MARKET OUTLOOK

Corporations currently have a problem: They have massive amounts of debt to repay after acquisitions, limiting the amount of money they can allocate to share buybacks and dividend increases. These buybacks have been the reason the stock market has risen as much as it has. According to data from Goldman Sachs, net purchases from companies totaled $1.6 trillion during the past three years while investors from pensions to mutual funds to individuals were sellers.

At $17.6 billion, corporate buybacks so far in 2019 are 18 times as much as the total buying from hedge funds, the only other client group that’s bullish on stocks. Charlie McElligott at Nomura cautioned investors to watch out for a market decline after the S&P 500’s 20 per cent rally from its December low. The next month is “the window for the U.S. equities pullback as supply/demand would shift,” McElligott wrote in a note. Other catalysts include quarter-end selling due to pension fund rebalancing and a pickup in Federal Reserve balance sheet runoff in the final two weeks of this month, he said.

Finally, of the companies listed in the S&P, the average dividend increase in 2018 was 11 per cent. This year, it’s been averaging 7 per cent, the historical norm but significantly lower than a year ago when companies began to pay lower corporate taxes.

For investors, it’s important to pay attention to portfolio structure through proper diversification by avoiding correlation risk in equity holdings, concentration risk of any one stock and holding enough cash to take advantage of any market corrections that may come our way.

TOP PICKS

CANTEL MEDICAL CORP (CMD.N)
Last purchased on March 20, 2019 at $67.02.

Cantel is a healthcare company that provides infection prevention (water sterilization for hospitals and dental clinics), control products and diagnostic and therapeutic medical equipment. Its diverse offerings include medical device reprocessing systems and disinfectants for dialyzers and endoscopes, water purification equipment, masks and bibs used in dental offices and therapeutic filtration systems.

The stock reached a high of $130.92, but currently trades at half that value thanks to a slowdown in the dental and life sciences businesses. However, organic revenue growth was 5.3 per cent last year and free cash flow is expected to double, which should provide a pickup in profitability. The company also installed a new CEO to help turn around its weaker businesses. Dividend growth is in the mid-teens and the payout ratio is just 8 per cent, so lots of room to grow the dividend.

ENGHOUSE SYSTEMS (ENGH.TO 1.01%)
Last purchased on March 21, 2019 at $31.99.

Develops software products for automated mapping, call centres, transportation solutions, facilities management and geographic information systems. It’s a Canadian company with lots of international exposure. It currently trades near its 52-week low because revenues in the last quarter rose only 1 per cent. That’s because they didn’t make any acquisitions, which to us is a positive sign that management won’t overpay for future deals. The dividend has steadily grown in the mid-teens and the payout ratio is only 8.5 percent.

EXPONENT (EXPO.O 0.35%)
Last purchased on March 20, 2019 at $57.27.

Exponent operates as a science and engineering consulting firm. The company performs scientific research, analysis and evaluations to solve complicated issues facing a range of industries and governments. A risky business is a potential customer for Exponent.

HALMA PLC (HLMA.LON)

Halma is a health and safety sensor technology group which makes products that detect hazards and protects assets at work in public and commercial buildings. Product demand is steady and, while not recession-proof, it can hold its own in difficult markets. Only 25 per cent of their sales are in the U.K. and European markets, so any drop in the British pound is beneficial to higher sales and earnings.

FIRST CASH FINANCIAL SERVICES (FCFS.O 0.89%)

First Cash Financial Services owns and operates pawn stores in the U.S., Mexico and other South American countries. When economies fall into recession, pawn shop activity picks up. If the U.S. dollar falls and the price of gold rises, First Cash Capital also benefits as they deal a lot with pawned gold jewelry. Since its first payment in 2015, the company has been raising its dividend by about 18 per cent annually.

METRO INC (MRU.TO 0.90%)

Metro is a Canadian food retailer in Quebec and Ontario that has recently purchased the assets of Jean Coutu, a pharmacy retailer. This is an inelastic consumer company that performs in both strong and weak economies. It currently trades at 14.5 times 2020 earnings as profits and dividends are expected to grow by 10 per year.

TRANSCANADA (TRP.TO) 
Last bought at $50.99.

TransCanada mostly operates natural gas pipelines in North America and Mexico. It plans to add $10 billion of new projects in 2019 and another $26 billion by 2020. If their Keystone XL project gets approved, the shares should recover from the discount they currently trade. The firm expects dividend growth to continue in the 8 to 10 per cent range for the foreseeable future. Its current dividend yield is an attractive 5.42 per cent.

UNILEVER NV (UN.N)
Last bought at US$53.88.

Unilever is a global consumer products company with three main divisions: food and beverages, cleaning agents and personal care. Global market volumes have remained robust in aggregate, up around 1 per cent. There are some significant bright spots:  Market growth in India and China remains strong, while e-commerce continues to be the key growth driver. In aggregate, underlying sales grew by 3.8 per cent in the third quarter, with volumes up by 2.4 per cent. In the emerging markets, growth accelerated to 5.6 per cent and we’ve maintained good volume growth at 3.4 per cent, which is very encouraging. Its current yield is 3.15 per cent and the dividend has historically grown by 10 per cent annually.

BECTON DICKINSON (BDX.N)
Last bought at US$234.16.

Becton Dickinson is a medical technology company that makes and sells medical devices, instrument systems and reagents. Its 2017 acquisition of C.R. Bard combined two strong free cash flow generating companies and added urology products to the Becton sales line. The company also makes disposable products, such as syringes and vials for blood tests. The stock yields 1.28 per cent, but the dividend has consistently grown 10 per cent annually.

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