It’s been our mantra for more than two years now: A lower exchange rate will drive a rebound in non-energy exports. But evidence of this development is still sorely lacking at the industry level.

Of course, as we wrote last week, we did see a huge jump in exports in June. Despite the glimmer of hope those results offered, one month does not a trend make (that’s another mantra).

From the perspective of a U.S. investor, these concerns may seem entirely academic. After all, the tailwind we once enjoyed from the rising Canadian dollar has since turned into a significant drag on investment performance now that the exchange rate is sharply lower.

But while the stock market and the economy don’t always march in lockstep, a resurgent economy will help drive growth in our stocks. And a rebound in non-energy exports is one way to get there, at least according the Bank of Canada (BoC).

The central bank believes strong exports will drive business investment, followed by hiring, wage growth and consumer demand, leading to a virtuous cycle of economic growth.

Right now, the BoC’s wish list might seem like a relic from the period preceding crude oil’s collapse. But with the expectation among some economists that energy prices will be lower for longer, finding new growth in the non-energy sectors has become even more urgent.

Unfortunately, as the central bank has famously observed, the relationship between exports and a lower exchange rate is no longer as strong as it was in the past. More recently, the central bank even conceded that it was “puzzled” by the weakness in non-energy exports that prevailed prior to the June surge, as only so much could be explained by bad weather coupled with the commodities crash.

However, CIBC economists have one plausible explanation: The lower exchange rate needs more time to work its magic. The bank notes that it typically takes six quarters before the depreciation of the currency fully translates into gains in exports.

While it’s true that the Canadian dollar’s decline began gathering momentum in mid-2013, CIBC says that by historical standards it was still trading at a relatively expensive level through mid-2014. It wasn’t until late last year, as crashing crude drove the Canadian dollar lower, that the exchange rate finally reached a level that should be beneficial to trade.

With only six months of trade data since then, that means, as CIBC puts it, that the lion’s share of the benefits of a lower exchange rate have yet to be revealed.

At the same time, it’s possible that the lower loonie won’t have quite the same effect on exports as it has had in the past. CIBC notes that a 20% depreciation in the exchange rate has historically boosted export volumes by 12%. But that might not be the case this time around.

Part of the problem is that while the once-strong Canadian dollar was enhancing our investment returns, it was also eroding Canada’s manufacturing base, causing it to lose significant market share to countries such as Mexico.

And that was after the manufacturing sector had already suffered a devastating blow from the Global Financial Crisis.

The relatively high exchange rate that prevailed during much of the ensuing recovery means that the sector has recovered little of the capacity it lost during the downturn.

Now that some of the key conditions are in manufacturers’ favor again, they can’t exactly ramp up production without the factories that have been shuttered.

The good news is that CIBC believes the exchange rate is already at the level necessary to spur growth for export-oriented manufacturers. The bad news is that they believe it will have to remain at this level for at least a couple of years to kick-start the sector again.

The Dividend Champions: Portfolio Update

By Deon Vernooy

Earnings season is now in full swing, and we are keeping a close eye on the progress of the Dividend Champions, with a keen focus on dividend growth.

BCE Inc. (TSX: BCE, NYSE: BCE) had another steady quarter, with earnings per share up 6.1% from a year ago.

Once again, the wireless business delivered strong results, as a growing subscriber base led to a 5.3% increase in EBITDA (earnings before interest, taxation, depreciation and amortization) for this unit.

At the same time, the ongoing decline in the use of landline phones continues to be a drag on the wireline business, though the strong growth in high-speed Internet subscribers provides some support for this division.

Overall, cash-flow generation remains exceptional, with free cash flow (i.e., operating cash flow less capital expenditures) comfortably covering the dividend.

Though debt, at 66% of capital, is on the high side, this should be manageable for a company with such a consistent income stream.

The dividend was boosted by 5.3%, with further growth of 5% per year expected for the foreseeable future. With a current yield of 4.8%, BCE is a core holding in the Dividend Champions Portfolio and a buy below USD46/CAD60.

Canadian asset manager CI Financial Corp. (TSX: CIX, OTC: CIFAF) delivered solid second-quarter results, with earnings per share up 14%.

The company now has $110 billion in assets under management, up 12% over the trailing year, with net inflows of $1.5 billion during the latest quarter.

Cash-flow generation remains strong, and the balance sheet has minimal leverage, with a debt-to-capital ratio of just 10%.

The company continues to buy back its own shares, with a substantial $118 million worth of shares repurchased so far this year.

CI Financial has a good investment performance track record and is considered one of the blue-chip asset management companies in Canada.

The dividend was boosted by 10% from a year ago, with further increases of 10% per year expected for the foreseeable future.

With a current yield of 4.1%, CI Financial is a buy below USD28/CAD37.

Finning International Inc. (TSX: FTT, OTC: FINGF), the largest Caterpillar equipment dealer in the world, had a difficult quarter, as evidenced by the 24% decline in earnings per share.

That weakness was especially apparent in Canada, where mining companies significantly reduced orders for new equipment.

While the sale of new equipment is linked to activity in the mining and construction sectors, the more stable Product Support division (which is now also the company’s largest revenue generator) managed to increase revenue by 1%.

However, with the order backlog declining by 22% during the second quarter, the outlook for Finning is now uncertain.

The company has taken several steps to cut costs, including a reduction in the workforce and the closure of select facilities. However, it will take time for the full benefit of these actions to materialize. For now, analysts forecast profits to decline by 15% for the full year.

