What are we looking for?
Companies poised to capitalize on the current political landscape.
The screen
Donald Trump will be inaugurated this Friday, and it's difficult to imagine a national leader more different to Mr. Trump than Justin Trudeau. But they do agree on some things, one being the need for fiscal stimulus – in the form of government spending on infrastructure – to spur economic growth. Interest rates appear to have bottomed out and begun rising in the United States, and are currently at historic lows in Canada. This means that monetary stimulus may have run its course, leaving fiscal stimulus as the predominant tool policy makers can use to encourage growth. Many infrastructure projects, such as Ontario's Highway 407 for example, are undertaken as a public-private partnership, with government working with a private company that has infrastructure expertise.
These companies could benefit from the current political landscape, and it appears that infrastructure stocks can still be bought at a good value. The Dow Jones Brookfield global infrastructure index, which tracks the stocks of global infrastructure companies whose shares trade in North America, is actually at a lower level than it was when Mr. Trump was elected. To find a sound, long-term investment, we screen companies in this index on a few very important metrics.
First we look for solid cash-flow growth – at least 40-per-cent growth over the past two years. Next, we make sure we're only looking at companies with a strong balance sheet, and exclude any whose debt is more than twice total equity. Finally, we consider return on equity and require a consensus estimate for the next fiscal year of at least 8.75 per cent.
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What did we find?
The only Canadian company to pass all of the above criteria is Inter Pipeline Ltd., which operates mainly in Western Canada. Inter is an oil pipeline and transportation company and Mr. Trudeau has so far approved – broadly speaking – of oil pipeline expansion. South of the border, PG&E Corp. of San Francisco is another attractive investment. PG&E generates electricity and provides electricity distribution to residential, commercial, industrial and agricultural customers in California.
For investors interested in infrastructure exposure but cautious about taking on company-specific risk, BMO has an ETF (ZGI) that tracks the Dow Jones Brookfield global infrastructure index. This option provides diversification across companies as well as geographically, with roughly 10 per cent of holdings allocated outside of North America.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.