RBC Dominion Securities Inc. Equity Income Guided Portfolio June 1, 2016 | Quarterly Report Portfolio Advisory Group – Equities What’s inside 3 Portfolio positions In search of green shoots 4 Sector commentary U.S. economy still providing a safer haven, but a shift could be underway. 8 Magna International Inc. Portfolio addition Rising interest rates are among the to focus on names that will likely hike biggest macroeconomic risks associated dividends over the medium term and/ 9 DH Corporation with owning a dividend-oriented or are more-positively leveraged to an Portfolio reduction portfolio, as higher bond yields generally economic recovery. have a negative impact on valuations. 10 Portfolio companies RBC Capital Markets Economics 17 Portfolio companies risks An improving U.S. economic outlook continues to believe that the U.S. combined with a gradual tightening economy is poised for a stronger 19 Methodology of Federal Reserve policy may push economic recovery than is the Canadian bond yields higher in the coming economy for 2016. On a year-to-date months. Therefore, RBC Capital Markets basis, the Canadian dollar is trading continues to forecast bond yields will in line with the RBC Capital Markets increase over the coming year, albeit Economics forecast of $0.75. RBC at a much-lower rate, with a target for Economics expects the loonie will get a the Government of Canada 10-year small lift in 2017 on the back of higher oil benchmark bond yield of 2% at the end prices and increased economic activity of 2016, about 65 basis points higher from government stimulus. Because than current levels. the recovery in the Canadian dollar is still potentially quarters away, we are To meet the Portfolio’s objective of maintaining the Portfolio’s exposure to providing a dividend yield that is the U.S. by focusing on companies with approximately 150% that of the S&P/TSX international operations or with a portion Composite Index, while minimizing the of sales denominated in U.S. dollars. risk of higher interest rates, we continue Canadian dollar forecast (US$/CA$) 1.10 Parity Forecast 1.00 0.90 For an overview of the Portfolio, please click here. 0.80 Click here for authors’ contact 0.70 End of period information. 2013 2014 2015 2016f 2017f US$/C$ 0.94 0.86 0.72 0.75 0.80 For important disclosures, see page 20. 0.60 All values in U.S. dollars and priced as 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 of May 31, 2016, market close unless otherwise noted. Source - Bank of Canada, RBC Economics Research forecasts NOT FOR DISTRIBUTION IN THE U.S. 2 | Equity Income Guided Portfolio In search of green shoots The Canadian economy has become more reliant on oil and oil investment over the past 15 years, and the adjustment process to a marked downshift in oil-related We believe the pace of investment has not been without bumps. The Energy sector is not only one of the dividend growth in Canada largest components of the S&P/TSX Index, but also has been traditionally one of will continue to slow in the higher-yielding sectors in the index. As such, most income-orientated strategies 2016, but a recovery could allocate a significant percentage of their mandates to that sector, despite the volatile be underway for 2017. nature of the underlying commodities. The sharp drop in oil prices that has occurred over the past 21 months has already forced most oil & gas producers to cut their dividends. At this point we believe the majority of the dividend cuts are behind us. However, the lower dividends yields now have forced income-oriented investors to shift focus to other sectors. Lower commodity prices are acting as headwinds to Canadian economic growth, and job losses in the oil patch will likely result in lower revenues and cash flows for most Canadian-centric companies. As such, we believe the pace of dividend growth in Canada will continue to slow in 2016. The dividend growth rate of the S&P/TSX Index has been on a downward trajectory for the past four years and is forecasted to fall into negative territory in 2016 for the first time since the Great Recession. Going forward we are encouraged by the expected upswings in