As of tomorrow Monday, the focus will be on how the market reacts to the Mueller report. Trump was not really fully exonerated – though he claims he was – but there was no proof of collusion and insufficient proof of obstruction of Justice. The market may take this as a very positive sign even though the Democrats are not about to drop their various inquires. As of early Sunday evening, pre-markets are up modestly.
As of Thursday, the market was focused on the benefits of lower-for-longer interest rates and not on the various signals that a recession might be coming soon to America.
However, on Friday as the yield curve inverted (The ten year yield ended the day slightly lower than even a one month treasury bill!) the market apparently began to fear recession and the S&P 500 was down 1.9% and Toronto was down 1.0%.
Some of the notable losses included FedEx down 2.8%, Amazon down 3.0%, and CRH Medical down 4.9%.
Among the few stocks with gains were: Couche Tard, up 1.5%, Riocan up 1.3% and Fortis, up 0.8%.
With the yield on Canadian government debt being roughly 1.6% to 1.7% for everything from 3 month treasury bills all the way to ten year bonds (and 30 year bonds around 2.0%) dividend stocks paying 4% and higher should be increasingly attractive – except if their prices are expected to fall due to recession or other reasons. Retail investors can also invest in GICs paying about 2.0% to 2.5% (For example, available at TD Direct) and somewhat higher at some smaller financial institutions not available through the bank discount brokers.
As an example of attractive dividends, the Boston Pizza units are now yielding 8.4% as they fell 2.4% to $16.41. There are certainly no guarantees but those units are likely to continue to pay the current $1.38 per year distribution. However, there is some risk of a modest cut of 5% or so in the distribution because the trailing payout ratio is 104%. But management appears to believe that they can maintain the ratio above 100% using cash on hand and that same-store-sales will slowly rise to bring the ratio back down to a sustainable 100% or less. There is always some risk that BP will lose market share and suffer same-store sales declines necessitating a distribution cut or that recession would cause that to happen at least temporarily. But overall, it seems likely that this 8.4% yield investment will do far better than guaranteed fixed income investments paying mostly 2% or less. Investors have had quite a bad experience with these units over the past 18 months as the price declined from highs over $23. It may be that this bad experience is scaring investors off from what appears to be a very attractive yield.
Somewhat similar comments apply to rate reset preferred shares. If interest rates in general are to remain lower-for-longer then the yields on rate resets should be looking more attractive even if they will reset at, for example, 5.6% of the current price for the Canadian Western Bank rate reset on our list. Investors have been repeatedly “burned” on rate reset shares as their prices fell due partly due to lower interest rates at times but mostly due to the market “demanding” higher spreads over the 5 year government bond. It may be that this bad experience has pushed the rate resets down to attractive prices. They are probably still best suited to those committed to holding for the long term for the yield and especially as a component of a taxable account.
I had a chance to talk to a local Edmonton BP owner on Friday. He does not expect boom times to return to his Edmonton restaurant but instead seems to expect stable results. It appears that he makes quite a good living from this one location. He is facing a mandated renovation that will cost towards $500,000 and he was not complaining about that.