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Focus on the Fundamentals

By Ari Charney on August 27, 2015

With extreme volatility back in the market, it’s easy to lose sight of the fundamentals.

Of course, in the case of Canada, those fundamentals were already challenged by a weak economy hit by a massive oil shock.

Nevertheless, some Canadian sectors saw a sharp rebound in the second quarter. According to Statistics Canada (StatCan), operating profits at Canadian corporations jumped 12.9%, to CAD80.9 billion, from the previous quarter.

Eleven out of 22 industries saw increases, but financials were responsible for more than 90% of the quarter-over-quarter rise. The sector’s operating profits surged by CAD8.5 billion, or nearly 50%, to CAD25.6 billion.

StatCan primarily attributes the financial sector’s performance to a large decrease in the value of actuarial liabilities among insurers, which led to a huge drop in expenses.

Outside the financial sector, operating profits grew at a comparatively sluggish 1.5%, to CAD55.3 billion.

However, it’s important to note that these results came after two consecutive quarters of declines. That means companies are still picking up the pieces.

But even the beleaguered energy sector saw its fortunes improve, albeit from a very bad situation to a less bad situation: Operating losses shrank to CAD379 million from CAD1.2 billion in the first quarter. Still, a big part of that result was due to a crude rally that has since sharply reversed.

Importantly, the manufacturing sector had broad-based gains, with 10 out of 13 constituent industries reporting increases in operating profits. The sector’s overall operating profits climbed 6.5%, to CAD13.2 billion.

The manufacturing sector figures prominently on the Bank of Canada’s economic wish list. The central bank has been hoping to see a rise in manufactured exports boost growth in the industry and flow through the economy as a whole. But progress on this front has been halting, at best.

Despite the return to growth, second-quarter operating profits were still 3.8% lower than a year ago overall and 12.6% lower among non-financials.

StatCan’s data is based on a survey of both public and private corporations. Among Canada’s publicly traded companies, the situation is better in some noteworthy ways and worse in others.

With earnings season almost over, nearly all of the 247 firms listed on Canada’s benchmark S&P/TSX Composite Index have reported their second-quarter results.

Given that commodities-oriented sectors such as energy and basic materials account for nearly a third of the index, their results weighed heavily on the broad market’s financial performance, which saw earnings drop almost 20% year over year on a 13% decline in sales.

But there’s hardly the sea of red that one might expect at the sector level. Six out of 10 sectors saw significant earnings growth, while five out of 10 sectors saw respectable, if mostly modest, sales growth.

Among the income-oriented sectors, utilities enjoyed a characteristically steady rise in revenue of 2.8%. And while Bloomberg shows the sector’s earnings skyrocketed by 88.5%, it should be noted that there are only a dozen names in this category, so it’s easy for a couple of companies to distort the average.

Nevertheless, we’re pleased that Fortis Inc. (TSX: FTS, OTC: FRTSF) was one of the companies that helped drive this distortion. The gas and electric utility saw a 47% increase in earnings per share for the second quarter.

And Fortis boosted its quarterly dividend by 6.25%, with further dividend growth of 6% per year forecast for the next few years. Fortis currently yields 3.6%.

Meanwhile, Canada’s telecom sector, which we like to think of as our favorite oligopoly, appears to have successfully navigated the mass expiration of customer contracts that occurred during this period.

The sector enjoyed growth in earnings of 8.3% on a 3.8% increase in revenue. Once again, two of our longtime favorites led the way.

BCE Inc. (TSX: BCE, NYSE: BCE) got a 12.2% boost in earnings on a 2% gain in revenue, while Telus Corp. (TSX: T, NYSE: TU) had steady earnings growth of 4.8% on a 5.1% increase in earnings.

BCE currently yields 4.9%, while Telus yields 3.9%.

Although the near- to medium-term outlook has gotten increasingly murky on the global macroeconomic front, we’re calmly collecting our quarterly paychecks from these dependable dividend payers.


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