With Banks, Oil Field Leading, Canada Heads For Dividend Boom

The dividend boom expected by stock market investors is finally taking shape.

Last year, the North American corporate sector cut dividends on a large scale, to come out of the worst of the pandemic with greater earning power.

With profits at record levels and still growing, many companies have started to return some of their excess cash to their shareholders.

“Dividends still have a long way to go to catch up,” said Stephen Duench, vice president and portfolio manager at AGF Investments Inc. “These are exciting times for dividend growth. These companies just print money.

As a group, companies in the S & P / TSX Composite Index have seen their earnings increase by around 90% over the past 12 months, well above the 11% average growth rate recorded over the past 15 years. (In the attached chart, earnings growth is brought forward six months to better show the trend.)

Canadian dividends, on the other hand, are currently well below their long-term trend – growing only 2.5% over the past year, compared to a long-term average of around 10%.

The large gap between profits and dividends can be explained at least in part by a residual caution on the part of business leaders.

When the global economy practically came to a halt in early 2020, a representative sample of Canadian companies reduced or suspended shareholder payments as a measure to protect companies from the pandemic.

Canadian businesses have been slow to let go of their frugality, even as balance sheets have swelled with cash reserves. It’s a similar story in the US stock market. S&P 500 companies cut their payouts by 27% in response to a 20% drop in profits in early 2020, according to a Credit Suisse report last month. Since then, profits have increased 32%, while dividends and buybacks have only increased by 1%.

The resumption of generous payments to shareholders will be a “key sign of a return to normalcy” for the stock market, Brian Belski, BMO’s chief investment strategist, said in a recent memo.

The third quarter earnings season is full of promising signs for dividend paying stocks as an asset class, said Izet Elmazi, chief investment officer at Bristol Gate Capital Partners. “We hear from all kinds of businesses on conference calls that they are in a decent financial position and have the ability and the will to put their money to work,” Elmazi said.

The big Canadian banks are a safe bet for generously rewarding their shareholders. Since March 2020, the federal regulator has banned banks and insurers from increasing dividends or buying back shares.

But the once dreaded wave of defaults resulting from the pandemic never really materialized, and banks are sitting on billions of dollars in excess capital as a result.

In the last quarter, core profits generated by big banks were 23% above pre-pandemic levels, according to a recent memo from Toronto-based Hamilton Capital Partners. “Current earnings and capital could support immediate dividend increases of 20-25%, even if earnings stagnate completely,” the report said.

Beyond financial services, Canada’s resource sectors have seen their earnings outlook change dramatically in recent months. With the surge in consumer demand around the world and the congestion of the global supply chain, the prices of commodities of all kinds have skyrocketed. Since the start of the year, the Bank of Canada’s commodity price index has risen by more than 40% to its highest level in more than seven years.

The West Texas middleman recently peaked at nearly US $ 85 per barrel. Around the same time last year, a barrel of US crude oil was trading at around US $ 35. “Many Canadian oil and gas producers are on track to meet their debt targets, leading investors to demand increased cash returns,” BMO Nesbitt Burns analyst Randy Ollenberger wrote in a commentary. note.

Meanwhile, CIBC World Markets analyst Dennis Fong said the oil field was in a “cash flow harvest” period. Even after the planned capital expenditures and dividends, oil sands companies are expected to have $ 28 billion in excess cash flow. At least half should be spent on debt repayment, leaving about $ 14 billion “to accelerate returns to shareholders, including buybacks given current valuations,” Fong wrote in a note.

The same theme runs across many different industries, offering dividend investors an unusually wide variety of good candidates, Duench said.

“You can find return in cyclical stocks like financials and energy. And you can find some of the best dividend growths in IT and healthcare, ”he said. “You don’t need to just buy defensive, rate-sensitive names like carriers, utilities, and commodities. ”

Be smart with your money. Get the latest investment information delivered straight to your inbox three times a week with the Globe Investor newsletter. Register today.