Canada, as an investment destination, isn't getting its due; our firm's recommendations below allow you to take advantage of plays on the Great White North that are now intrinsically strong but undervalued.
Let's first examine Canada's banks. Six of these banks hold about 90% of the nation's banking assets. This is a classic oligopoly, which enables them to price their services advantageously and maintain a stable deposit base. The nation's banks are consistently ranked among the world's strongest and safest, most recently according to Bloomberg and Global Finance magazine.
Our favorite in the group is Bank of Nova Scotia ( BNS ). Popularly known as Scotia Bank, it's well diversified in both operations and geography. Scotia is expanding both through organic growth and acquisitions; it's had 30 since 2007. Total assets have increased 27% in two years, and the bank's significant international diversification includes Latin America and Asia. However, returns on common equity have remained solid, averaging 17.4% over the last five and a half years, with steady asset quality and strong cost controls.
Canada is also a resource-rich economy with huge confirmed oil reserves; it's also a major producer and exporter of minerals, natural gas, and agricultural commodities.
Our favorite investment in this broad sector is TransCanada Corp. ( TRP ). We like this conservative, high-yield stock partly because it has been depressed by political controversy and uncertainty, despite the underlying stability of its business. TransCanada is one of the largest pipeline operators in North America, with some 35,000 miles of natural gas pipelines. The US government has delayed a decision about whether to allow complete construction of the partly built Keystone XL pipeline here. But TransCanada already is moving ahead with a new Canada-only proposal.
TransCanada's low-risk pipeline business, with high barriers to entry, represents 77% of cash flow. And we believe management will continue to seek ways to offset declining natural gas volumes from western Canada. Growth historically has been low but stable. Meanwhile, the dividend has increased for 13 consecutive years, rising 130% over that time. Yielding 4% now, with dividend-growth a probability, this is another bond substitute for long-term investors.
Among Canada's other investments, we also like Magna International ( MGA ). As one of the world's largest, most diversified auto parts suppliers, it's benefiting from the auto industry's renaissance and increased outsourcing. Based in Ontario, Magna provides a wide variety of services, from vehicle engineering and assembly, to parts production. With $32.7 billion in sales, it has 315 manufacturing operations in 29 countries.
Magna's sales and earnings for this year's first six months exceeded consensus expectations. Sales jumped 16% to a record $8.96 billion in the second quarter, and management raised full-year revenue guidance. Analysts have boosted their earnings estimates for Magna International, for a current EPS consensus of $6.14 in 2013 and $7.38 in 2014.
Magna is cash rich ($1.2 billion, with low debt) and shareholder oriented. It has boosted its quarterly dividend by 78% over the past three years. The company is also in the middle of a 12 million share-buyback program. Shares have soared over the last 12 months, but the stock is still cheap in light of its growth, trading at just 13 times forward earnings. Given improving industry fundamentals, we believe the shares offer good value.
Numerous other Canada investments look attractive now for long-term investors, particularly in mining, railroads, and agriculture.
The best single way to invest in Canada is via iShares MSCI Canada (NYSEARCA:EWC), an exchange-traded fund (ETF) that tracks about 85% of the nation's stock market. This ETF holds about 100 stocks that primarily trade on the Toronto Stock Exchange. Some 40% of EWC's holdings are energy and materials companies, led by Suncor Energy ( SU ), Canadian Natural Resources ( CNQ ), Enbridge (ENB) and TransCanada. Financials account for another 35%.
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