3 Dividend Earning Industrial Stocks To Invest In August

Summary

• The manufacturing sector declined by 22.4 percent in April due to the pandemic-induced lockdown and is slowly regaining lost ground
• The TSX industrials index has outpaced the broader gauge amid pandemic
• Kalkine analyses three blue-chip stocks (CNR, CP and WCN) paying regular dividends in the Canadian industrial sector

The contribution of industrial and manufacturing sector to Canada’s gross domestic product (GDP) has been largely stagnant in the last decade. Till the first quarter of 2020, manufacturing sector contributed over 10 percent of the GDP (down from 16 percent in 2002) and employed 1.7 million people across industries, shows federal government data.

Following the historic economic contraction in April due to the pandemic, the manufacturing sector declined by 22.4 percent as factories and production hubs shut down in Canada to curb the spread of the virus. Latest data from Statistics Canada shows the sector regained 7.4 percent in May. Manufacturing industry also exports over C$ 354 billion annually, making up 68 percent of all Canada's merchandise exports.

The overall industrial sector is wide and includes manufacturing, construction, air transportation, cleantech manufacturers, forests products and many more sub-sectors. Each of these sub-sectors have faced unprecedented declines as the country-wide markets shuttered on federal orders.

Industrial Stocks Performance During COVID-19

Traditionally, the S&P/TSX composite industrials sector has mirrored the movements of benchmark Toronto Stock Exchange index. However, in the last few pandemic months, the industrials index has outpaced the TSX index.

Relative performance of TSX and TTIN since January 1, 2020

[Red line denotes the S&P/TSX Capped Industrials Index (TTIN) while blue line denotes the S&P/TSX Composite Index (TSX)/ Source: tsx.com]

The 28-member industrials index, with an adjusted market cap of 262.607 billion, is mostly trading flat this year (down 0.47 percent at time of writing this article) as opposed to the S&P/TSX Composite Index that lost 5.24 percent year-to-date (YTD). On the quarter-to-date (QTD) scale, the industrials index advanced by 5.13 percent, higher than TSX Composite’s 4.22 percent gains.

Industrial companies weigh 11.63 percent on the broader TSX and 11.87 percent on the sister index, Toronto Stock Exchange Venture (TSXV). Its combined market capitalisation stands at C$ 3 trillion. In the last five years, industrial products and services raised C$ 273 billion (as of December 31, 2019) equity capital on TSX and TSXV.

Today, let’s look at three blue-chip stocks paying consistent dividends in the Canadian industrial sector.

Canadian National Railway Company (TSX:CNR)

Regardless of where the economy flows, this North American transportation and logistics company has proved itself as a high-dividend stock. The firm has improved its operating ratio and posted better than expected second fiscal quarter results under the pandemic situation and union blockades.

Canadian National Railway has an operating ratio of 75.5 percent, was up 18 points year-over-year (YoY) for the quarter. The rise comes despite 19 percent decline in top line revenue. Its free cash flow at the end of the recessionary quarter stood at C$ 1 billion, an increase of C$495 million. The company announced a quarterly dividend of C$ 0.5750 per common share, to be payable on September 30, 2020.

Ratings agency Moody's has reaffirmed the railway firm’s credit A2 rating with stable outlook.

The company has a C$ 2.9 billion capital investment plan for 2020 to encourage the country’s economic recovery. It also invested in approximately 1,500 high-capacity “covered hopper cars” to expand their delivery footprints in grain export business from January of 2021.

Canadian National Railway’s transports over C$ 250 billion worth of goods annually and is focused on reducing its carbon footprint for long-term success.

It is currently valued at C$ 93 billion and is the largest company by market cap on the TSX industrial index. Its stocks are up 11 percent this year and +13.6 percent in three months. Currently, its shares are trading at C$ 130.84.

The Canadian National Railway’s stock prices may further boost after economic activity gains pace and supply chain normalises across the country post-pandemic.

Canadian Pacific Railway Limited (TSX:CP)

Shares of Canadian Pacific Railway have posted strong gains in the face of the pandemic. The scrips gained over 16 percent in three months and advanced 11 percent since January this year. The stocks hit a new 52-week high of C$ 280.76 on July 22.

With an approximately C$ 50 billion in market cap, Canadian Pacific Railway is the second largest firm on the TSX industrials index. Its operating ratio in the second quarter stood at 57 percent, 140 basis point improvement YoY.

The company has been consistently generating dividends, paying out C$ 2 billion since 2014. It aims to achieve a 25 percent adjusted dividend payout ratio. It announced a quarterly dividend of C$ 0.95 per share (payable on October 26, 2002), up 15 percent from previous dividend of C$ 0.83 per share.

Canadian Pacific Railway posted historically best-ever quarter after moving 8.41 million metric tonnes of Canadian grain and grain products during the pandemic. It also moved 2.76 MMT of grain in June, breaking its previous June 2014 record. Train weights and lengths are at an all-time record high, said company CEO Keith Creel during Q2 2020 earnings call.

It recently announced science-based emissions reduction target to guide its climate action, based on the lines of Paris Agreement and the Pan-Canadian Framework on Clean Growth and Climate Change goals.

Waste Connections Inc. (TSX:WCN)

Stock prices of Waste Connections, a waste management firm in North America, has increased by 16 percent this year. In the last three months, the shares have advanced by 14 percent, beating all expectations amid pandemic.

Posting a strong first quarter result, the company showed an 8.7 percent increase in top line and an adjusted free cash flow of US$ 235.7 million. It also declared a quarterly cash dividend of US$ 0.185 per common share, payable on August 18.

Waste Connections is a forward-looking environmental and waste solutions firm offering services to residential, commercial, landfill and transfer station, industrial and manufacturing sectors. It also has portable toilets and intermodal containers.

The company will announce its second fiscal quarter financial results August 6.