dividend growth forecasted for 2017. We will continue to search for companies that have the capability of returning capital to shareholders, either in the form of dividend increases or share buybacks for the Portfolio. Performance S&P/TSX Index year-over-year change in dividends 12.4% 11.3% 9.6% 8.0% 3.3% 5.1% 5.4% 1.0% 3.2% -2.3% -14.2% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E Source - RBC Dominion Securities, Bloomberg The Equity Income Guided Portfolio generated a total return of 8.75%, 299 basis points behind the S&P/TSX High Dividend Index, which returned 11.74% for the quarter, and behind the broader index return of 10.24%. The Portfolio’s underperformance was due to the underweight position in Energy and Materials sectors, which were the top performers on the index during the last quarter. Return for the spring quarter (3/1/16 – 5/31/16) Equity Income Guided Portfolio 8.75% S&P/TSX Composite Index 10.24% S&P/TSX High Dividend Index 11.74% Source - FactSet June 1, 2016 | RBC Wealth Management 3 | Equity Income Guided Portfolio Forecast Forecast Price to Forecasted growth in dividend Market Price 52-wk EPS / AFFO / CFPS Earnings/AFFO/CFPS Div Payout Ratio EPS/AFFO growth rate Company name Weight cap (B) 5/31/16 range ($) 2015A 2016E 2017E 2015A 2016E 2017E yield 2015A 2016E 2017E or CFPS to 2017 Interest sensitive BMO Bank of Montreal 5.0% $53 $82.30 85 - 64 7.00 7.60 7.70 11.8x 10.8x 10.7x 4.2% 46% 45% 46% 1% 3% BNS Bank of Nova Scotia 2.5% $77 $64.14 67 - 51 5.67 5.87 6.27 11.3x 10.9x 10.2x 4.5% 48% 49% 48% 7% 6% NA National Bank 5.0% $15 $43.52 50 - 35 4.70 4.09 5.00 9.3x 10.6x 8.7x 5.0% 43% 53% 46% 22% 7% RY Royal Bank of Canada 5.0% $117 $78.83 81 - 65 4.1% TD TD Bank 5.0% $106 $57.11 58 - 48 4.61 4.76 5.10 12.4x 12.0x 11.2x 3.9% 43% 45% 46% 7% 8% CIX CI Financial 2.5% $8 $28.70 35 - 26 2.02 1.94 2.15 14.2x 14.8x 13.3x 4.8% 64% 70% 68% 11% 7% BAM'A Brookfield Asset Mgmt****^ 2.5% $45 $46.02 47 - 38 1.59 1.94 2.07 28.9x 23.7x 22.2x 1.5% 30% 27% 25% 7% 8% MFC Manulife 5.0% $39 $19.52 24 - 15 1.68 1.80 2.10 11.6x 10.8x 3.8% 40% 41% 40% 17% 0% IFC Intact Financial 5.0% $12 $91.70 97 - 77 6.38 5.45 6.79 14.4x 16.8x 13.5x 2.5% 33% 43% 35% 25% 3% HR.UN H&R REIT * 2.5% $6 $21.22 23 - 18 1.48 1.56 1.62 14.3x 13.6x 13.1x 6.4% 91% 87% 83% 4% 0% SRU.UN Smart REIT * 2.5% $4 $34.50 35 - 27 1.99 2.08 2.19 17.3x 16.6x 15.8x 4.8% 81% 80% 78% 5% 4% BCE BCE^^ 5.0% $52 $60.45 61 - 52 3.36 R R 18.0x R R 4.5% 77% R R R R FTS Fortis 5.0% $12 $41.02 42 - 34 2.11 2.16 2.39 19.4x 19.0x 17.2x 3.7% 66% 69% 67% 11% 6% H Hydro One 2.5% $15 $24.44 25 - 21 1.12 1.17 1.26 21.8x 20.9x 19.4x 3.4% 0% 72% 70% 8% 5% Consumer SJR'B Shaw Communications 5.0% $12 $25.08 28 - 23 1.85 1.45 1.72 13.6x 17.3x 14.6x 4.7% 63% 83% 70% 19% 1% TRI Thomson Reuters ^ 5.0% $41 $55.07 56 - 47 1.39 1.31 1.75 39.6x 42.0x 31.5x 3.2% 124% 138% 98% 34% -3% CGX Cineplex 2.5% $3 $51.57 52 - 42 1.68 1.79 2.14 30.7x 28.8x 24.1x 3.1% 92% 90% 79% 20% 4% Industrial CNR Canadian Nat. Railway 5.0% $61 $77.75 84 - 67 4.45 4.58 5.14 17.5x 17.0x 15.1x 1.9% 28% 33% 33% 12% 15% DH DH Corporation 2.5% $4 $34.31 44 - 29 2.55 2.15 2.73 13.5x 16.0x 12.6x 3.7% 50% 60% 47% 27% 0% MG Magna International ^ 2.5% $21 $53.25 75 - 42 4.49 5.17 5.80 11.9x 10.3x 9.2x 2.4% 25% 26% 24% 12% 6% TIH Toromont Industries 2.5% $3 $36.83 39 - 27 1.86 1.99 2.23 19.8x 18.5x 16.5x 2.0% 37% 36% 32% 12% 0% Resources ARX ARC Resources**** 2.5% $8 $21.57 23 - 14 2.27 1.85 2.00 9.5x 11.7x 10.8x 2.8% 53% 35% 30% 8% 0% SU Suncor Energy**** 2.5% $57 $36.22 40 - 27 4.71 2.42 5.41 7.7x 15.0x 6.7x 3.2% 24% 48% 21% 124% 0% ENB Enbridge* 2.5% $49 $52.28 61 - 40 3.72 3.99 4.29 14.1x 13.1x 12.2x 4.1% 50% 53% 54% 8% 10% TRP TransCanada 2.5% $38 $54.34 55 - 41 2.48 2.62 2.83 21.9x 20.7x 19.2x 4.2% 84% 86% 86% 8% 8% ALA AltaGas^^* 2.5% $4 $30.31 41 - 27 2.84 R R 10.7x R R 6.5% 70% R R R R IPL Inter Pipeline Fund * 2.5% $9 $26.65 31 - 18 1.88 1.91 2.06 14.2x 14.0x 12.9x 5.9% 78% 82% 80% 8% 6% AGU Agrium ^ 5.0% $16 $118.35 140 - 105 7.25 5.83 6.68 16.3x 20.3x 17.7x 3.8% 47% 60% 52% 15% 0% Weighted average dividend yield 3.85% Source - RBC Capital Markets, Bloomberg ^ The EPS and dividend are in U.S.