March 27, 2023
Commentary: NCM Income Growth Class
On March 27, 2023, Portfolio Manager Alex Sasso provided an update on NCM Income Growth Class including what makes the fund so different from mainstream competitors and details on two recent changes to the portfolio.
Hello, everybody. Today is March 27, 2023. My name is Alex Sasso. I'm the manager of the Income Growth Fund. Income Growth Fund is our dividend-heavy small cap fund.
As you guys may know, at NCM, we love dividends. It's pretty simple why. One, they're very easy to understand. They keep us out of trouble. Dividend growers, which is the segment that we concentrate on, they produce better long term rates of return, it's one of the only tools you have to fight inflation, and five, I would say they provide pretty attractive tax benefits, particularly for Income Growth, because Income Growth really concentrates on Canadian focused dividend companies.
So what has changed in the fund over the last few months since I last did one of these webcasts? Well, we've added a new oil and gas name I can tell you about. It's a company called Headwater Exploration. It's about a one and a half billion dollar market cap, oil and gas company, and it pays a nice juicy 6% dividend yield. Average daily production expected for 2023 is 18,000 BOE per day.
At current strip, it's going to produce $280 million cash flow of which just less than $100 million of that is used to finance that really attractive dividend. And we see really impressive new pool discoveries at two of the properties, one’s called West Nipisi. The other one is Merton Hills West. They're really exciting projects for the company. It's run by one of the best management teams in the oil patch, so we're pretty excited about this new name.
Other changes in the fund is we've lightened up on our position in Mullen Trucking. Not that there's anything wrong with the business, not that we see a change in it. It had just grown to a fairly big weight and the market had rewarded, I would say maybe the last quarter was in line, but we think we think the management team took a really conservative view on the last quarter, and I think the market has realized that and pushed the stock price up, so we used that strength in the stock price, in a fairly poor market, I might add, to lighten up on that name.
So looking forward, we really like how the portfolio is positioned. As you guys know, I like to talk about some of the attributes of the fund.
Let's talk about trailing price earnings ratio. And price earnings ratio is a measure of the valuation of the companies that we own in the fund. Ideally, you'd like companies that are growing really quickly with less expensive valuation. That's how I would characterize this fund. So the trailing price earnings is less than 11 times. It's some of the best numbers that I've seen in some time. The S&P TSX Composite, according to CPMS, is 13.7. And these are numbers at the end of February of 2023.
Our estimated price earnings is 10.5 versus the TSX at 13.3. Our price to cash flow ratio on a trailing basis is 5.4 versus the TSX Composite at 7.8. So you can see that the fund is better priced than the TSX. The return on equity is 16% versus 16% for the S&P TSX and our expected return on equity is 16.2 versus 15.9, so slightly better. So much better valuation, slightly better profitability.
Our earnings surprise numbers are better. Our estimate revision numbers are better. Our quarterly earnings momentum in the fund is 7.7 versus a -0.1 for the TSX. So our companies are growing faster and trade at a cheaper valuation. One of my favourite metrics is free cash flow yield. The free cash flow has historically been one of the better predictors of future stock price movements. Our free cash flow yield is 8.8% and the TSX is just over 5%. And our yield is 4.45% according to CPMS for the fund.
So pretty impressive metrics. It's really important for our core investment methodology here. We always like our metrics, not on a perfect each individual company basis, but on the fund basis, we like that to be much better than the benchmark.
So, you know, what's really interesting about this product is it continues to be different than other equity balanced funds and dividend funds from the perspective that it really focuses in on the whole market cap spectrum. So small caps, mid-caps and large caps. And to give you an example, if you take a look at companies with a market cap of just greater than $3 billion, you have 125 dividend payers on the TSX. Now if you include small, mid and large caps, you get 335 companies. Most of our competition really concentrates on the greater than $3 billion in market cap category. We should outperform over long periods of time because we've got almost three times the sample set of securities to choose from.
And here's another reason why I think this product makes a lot of sense for advisors and their clients. The fund, as I mentioned, pays a dividend yield of greater than 4%. It's a tax effective yield as well. But if the dividends in the fund grow at, let's say 10%, with that 4%-plus dividend yield, it would take you 13 years for you to get fully repaid the total value of your investment just via the dividends, assuming no capital gains over that time period as well. So, you know, it's pretty impressive from that perspective.
It's really what we concentrate on is the dividend growers. It's not just the dividend payers. We think that this fund does a really good job of contrasting and complementing mainstream ETFs, other dividend focused funds and individual dividend paying securities.
So thank you for your time and I appreciate you listening to our short webcast here on the NCM Income Growth Fund. If you have any questions, feel free to contact us at email@example.com.
The information in this video is current as of March 27, 2023 but is subject to change. The contents of this video (including facts, opinions, descriptions of or references to, products or securities) are for informational purposes only and are not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. The communication may contain forward-looking statements which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Alex Sasso, CFA
Chief Executive Officer and Portfolio Manager of NCM Small Companies Class and NCM Income Growth Class.