Last week we made some notable changes in our income model portfolios, primarily trimming back positions in big US tech and semiconductor plays, along with Stella Jones.
We took the week to strategize and think the positions over, and we now have some new buys to release in our model portfolios.
First, however, we’d like to speak about a Canadian Foundational Stock that reported earnings.
Alimentation Couche-Tard (TSE:ATD)
It was a strong quarter for Alimentation Couche-Tard, closing the earnings season on a high note. After currency conversion, Q4 earnings of $0.94 beat by $0.30, while revenue of $21.39B beat by $150M. Worth noting before we go any further is the fact that this quarter included one extra week of data. Any financial data referenced from here on out will be USD, the currency in which they report.
Year-over-year, adjusted earnings per share grew by 29.1%, and merchandise and service revenues increased by 11%. The company also saw same-store sales growth and margin expansion in the low-to-mid single digits across all its operating regions (Canada, US, and Europe). Fuel volumes continued to improve slowly, again offset by higher fuel margins.
Alimentation continues to grow its location base. In the quarter, it closed on acquiring 65 car washes and 55 convenience and retail locations. Also, it agreed to purchase an additional 112 convenience and retail sites in the US. Furthermore, it decided to purchase 2,193 sites from European operator TotalEnergies, which will be its focus this year.
Despite the acquisitions, the company exited the quarter with a similar leverage ratio as last quarter (1.46). We’d expect this to rise following the closure of the Total Energies acquisition. The company stated that the leverage ratio would increase to 1.81x post-TotalEnergies deal in the absence of share repurchases. In Fiscal 2023, it spent $2.3B on share repurchases, totalling 5% of its float.
Of note, the company did renew its share purchase plan, and given the company’s strong cash flow profile, we’d expect continued share repurchases. With that in mind, we consider the targeted leverage ratio of 1.81x to be on the high side. Furthermore, the company has a deemed leverage ratio of 2.25x as a target for the “normal course of business,” so even with the significant acquisition, it still has ample room to make additional moves.
Overall, it was a solid end to the fiscal year for Alimentation, and it remains well-positioned to perform strongly in the coming years.
Dividend Growth Model Portfolio Changes
As we’ve hit the midway point of the year, we tend to review our model portfolios and make changes as we see fit.
This summer, the clear runup was in US tech stocks. And, because this portfolio contains two of the best dividend growth stocks in the tech sector, Apple and Microsoft, we are left with some room to spend in this portfolio as we scale back positions.
If you forgot what happened in this model last week, we’ll refresh your memory:
Our Apple and Microsoft positions had been approaching 6% allocations due to the technology runup. Instead of trimming them back to their 5% original allocations, we went a percentage further to 4% due to high valuations.
We trimmed Stella Jones, an outstanding performer from the Bull List, from a nearly 4% allocation back to its target of 3%.
In terms of overall performance, the portfolio has done quite well. Returning just under 6% throughout the year, it’s slightly outperforming its benchmark, a blend of the S&P 500 and the TSX.
The struggles in the portfolio have been apparent, mainly in the sectors that are interest-rate sensitive. Think financials, utilities, real estate, etc.
Foundational Stocks Granite REIT (TSE:GRT.UN), Telus (TSE:T), and Brookfield Renewables (TSE:BEPC) got off to hot starts during the year but have started to retrace gains due to the fact the Bank of Canada went back on their word of pausing rates and instead decided to hike them yet again.
All eyes will be on the July meeting with the Bank of Canada regarding these rate-sensitive stocks. With inflation cooling and economic activity slowing, more signs point to the bank keeping rates at current levels in July. However, judging by how quickly they changed their tune on a pause in hikes, we’ve stopped trying to predict what will happen.
However, on the finance end, there are also a few stocks like Bull List stocks TMX Group (TSE:X), Intact Financial (TSE:IFC), and Equitable Bank (TSE:EQB) that are bucking the trend in the finance sector.
This portfolio has a multitude of top-ups in terms of allocations and one new addition. Let’s first speak about the new addition.
We’ve decided to add US Foundational Stock Blackrock (BLK) to the portfolio
For those unfamiliar, BlackRock is the largest asset manager in the world, with $85 trillion in assets under management. Yep, that’s right, there is none bigger. Regarding product mix, 56% of the firm’s managed assets are in equity strategies, 31.5% in fixed income, 8.7% in multi-asset class, and 3.8% in alternatives.
The company perfectly fits the mould of a dividend growth stock with a strong foundation. It has a 13-year dividend growth streak and has raised the dividend by nearly 14% annually over the last half-decade.
This dividend growth is coupled with solid earnings growth, as the company has grown earnings at a 10.5% annual rate over the last decade.
Earnings have dipped in a post-pandemic world, which is to be expected. The markets were crazy, and activity was at all-time highs. But we have little doubt Blackrock won’t be able to keep the double-digit earnings and dividend growth pace intact.
With the dividend making up only 60% of earnings, it also has a large buffer regarding dividend growth.
Our position in the portfolio will be a starter one at 2.5%, with plans to add as we go throughout the year.
We’ve added an overweight position in Telus
It can be argued that Telus has undergone its worst drawdown in over 15 years. Rate fears and fears of difficulties maintaining earnings have caused prices to dip.
