Editor’s Note: Please see our latest analysis of Canadian National Railway Co., CI Financial Corp., and Canadian Utilities Ltd. in the Portfolio Update following the article below.

The Federal Reserve has been seemingly on the verge of a rate hike for almost a year now. And it’s starting to become reminiscent of that old gag from the Peanuts comic.

Every time the Fed is poised to raise interest rates off the zero bound, something happens in the global economy or the financial markets that causes it to defer the action, not unlike Lucy pulling the football away from Charlie Brown just before he’s about to kick it.

In its latest statement, the Fed seems to be implying that it’s seriously considering raising interest rates at its next meeting. But given the stealth war against deflation that’s occurring around the world, we wouldn’t be surprised to see some other disturbing event transpire that would cause it to continue to pause.

Such considerations may seem academic to readers of a newsletter that’s focused on Canada. But the influence of the Fed’s interest rate policy runs deep, especially for two countries that share a border.

Indeed, one of the best examples in recent memory was the so-called taper tantrum in mid-2013, when the Fed discussed its plans to withdraw extraordinary stimulus, and the mere anticipation of such a move caused currencies and rate-sensitive securities around the world to fall into a deep swoon.

For U.S. investors, these currency fluctuations have a very obvious effect on investment performance. During the global commodities boom, the Canadian dollar’s rise above parity with the U.S. dollar gave our portfolios an enormous tailwind. But since the boom has come undone, the lower loonie has been a drag on performance.

At this point, U.S. investors who already own Canadian stocks have probably moved to the acceptance phase of enduring a falling exchange rate.

But for those of you with new money to invest, the lower loonie presents an enticing opportunity to buy solid, dividend-paying companies at a steep discount. However, you might be waiting for the currency to hit its ultimate bottom before making a move.

Right now, the loonie trades near USD0.76, just above its recent low. Should the Fed finally act, then the Canadian dollar would likely decline further, offering a very attractive entry point.

After all, the Canadian dollar can’t be all that far from a bottom. The worst forecast for the currency through 2017 is for it to hit a low around USD0.71.

But that forecast is an outlier. Consensus projections suggest the currency will bottom around USD0.74 during the first half of 2016, before beginning a modest rise.

However, human beings have a flair for the dramatic, which is why markets tend to overshoot on the upside, as well as the downside. So if a bottom is in sight, it wouldn’t necessarily surprise us to see the loonie hit USD0.70, at least briefly.

Aside from how well the country’s economy navigates the oil shock, the biggest effect on the Canadian dollar will be the extent to which the Bank of Canada’s (BoC) monetary policy continues to diverge from that of the Fed.

The central bank’s policymakers see a lower exchange rate as crucial for engendering an economic turnaround, one that they hope will be sparked by a surge in export activity courtesy of a lower loonie and a resurgent U.S. economy. And that was on the BoC’s wish list even before the energy boom went bust.

The Canadian dollar did have a brief surge recently due to election euphoria over the Liberal victory at the polls. Traders were perhaps eyeing the party’s platform that calls for CAD60 billion in infrastructure spending over the next decade.

But economists project the proposed infrastructure investment will only lift the country’s gross domestic product by a tenth of a point to five-tenths of a point per year.

Still, that’s not quite as insignificant as it sounds. The consensus forecast is for Canada’s economy to grow 2% annually over the next two years. The BoC has previously identified 2.5% growth as the minimum threshold to remove excess capacity from the country’s economy. So half-a-point could be pretty meaningful in this context.

Some financial pundits believe this could take pressure off the BoC to provide additional easing. The central bank has cut its benchmark overnight rate twice this year, to 0.5%.

A majority of traders are currently betting that the overnight rate will remain at its current level through the end of 2016. By contrast, the federal funds rate is expected to rise to at least 0.5% by the end of next year.

It’s actually pretty rare for the two central banks to be headed in opposite directions. The Fed and the BoC are usually pretty closely aligned in their policymaking. In fact, it’s been more than 20 years since they headed in different directions. But as BoC Governor Stephen Poloz has previously observed, “Those are usually fairly temporary things.”

