September 4th, 2011
Within the Colefold model equity portfolio, the shares of energy related companies, including Encana and Suncor, traded lower during the third quarter as anxiety about the economic recovery hurt energy prices. US industrial holdings, including Eaton and 3M, were also weaker due to their level of economic sensitivity.
Looking at Encana specifically, although lower natural gas pricing has eroded profitability recently, it has historically maintained a competitive level of profitability, has grown dividends by an average annual rate of 43% over the past 5 years and carries a low level of debt, at 29% of total capital. It is also considered a well-managed business as evidenced by capital allocation. As well, natural gas may outperform crude oil going forward. Overall, we believe Encana’s underlying business fundamentals remain positive and current valuations offer a compelling 4.2% yield and an attractive opportunity for long-term capital appreciation.
As in recent quarters, we continue to enjoy the benefit of owning high quality Canadian yield-oriented names including Enbridge, BCE and Trans Canada Pipelines, all of which generated positive relative and absolute performance in the third quarter, due to fundamentals such as credit quality and dividend strength.