For long-term investors, this is exactly what we want. We’ve seen irrational fear cause outstanding buying opportunities many times in the past (US tech companies in 2022, anyone?).
As of right now, we feel that opportunity is there with Telus. And as a result, we’re using some of the tech proceeds to increase our weighting in the company to 6%, the largest in the portfolio. This is 1% higher than its typical weighting.
We’ve topped up positions in Brookfield Renewables and Granite REIT
We will take advantage of lower prices in both Foundational Stocks Brookfield Renewables and Granite REIT. With Brookfield, it’s continuing to execute, with growing funds from operations and strategic acquisitions being made to grow its asset base.
Yes, utilities will continue to face pressure due to rising interest rates. However, we don’t mind accumulating Brookfield here at lower prices.
With Granite, it’s much the same. This is an outstanding industrial REIT, growing funds from operations and its distribution at a strong rate. Occupancies remain high, the bullish thesis for industrial properties continues, and we’re happy to keep buying more of this one as prices remain low.
High Yield Model Portfolio Overview & Changes
The High Yield portfolio is off to a great start through the first six months of the year. With total returns of 8.00% year to date, it’s crushing its benchmark, down 0.21% in 2023.
As of our last update, the portfolio is yielding 5.40% and impressively had a max drawdown of only 4.95%, which came earlier this year.
Before we get into some portfolio moves, let us look at key highlights from individual positions.
Without question, the best-performing stock within the portfolio is Broadcom (AVGO). This tech giant has benefited from a significant-tech rebound south of the board and is currently up 55% year-to-date. The company’s performance is even more impressive when one considers that this is one of the largest tech companies in the world, with a current market cap north of $350B. It is rare to see such huge swings among large players, but we’ve seen this phenomenon across the board as big tech drives the big S&P rebound in 2023.
Aside from big tech, two companies are sitting on returns north of 20%: Great West Life (22.91%) and Dream Industrial REIT (20.70%). The latter is somewhat surprising considering the pressure REITs have been under while the former is closing the valuation gap that existed earlier this year.
Finally, a few more holdings are sitting on double-digit gains this year. Those include Parkland (+11.07%), Brookfield Asset Management (+11.53%) and Brookfield Renewable Corp (+12.13%). All three have been quite volatile but are sitting on respectable yearly gains.
Turning our attention to the laggards, only one holding is currently sitting on a double-digit loss – Automotive Properties REIT (-11.40%). If you include the distribution, that loss narrows to 8.90%, but it remains the worst-performing holding of the portfolio.
As it is a Dividend Bull List pick of ours, we’ve talked at length about some of its struggles, but we remain confident in the company’s ability to rebound. It may just require a little bit more patience.
The other companies that bring up the rear include Chemtrade Logistics Fund (-8.70%) and Enbridge (-6.95%). Once again, the loss narrows once the distribution/dividend is considered, but both these cyclical stocks have struggled to perform.
Higher interest rates are impacting most midstream companies like Enbridge, while Chemtrade is on the verge of exiting a difficult period. By all accounts, the company is taking a more bullish tone when talking about the next few years (vs the past few) and recently raised fiscal 2023 guidance.
The rest of the individual positions are all trading within low single digits of break-even, which is relatively in line with the benchmark.
In terms of performance by some of the ETFs, the Harvest Tech Achievers Gr&Inc ETF (HTA) is putting up outstanding results. The ETF has total returns of 35.63%, thanks largely to the outperformance of Big Tech in the US. This ETF holds some of the biggest stars of 2023, including Nivida (NVDA), Advanced Micro Devices (AMD) and more. It is a “who’s who” of big tech and has led to outsized gains.
Conversely, the Harvest Healthcare Leaders Inc ETF (HHL.TO) is only sitting on total returns of 1.70% as the entire healthcare industry has struggled. Once again, this ETF holds some of the largest healthcare in the world, including US Foundational Stocks like Pfizer (PFE), which have had a difficult year.
Moves inside of the high-yielding portfolio
Regarding portfolio movement, we mostly did some ‘cleaning up’ and, for the most part, re-balanced to ensure our allocations aligned with targets. This led to some trimming to HTA.TO to get back down to its target allocation, and we added to the Brookfield Renewable (BEPC) and Brookfield Asset Management (BAM) positions to get them back in line with targets.
We trimmed back Broadcom (AVGO)
Previously, we had a targeted allocation for AVGO of 5%. However, given the big runup and its inclusion in HTA, we decided to reduce our target allocation to 4%. Upon reviewing the portfolio, AVGO had run up to 6.5%, so we trimmed it down to the new allocation (4%). After these changes, the portfolio’s Technology exposure is 9.45%.
We increased our position size in Canadian Natural Resources (CNQ)
In reducing our targeted allocation on AVGO by 100 basis points, we subsequently increased our targeted allocation to Canadian Natural Resources (from 3% to 4%). This brings our overall exposure to the Energy sector to 9.72%.
No other changes to the portfolio took place as we felt comfortable with the other positions. We didn’t feel there was a need to move on from any position and believe it is well-balanced as we head into the second half of the year.