The Dividend Champions: Portfolio Update

By Deon Vernooy

Joseph P. Kennedy, father of U.S. President John F. Kennedy, is credited with the saying, “When the going gets tough, the tough get going.” This is particularly appropriate for the latest quarterly results from Dividend Champions holding Canadian National Railway Co. (TSX: CNR, NYSE: CNI).

The company announced a 21% increase in earnings per share for the third quarter and a 25% increase in the dividend, despite a tough operating environment in which carloads declined by 6% during the quarter.

The solid results came about as a result of the weaker Canadian dollar, which lifted U.S. dollar-translated profits. Price increases compensated for lower volumes leading to an increase in revenue of 3%. Operating costs decreased by 5% (mainly as the result of a 34% drop in fuel costs), and the decline helped drive an 18% rise in profits.

A lower share count (-2.3%) as a result of the share buyback program explained the balance of the improvement in the earnings per share.

Carloads were under pressure during the third quarter, with total loads down 6%. Poorly performing sectors included coal, grain, metals and minerals, and petroleum and chemicals. Motor vehicles and equipment and intermodal (containers) were the better-performing categories.

The balance sheet remains solid, with a debt-to-capital ratio of 43%. Cash flow is abundant, with operating cash flow representing 41% of revenue so far this year. Free cash flow declined year over year, but still covers the dividend 2.4 times.

The company expects to increase earnings per share by double digits in the current year, to continue buying back shares, and to increase the dividend payout ratio (on net profit) from the current 29% to 35% over time.

Despite ranking at the top of our Dividend Champions Quality Score, the stock is not cheap: It has a price-to-earnings ratio of around 18 times and a dividend yield of 1.6%.

We would not chase the shares higher after their recent performance. We consider fair value to be at USD57/CAD74, which is somewhat below the current share price.

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CI Financial Corp. (TSX: CIX, OTC: CIFAF), profiled in the October issue of Canadian Edge, announced the acquisition of First Asset Investment Management. The terms of the transaction were not disclosed, but based on First Asset’s $3 billion in assets under management, we estimate the price could be between $50 million and $100 million. CI Financial will probably fund the transaction with cash on hand.

The deal is relatively small for CI, but the key attraction is First Asset’s exchange-traded funds (ETF), which would help plug a hole in the company’s product line-up. First Asset manages roughly $1.6 billion of assets in its ETFs, and the company generated robust organic growth of 50% across its ETFs over the past year.

The deal could give CI a strong platform for future growth: Inflows are growing at a much faster pace for ETFs than mutual funds, thanks in part to ETFs’ lower costs.

With a current dividend yield of 4.2%, CI Financial remains a Buy below USD27/CAD35.

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Alberta-based Canadian Utilities (TSX: CU, OTC: CDUAF) announced quarterly earnings per share of CAD0.37, unchanged from a year ago. This was slightly lower than generally expected, and the share price declined by about 4% the day after the results were announced.

Of the company’s three main businesses, its utility division contributes the most to profits. The segment distributes and transmits electricity and gas in Northern and Western Canada and operates several pipelines. Adjusted profits increased by 8% during the quarter due to several regulatory decisions and by 20% for the first nine months of the year.

Profits from the Canadian energy division and the Australian division increased by 5% and 12%, respectively, during the quarter.

The balance sheet remains in reasonably good shape, with a debt-to-capital ratio of 51%, while the cash flow and accounting profits cover the dividend adequately.

Although we did not see anything overly concerning in the company’s earnings, it did make numerous adjustments to the stated accounting profits to arrive at the “normalized adjusted profits,” which complicates our analysis.

The quarterly dividend was increased by 10.3%, for a current yield of 3.3%. While the stock is currently listed in our Dividend Champions Portfolio with a fair value of USD28/CAD36, we would not be buyers at the moment.