Canadian equity markets are upbeat this year, with the S&P/TSX Composite Index rising 5.4% year to date. Signs of easing inflation and the United States Federal Reserve’s indication that it would slash interest rates three times this year appear to have improved investors’ confidence, driving equity markets higher.
Despite strengthening broader equity markets, a few companies are still trading at attractive valuations, thus offering entry points for long-term investors. The following three top value stocks can deliver superior long-term returns.
Fortis
Fortis (TSX:FTS) operates 10 regulated utility assets, serving around 3.5 million customers in North America and meeting their electric and natural gas needs. Owing to its regulated utility asset base, the company’s financials are less susceptible to market volatility. Besides, it has delivered an average total shareholders’ return of 10.7% for the last 20 years, outperforming the broader equity markets.
Meanwhile, the utility business is capital-intensive, requiring companies to take on huge debt to fund their capital expenditures. So, rising interest rates have increased Fortis’s interest expenses, thus weighing on its financials and stock price. It has lost around 13.5% of its stock value compared to its 52-week high. Amid the recent weakness, the company trades at 16.8 times analysts’ projected earnings for the next four quarters.
However, Fortis’s long-term growth prospects look healthy. The company plans to invest around $25 billion over the next five years and expand its rate base at an annualized rate of 6.3%. So, the utility, which has been raising its dividend for 50 years, hopes to increase its dividends by 4 to 6% annually through 2028. So, I believe Fortis is an excellent buy at these levels.
Magna International
Magna International (TSX:MG), which manufactures automotive components, has been under pressure over the last few years. Lower vehicle production due to chip shortages and UAW (United Auto Workers) labour strikes have weighed down the company’s financials and stock price. Compared to its 2021 highs, the company has lost around 40% of its stock value.
Meanwhile, the Aurora-based company continues strengthening its presence in megatrend areas such as powertrain electrification, battery enclosures, and active safety. It expects to invest around $1.2 billion this year in the sector and projects the capital expenditure to decline in the coming years. Amid growing demand and continued investments, MG’s management expects its sales from megatrends to grow at an annualized rate of 40% through 2026. The company is also confident that the segment will turn profitable by 2026.
Further, MG’s management expects its overall revenue to reach $48.8 to $51.2 billion by 2026, representing an annualized growth of 5.3%. Also, its adjusted EBIT margins could improve by 180 basis points during the period. Given its healthy growth prospects and attractive NTM (next 12 months) price-to-earnings multiple of 9.2, I am bullish on MG. It has also raised its dividends for 14 consecutive years and currently offers a forward yield of 3.38%.
Telus
Another value stock that I am bullish on would be Telus (TSX:T), one of Canada’s top telecom players. In November, the CTRC (Canadian Radio-television and Telecommunications Commission) allowed smaller players to utilize large telecom companies’ fibre-to-the-home (FTTH) networks to offer their services to improve competition. The announcement would disincentivize companies, such as BCE and Telus, which have invested aggressively in expanding their broadband infrastructure. So, the company has been under pressure, losing over 23% of its stock value compared to its 52-week high.
However, the expanding customer base and growing revenue per user amid rising demand, and its continued investments in expanding its 5G infrastructure could boost its financials. Also, the contributions from its other business verticles, Telus Health, TELUS International, and TELUS Agriculture & Consumer Goods, could rise in the coming quarters. Further, Telus offers a forward dividend yield of 6.74% and trades at an attractive NTM price-to-sales multiple of 1.6, making it an attractive buy.
