After a disappointing period for equity investors in the last year, the first two months of 2023 have seen the share prices of companies across sectors move higher. While the stock market is expected to remain volatile in the next 12 months, you can still go bottom-fishing and buy quality, undervalued stocks at a discount.
So, here are two of my favourite Canadian stocks you can consider buying in 2023 for your TFSA (Tax-Free Savings Account).
Canadian Natural Resources
The first stock on my list is Canadian Natural Resources (TSX:CNQ), which is one of the largest companies on the TSX. Down 12% from all-time highs, CNQ stock also offers investors a tasty dividend yield of 4.4%.
Canadian Natural Resources has been among the top-performing stocks on the TSX in the last 20 years. Since March 2003, CNQ has returned a whopping 1,820% to shareholders after adjusting for dividends.
While CNQ is part of the highly cyclical energy sector, its low cost of operations and diversified base of assets allow the company to generate cash flows across market environments. Its strong balance sheet and robust financials have enabled the energy giant to increase dividends by more than 20% annually in the last two decades.
CNQ benefits from a balanced product mix of natural gas, bitumen, and crude oil. Further, its long-life, low-decline asset base ensured Canadian Natural Resources could maintain its dividend, even when oil prices fell off a cliff in mid-2020.
An elevated pricing environment and record cash flows meant CNQ paid out a special dividend totaling $1.5 per share in the second quarter (Q2) of 2022.
Going forward, CNQ aims to distribute 50% of its free cash flows toward enhancing shareholder wealth and lowering its debt profile. Once its net debt falls below $8 billion, CNQ will increase its dividend payouts and accelerate its buyback program.
At current prices, CNQ stock is trading at a discount of 20% to consensus price target estimates. After accounting for dividends, total returns will be closer to 25% in the next 12 months.
Brookfield Infrastructure Partners
Another TSX stock that has delivered outsized returns to shareholders since its initial public offering is Brookfield Infrastructure Partners (TSX:BIP.UN). The diversified infrastructure giant went public in January 2008 and has since surged by 1,330%.
The company owns and operates several businesses that include electric and natural gas transmission and distribution, data centres, toll roads, and other infrastructure assets that generate predictable cash flows.
It has a presence in recession-resistant verticals such as utilities and data operations, resulting in steady cash flows for BIP in recent years. Moreover, Brookfield Infrastructure has explained it needs significant capital to maintain and expand the infrastructure demand of the global economy resulting in several acquisition opportunities.
Despite its market-thumping gains, BIP stock offers investors a forward yield of 4.4% which is expected to increase between 5% and 9% over the long term.
Down 18% from all-time highs, BIP stock is priced at a discount of 35%, given consensus price target estimates.
While most companies struggled to maintain profits in 2022, BIP’s funds from operations rose a stellar 20% year over year to $2.1 billion. Its long duration, fixed-rate debt, as well as inflation-linked contracts within business units, shielded BIP from the impact of interest rate hikes.