The International Monetary Fund (IMF) recently downgraded its world economic outlook over fears that worsening business sentiment, geopolitical instability and a slowing China will impede growth. The IMF forecast that global GDP growth will weaken to 3.3% or 30 basis points lower than 2018. A range of macro factors are responsible for this, including tightening credit in China, weaker growth in Latin America and deteriorating fundamentals in the Eurozone, U.K., U.S., Australia and Canada.
Canada experienced one of the most significant downgrades with the IMF revising its 2019 GDP forecast downward to 1.5%, which is 0.3% lower than 2018 amid concerns that the domestic economy could slow even further. This foreboding news makes now the ideal time for investors to consider bolstering their exposure to stocks with solid defensive characteristics, but that are also capable of growing at a solid clip when the economy improves.
Brookfield Infrastructure Partners (TSX: BIP.UN)(NYSE: BIP) is a leading globally diversified provider of infrastructure, which is critical to economic activity. It generates around 95% of its earnings from regulated as well as contracted sources and possesses a wide economic moat that protects its revenue.
The inelastic demand for the utilization of its infrastructure including ports, railways, toll roads, energy utilities, telecommunications towers and datacenters endows it with solid defensive characteristics protecting it from economic downturns. Brookfield Infrastructure has an established history of growing earnings from a combination of organic growth, asset recycling and opportunistic acquisitions.
Earnings before income tax depreciation and amortization (EBITDA) has a compound annual growth rate (CAGR) of 9% since 2014, and has reported an average EBITDA margin of greater than 55% over the period. This has allowed Brookfield Infrastructure to reward investors by hiking its distribution for the last 11 years straight to be yielding a very juicy 5%.
Canadian National Railway (TSX: CNR)(NYSE: CNI) owns North America’s only true transcontinental rail network. Steep barriers to entry for the industry, including strict regulatory requirements and the need for massive amounts of capital to acquire the required track and rolling stock protects its earnings. Rail remains the only economic and low risk means of transporting bulk freight such as crude, minerals and grain, ensuring that demand for Canadian National’s services will remain strong even if the economy slows.
These characteristics endow Canadian National with a wide almost insurmountable economic moat, which along with operating in an oligopolistic industry, protects its earnings. For these reasons, it is well positioned to weather economic downturns and continue increasing its dividend on a regular basis.
Canadian National has increased its dividend for an incredible 23 years straight to see it yielding almost 2%. Its wide economic moat coupled with management’s focus on driving greater efficiencies and improving track as well as rolling stock will boost profitability, supporting further dividend hikes.
Pembina Pipeline (TSX: PPL)(NYSE: PBA) is a leading North American provider of pipelines, storage, processing and midstream services to Canada’s energy patch. It forms a crucial link between Canada’s oil and natural gas fields and energy markets.
A combination of significant capital requirements and strict regulation means that the energy infrastructure industry has steep barriers to entry. That, along with the inelastic demand for energy, the critical nature of Pembina’s infrastructure, existing transportation constraints and growing domestic hydrocarbon production means that demand for the utilization of Pembina’s assets will grow at a steady clip.
Those characteristics protect its earnings from a deteriorating economy and virtually guarantee that they will continue to expand at a steady rate. Pembina has rewarded investors by boosting its dividend for the last seven years to see it yielding a tasty 4.5%. Its guaranteed earnings ensures that the dividend is sustainable and will continue to grow at a decent clip.
