Equity markets took a breather in August following an impressive streak of positive returns. In British Pounds, the Fund’s NAV-based total return was -2.3%, beating the benchmark return of -2.9%. The sell-off was a function of equity multiples contracting, driven by an increase in bond yields and higher volatility.
At its most recent meeting on 6 September, the Bank of Canada (BoC) held its policy interest rate at 5%. BoC Governor Tiff Macklem cited “recent evidence that excess demand in the economy is easing” and we expect this to continue given the lagged effects of monetary policy. Relative to other countries, the interest rate environment in Canada is more benign. Specifically, Canadian 10-year bond yields finished August at 3.56%, 80 basis points lower than the United Kingdom’s 10-year Gilt yield of 4.36%. We do not expect the BoC to hike its overnight policy rate again this year unless inflation data comes in well above expectations.
The TSX outperformed the S&P 500 in August which is a trend we expect to continue for the remainder of the year. Cash flow generation has surged to all-time highs for Canadian companies, resulting in record levels of capital returns to shareholders in the form of both dividends and share buybacks. More than half of TSX companies have hiked their dividends over the last twelve months and a record-setting 56% have bought back shares over the same period. The TSX dividend yield is near record levels and net share repurchases are now 2.2% of market capitalisation. High shareholder returns are an increasingly important advantage that Canadian companies possess relative to other countries.
Whitecap Resources, the Fund’s eleventh largest position as at 31 August, offers an example of a Canadian energy company that is generating high and growing levels of free cash flow. This has been manifested in their recent announcement of a 26% increase to its monthly dividend, resulting in a yield of nearly 7%. It was the second increase since closing its acquisition of XTO Energy in August 2022 and the dividend is up over 100% since then. Moreover, given the company’s stated goal of returning 75% of free cash flow to shareholders, the new dividend, which represents approximately 68% of free cash flow, will likely be supplemented by special distributions and/or share buybacks going forward. Whitecap recently renewed its buyback program, allowing for the purchase of up to 10% of its stock to May 2024.
European natural gas prices have spiked in early September amid strike risks at Australian LNG facilities, which represent 10% of global LNG exports. The potential outage once again highlighted the fragility of European energy markets, reminding us of the long-term importance and potential of North American LNG exports. In August, the Fund initiated a position in Peyto Exploration – an energy producer that has established a track record as one of the lowest-cost natural gas producers in North America. In addition to its upstream operations, Peyto operates more than 200 miles of gas gathering pipelines. Peyto’s dividend yield, which currently exceeds 10%, is supported by an active hedging program on more than half of its winter gas volumes at higher prices than current spot rates.
