Editor’s Note: Please see our latest analysis of RioCan REIT, Potash Corp., and Fortis in the Portfolio Update following the article below.

Given the extent of the oil shock, it’s probably too soon to say that Canada’s economy is fully on the mend. But most economists had expected the country’s gross domestic product (GDP) growth to reaccelerate during the latter part of the year after an atrocious first half.

And the latest economic data certainly suggest that Canada is finding its footing again. The otherwise lackluster second quarter ended on a strong note, with June GDP up a revised 0.4% month over month, exceeding the consensus forecast by two-tenths of a percentage point.

Now that Statistics Canada has reported the latest numbers for July, we can see that the country’s economy has once again surpassed economists’ expectations. July GDP grew 0.3% month over month, ahead of the consensus forecast by a tenth of a percentage point.

Two consecutive months of growth is a welcome relief after five straight months of declines.

Since Canada is in the midst of the rough and tumble of an election season, there was some debate over whether the first-half contraction was a “technical” recession.

Many economists quibbled with this characterization, since the declines in GDP weren’t accompanied by similar setbacks in other important parts of the economy, such as employment growth.

Regardless of what you call it, the economy’s retrenchment appears to have been relatively short-lived. As BMO Capital Markets economist Benjamin Reitzes told the Financial Post, “Most definitely, this is among the shortest and most mild (recessions) in Canadian history.”

Also a relief is the fact that the economy managed to produce such growth even after oil prices collapsed once more in July.

In fact, oil and gas production was one of the leading contributors to economic growth in July, up 4.4%, mainly due to a 9.1% gain in non-conventional oil production.

Part of the recovery in crude oil volumes appears to be due to a return to normal activity after production was hindered by maintenance activities and wildfires in April and May.

Economists with CIBC note that despite the drop in oil prices, industry estimates indicate that crude oil production could grow by as much as 200,000 barrels per day. With data showing just two-thirds of that threshold having been achieved, there could be more gains ahead.

Manufacturing output also grew during the month, up 0.6%, due to gains in production of transportation equipment and furniture, among other items.

We’ve been monitoring the manufacturing sector since the Bank of Canada sees its resurgence as key to transitioning away from the economy’s dependence on spending by debt-burdened consumers.

The declining exchange rate is expected to play a big role in this shift, and the lower Canadian dollar does appear to have given export volumes a boost recently. The loonie currently trades at around USD0.75, down nearly 16% from its trailing-year high.

Meanwhile, on a year-over-year basis, important economic contributors such as real estate and finance were up 3.1% and 6.9%, respectively.

So how do economists expect the second half to shape up? The consensus forecast is for GDP to grow by an average of slightly more than 2% during the third and fourth quarters, a sharp contrast to the decline posted for the first six months of the year.

Even so, with the oil and gas sector at least partially sidelined, the Canadian economy’s return to full capacity is projected to take longer than previously forecast.

The Bank of Canada estimates it would take annualized growth of at least 2.5% for the economy to be firing on all cylinders again, and it doesn’t expect GDP growth to surpass that number for a full year until 2017.

Fortunately, our investment strategy of selecting companies with sound balance sheets and the ability to deliver strong dividend growth should help us weather this difficult period.

The Dividend Champions: Portfolio Update

By Deon Vernooy

RioCan Real Estate Investment Trust (TSX: REI-U, OTC: RIOCF), the largest shopping center landlord in Canada, announced it has acquired the interest held by joint-venture partner, Kimco Realty Corp. (NYSE: KIM), in 22 Canadian properties for CAD715 million, including CAD231 million of debt.

The joint venture with Kimco will also be terminated, and the remaining 13 properties will be sold.

The deal gives RioCan an additional 2.8 million square feet of property, equivalent to about 3.5% of the REIT’s existing portfolio.

The cash portion of the transaction (CAD484 million) will be financed with internal resources and available credit facilities.

RioCan already provides leasing and management services to the properties and does not expect to require any additional resources. It also says the transaction will be immediately accretive, adding about CAD45 million to annual net operating income (equivalent to about 7.3% of 2014 NOI).

RioCan is not currently a member of the Dividend Champions Portfolio, but with the unit price down 17% from its recent peak and a dividend yield of 5.6%, the REIT is becoming an increasingly attractive candidate for addition to our portfolio.

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Mosaic Co., the U.S. fertilizer company and second-largest North American potash producer, announced late last week that it was extending maintenance downtime at its Colonsay, Saskatchewan potash mine. This was in response to weaker-than-expected demand from their North American and Brazilian customers.

The share prices of publicly traded potash producers, including Dividend Champions holding Potash Corporation of Saskatchewan (TSX: POT, NYSE: POT), tumbled on this news.

We’ve been concerned about Potash Corp. for a while. We had previously downgraded the stock to “Hold” because it looked like the firm might pay too much to acquire K+S AG, the German potash producer.

Potash Corp.’s current yield of 7.4% would normally raise questions about the sustainability of its dividend. However, we remain confident that the company will be able to sustain its dividend even in a lower potash price environment for a number of reasons:

• Free cash flow is expected to ramp up considerably over the next few years, as the heavy capital expenditure program of $2 billion per year comes to an end and new facilities come on line in 2016 and 2017. Capital expenditure requirements have already declined to around $1.1 billion in 2014 and 2015, with further sharp declines expected in 2016 and 2017. Operating cash flow remains sound, and with lower capital requirements it should be able to comfortably cover the dividend.

• Cash operating costs for potash production are currently at $83 per ton (the spot price is around $300/ton) and is expected to drop further as new low-cost production facilities at Rocanville and New Brunswick come into full production in 2016 and 2017.

• The balance sheet remains in good shape, with a debt-to-capital ratio of 29%.

Potash Corp. operates some of the lowest-cost potash production facilities in the world and is in a strong position to protect its position even with lower potash prices.

During the firm’s second-quarter earnings release, management seemed rather optimistic about global potash demand, especially with regard to China and India. Profit guidance and volume indications for the year were also confirmed, with only minor changes as recently as late July.

Potash Corp.’s valuation premium relative to its peers has narrowed significantly. That along with a dividend yield of more than 7% makes the stock highly attractive. Despite the risk entailed by its bid for K+S, we’ve upgraded Potash Corp. back to a Buy below USD23/CAD30.

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Fortis Inc. (TSX: FTS, OTC: FRTSF), the Canadian utility giant and one of our Dividend Champions, announced a CAD0.375 per share dividend for the fourth quarter, a 10.3% increase from a year ago. Management also indicated that it’s targeting dividend growth of 6% annually through 2020.

Like other North American utility stocks, Fortis’ share price has been under pressure for the past few months and is down 14% since its February peak. The dividend yield is now 4.1%, which is attractive in absolute terms and also when compared to government bonds. Fortis is a Buy below USD28/CAD38.