A dynamic duo for income investors — Chinese oil and Canadian banks
Among income stocks, this U.S. advisory has had success with two Chinese oil stocks and has added a second Canadian bank as a buy.
The distance between China and Canada seems to be shrinking.
When you look at the new container port at Prince Rupert, B.C., that’s true literally — it cuts about 58 hours off shipping time from Chinese ports.
But business ties are tightening as well, especially but not exclusively in the Alberta oilfields.
Today, however, we consider China and Canada separately. We’ll see them through the eyes of a leading U.S. advisory.
Reviewing its Income Portfolio, The Complete Investor is pleased with the performance of the two Chinese oil companies it holds.
It is equally happy with the Canadian bank in that portfolio — and now it has added another one.
Normally, we’d begin with the Canadian investments. But this time we’ll start in what is less familiar territory for many Canadian investors, big Chinese oil.
World’s largest stock
The two Chinese energy stocks are PetroChina (NYSE-PTR) and CNOOC (NYSE-CEO), or China National Offshore Oil Corporation.
PetroChina, headquartered in Beijing, is the biggest oil company in the country and the single largest stock in the world by market cap.
CNOOC, which has its head offices in Hong Kong, is China’s largest explorer, developer and producer of offshore oil and natural gas. Much of its work is done in the seas off China, but it is spreading around the globe.
Both have been “standouts in terms of revenue and profit growth,” says Ms. Genia Turanova, writing for the advisory.
CNOOC has raised its payout at an average rate of 20 per cent over the past five years, 15 over the past three. PetroChina’s payout has not risen of late, adds the author, but strong profit growth should set the table for higher income along with ascending capital gains.
Disciplined acquisitions
Both Chinese companies have been buying energy assets abroad, reports Ms. Turanova, in places like Canada, Australia and Brazil.
“This disciplined and measured acquisition of energy assets sets these two state-owned energy giants apart from other oil and gas companies, which in the current global financial crisis have hesitated to add to their exploration and production budgets.”
Chinese companies have used the crisis to their advantage, notes the author. And as China consumes more energy at home to support its growth, you can look for more mergers and acquisitions, especially with the yuan cut loose from the dollar.
PetroChina’s most recent quarter was its best since the third quarter of 2008. It keeps adding assets overseas. The latest acquisition is the Halfaya oilfield in Iraq. It is also aiming for a stake in an Australian energy firm.
Not least, says Ms. Turanova, the market should soon start to assign greater value to PetroChina’s natural gas assets. This giant is trading today at $111.86 and yielding 3.4 per cent on the $3.81 dividend.
Wildcat discoveries
CNOOC also had a strong quarter, as total revenue more than doubled. Few energy stocks are growing as fast as this one, says Ms. Turanova. It has four major offshore production areas in China, a huge presence off the Indonesian coast and assets in Nigeria and Australia.
One difference between the two — CNOOC is not tied to price regulations like PetroChina and thus more closely tied to oil prices.
It’s also hitting the jackpot. In the first quarter of 2010, it made five successful wildcat discoveries and drilled five winning appraisal wells, one of which may be the entree to a large new oilfield.
CNOOC is richly valued at $166.82 and yields 2.1 per cent on a dividend of $1.05.
By the way, there are two Canadian energy stocks in this portfolio, Canadian Oil Sands Trust (TSX-COS.UN; OTC-COSWF) and TransCanada Corporation (TSX/NYSE-TRP).
Higher credit quality
Like China, says Ms. Turanova, Canada is “another country with above average growth.” Not as robust as China’s, perhaps, but solid nonetheless.
Three months ago, this advisory added Bank of Montreal (TSX/NYSE-BMO) to its Income Portfolio, and has not regretted it. Despite the severe market correction of the past two months, the shares have held their ground at $59.45 and yield a solid 4.7 per cent on the $2.80 dividend.
Now it has added Toronto-Dominion Bank (TSX/NYSE-TD). In fact, we touched on the advisory’s recommendation of this bank last week (see Daily Buy-Sell Adviser, June 29). But Ms. Turanova has some important points to make.
TD is not only a force to reckon with in Canada, she says, “it has a large and growing presence in the U.S., where it ranks among the top 15 banking companies.” It is also one of three Aaa-rated banks on the NYSE and one of the rare banks on that exchange not to cut its dividend during the financial crisis.
“In fact, its payouts have increased at an 11 per cent average over the past three years, reflecting management’s dedication to rewarding shareholders and — remarkable in an environment of massive bank losses — a rise in per-share earnings.”
Meanwhile, TD keeps adding banks in the U.S. Equally important, says the author, “its loan portfolio has a higher credit quality than those of its Canadian and U.S. peers, inspiring confidence in future growth.”
Trading at $70.89 and yielding 3.4 per cent on its $2.44 dividend, this bank is “a great investment for income and growth investors alike,” concludes Ms. Turanova.
There is still a great deal of uncertainty over the immediate future of global growth. But if you had to pick two places doing a reasonably good job of it, you could do a lot worse than China and Canada.
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