We like Finning because of its ability to maintain its dividend through market cycles. In this respect, the company did not disappoint: It was able to boost its dividend by 3% from a year ago, thanks to a strong balance sheet and solid cash-flow generation.

Finning’s share price has fallen by about 32% from its trailing-year high. Any sustained recovery will depend on a rebound in the mining and construction sectors.

Meanwhile, the 3.3% dividend yield, which the company should be able to sustain during the downturn, as well as ongoing share buybacks, will support the share price. Finning is a buy below USD18/CAD24.

Inter Pipeline Ltd. (TSX: IPL, OTC: IPPLF) delivered a strong result for the second quarter, with a 38% increase in funds from operations per share (funds from operations adds back non-cash items, such as deferred tax and depreciation, to net income and is considered to be an appropriate measure of financial performance for this type of business).

The strong quarter was primarily due to revenue generated from new oil sands pipeline capacity coming on stream in the Polaris and Cold Lake pipeline systems. This new capacity, as well as the completion of extensions to the Saskatchewan pipeline system and contributions from the newly acquired Swedish liquids terminals, should help push profits higher during the second half of the year.

Cash-flow generation remains quite strong, though the balance sheet looks somewhat stretched after heavy capital spending in recent years. Nevertheless, cash flow is expected to continue improving, thanks to contributions from newly added assets.

The monthly dividend is now 19% higher than a year ago, for an attractive yield of 5.4%. Inter Pipeline remains one of our preferred targets for new investments and is a buy below USD22/CAD29.

Shawcor Ltd. (TSX: SCL, OTC: SAWLF) saw second-quarter EBITDA (earnings before interest, taxation, depreciation and amortization) drop 84% from a year ago. This was not unexpected as the company’s main activity is to provide pipeline coatings to the depressed oil and gas sector.

To endure in this challenging operating environment, Shawcor has taken a number of steps to reduce costs, including a 20% reduction in the workforce and the closure of select plants.

Management offered a cautiously optimistic outlook for the second half of the year, noting that North American demand for its products and services may have reached a bottom during the second quarter, and that order backlog and bidding activity are at a reasonable level.

Cash-flow generation remains sound, with free cash flow comfortably covering the dividend. The balance sheet, with debt to capital at only 20%, is still in excellent shape.

We like Shawcor because of its ability to withstand severe industry downturns, such as the one we’re in presently. We believe that the dividend is safe for the foreseeable future, and the stock price, which has now declined 50% from its trailing-year high, has considerable upside potential when the industry recovers. ShawCor is a buy below USD26/CAD34.

Canadian life insurer Sun Life Financial Inc. (TSX: SLF, NYSE: SLF), with operations in Canada, the U.S. and Asia, announced pleasing second-quarter results, with a 24% increase in underlying earnings per share.

The insurance and wealth management business is performing well, with premiums and deposits up by 24%. However MFS, Sun Life’s U.S. asset management subsidiary, has now seen four quarters of net outflows of assets.

Sun Life boosted its dividend by 6% compared to a year ago, with reasonable prospects for a further 5% to 10% growth per year for the next few years. With a current yield of 3.5%, Sun Life remains a core holding in our Dividend Champions portfolio and is a buy below USD34/CAD45.

Telus Corp. (TSX: T, NYSE: TU) announced mixed results for the second quarter. On a GAAP basis, earnings per share declined 10% from a year ago, though this was entirely due to a one-time $59 million restructuring charge related to the closure of the Blacks Photography stores. Excluding this charge, profit per share grew 4.8%.

Overall, the company performed quite well during the second quarter, with total customer connections increasing by 2.5%, to 13.9 million. Wireless mobile, high-speed Internet and TV connections all showed solid increases in net subscriber additions.

Wireless revenue per user saw a nice jump, thanks to the 18% increase in wireless data revenue due to increased mobile phone use for videos and games.

As is the case almost everywhere else in the telecom industry, fixed phone line connections are decreasing, down 3.1% in the latest quarter.

Cash flow remains solid, but debt now stands at 61% of capital. The company has had to increase its borrowing to finance spending at wireless auctions for AWS-3 and 2500 MHZ spectrum licenses.

Following its earnings release, Telus confirmed that CEO Joe Natale will be replaced by former CEO and current Chairman Darren Entwistle. Since Entwistle had previously been at the helm for 14 years and had only handed over the reins a year ago, the change should have minimal impact on the company’s strategy and operations.

The dividend was increased by 10.5%, with further growth of 10% per year expected for the foreseeable future. With a current yield of 3.8%, Telus is one of the top holdings in the Dividend Champions Portfolio and is a buy below USD36/CAD47.

Poor snow conditions caused a sharp drop in skier visits for Whistler Blackcomb Holdings Inc. (TSX: WB, OTC: WSBHF), resulting in a financial loss per share of $0.14 for the fiscal third quarter (ended June 30).

On the positive side, the retail and food and beverage businesses continued to perform well, as bike-park and hiking visitors filled some of the gaps left by the absent ski visitors.

The company is expected to be a major beneficiary of the weaker Canadian dollar, hopefully drawing a larger number of U.S. and international visitors.

The dividend remained unchanged compared to a year ago, though the stock still sports an attractive yield of 4.6%. However, with the share price up 18% since early May, we’ve downgraded Whistler to a Hold.