Here are a couple of stocks that have had a correction recently but could make a comeback over the next three to five years. It’s the perfect time to discuss their spooky slide on Halloween.
Aecon
Aecon (TSX: ARE) stock has declined approximately 30% from its peak earlier this year. Its business results continue to be weighed by four large legacy projects that have fixed pricing. The company was caught off guard by the relatively high inflation.
That said, there’s strong demand for the offerings of the Canadian construction and infrastructure development company, as illustrated by its backlog of $6.2 million at the end of the third quarter. Management noted that these projects still made up $528 million (or about 8.5%) of the backlog. The negative impact of these projects on Aecon will diminish, which should lift its results (and the stock) over time.
Aside from the legacy project issue, Aecon is a cyclical stock that makes it a good candidate for a turnaround investment. Analysts currently have a 12-month price target that represents 42% upside potential. Just beware that it could take multiple years to get there and that, in the interim, the stock will likely have above-average volatility. In the meantime, Aecon stock offers a dividend yield of almost 8%.
You’ll notice that its trailing 12-month (TTM) interest expense almost tripled the 2019 levels. Recently, the company meaningfully reduced its debt levels. In the last quarter, its debt-to-asset and debt-to-equity ratios were 65% and 1.9 times, respectively, down from 2019’s 72% and 2.6 times.
The sale of an asset helped the company achieve a solid profit of $152.2 million year to date, resulting in a low TTM payout ratio of about 26%. This month, Aecon also announced a strategic investment by Oaktree in the form of a net $150 million convertible preferred equity investment in Aecon Utilities. This strengthens Aecon’s balance sheet.
Bank of Nova Scotia
An even more reliable stock for big dividend income today is Bank of Nova Scotia (TSX: BNS). Generally, investors trust big Canadian bank stocks for their dividends because of their key market positions in Canada. The Big Six Canadian bank stocks, including Bank of Nova Scotia, operate in an oligopoly. Together, they hold about 90% of the country’s banking deposits.
The banks are supported by regulation, and they are well capitalized. When there’s heightened risk in the economy, they anticipate higher provisions for credit losses (PCL) and increase their reserves. Around the last two recessions, the regulator asked them to freeze their dividends and halt share buybacks to improve the stability of our financial system. With heightened economic risk, the bank might be asked to freeze its dividend again. However, buyers of the stock today are getting paid well.
The dividend stock has declined a whopping 35% from its peak in 2022. At $55.41 per share at writing, near its 52-week low, it offers an incredibly massive dividend yield of just under 7.7%. Because of lower earnings, primarily from a jump in PCL, the bank’s TTM payout ratio also jumped to just under 70%. A rebound in earnings would improve the payout ratio. Assuming a normalization over the next three years, the stock could appreciate about 59%.
