has come down a bit in the past three months because the Canadian media and communications industry is going through some big changes and the market is unsure how the players will be affected.
Beginning in March, Canadian TV subscribers will have the option to choose a basic $25 package and then add channels on a pick-and-pay basis. This has some pundits concerned that subscription revenues will fall.
BCE and its peers are unlikely to make it easy for viewers to drop their monthly fees without giving up some of their favourite channels. As a result, I suspect revenues won’t change much.
As for content producers, there will certainly be some programs that won’t make the cut, but BCE has a strong portfolio of specialty channels, and the company will shut down any operations that aren’t profitable.
BCE plans to invest about $20 billion in its state-of-the-art wireless and wireline networks over the next five years to ensure its data-crazy customers have access to the best services possible. There aren’t many companies that can come up with that kind of money to compete, so BCE’s position at the top of the castle is probably quite secure.
BCE generates a ton of free cash flow and pays a quarterly dividend that yields 4.7%. If you are looking for a stock you can simply buy and forget for years, BCE is about as good as it gets.
