August 22, 2023
Commentary: NCM Income Growth Class
On August 22, 2023, Portfolio Manager Alex Sasso, CFA provided an update on the fund’s key metrics versus its benchmark and highlighted its top 10 holdings.
Hello everybody. It's Alex Sasso. Today is August 22nd, 2023. I'm the lead portfolio manager for the Income Growth Fund. Many of you will know that this is our equity focused, high quality fund that really concentrates on dividend payers.
We have a dual focus with this product on companies that are growing and pay a meaningful dividend yield. The fixed income portion of the fund, which is a smaller portion of the fund, is really focused in on short, typically short term, high quality, high yield bonds. We like to see a little bit less interest rate sensitivity on this side, but still capture the meaningful yield to some of these fixed income securities will pay. And we're really targeting a 3 to 5% tax advantaged annualized yield to investors.
It’s a small-mid cap focused fund. We really concentrate on companies that have consistency in their earnings and revenues, and that's consistency in their growth of earnings and revenues. They're Canadian companies. And so you're able to take advantage of a better tax rate, given that they're Canadian companies. We really do focus in on a defensible, repeatable investment methodology.
Many of you will have heard me say over the years that we don't provide investment stories. We don't buy fads, we don't buy companies that are earnings negative.
We really do have hundreds of companies in our database that we follow. But if it's a company where the quants look really strong and improving and earnings and the fundamentals of the business look good then we get pretty excited about it. And we typically have pretty strong relationships with these management teams. We create a bit of a partnership with them and over time you get to understand the art of portfolio management in which you do read body language.
So I do want to spend a little bit of time talking about some of the metrics of the fund, because I think that's a key differentiator. And so I'll read through our top ten and then I'll read through some of the valuation advantages that the fund has. So currently in the top ten we have Topaz Energy is one of our larger positions, a company called Goeasy, CT Reit, Superior Plus, Polaris, Dexterra, Martinrea International, we have Canadian Western Bank, Whitecap and Information Services and that makes up the top ten. You can see that that's very much different than what you will find in a typical dividend fund where you have mostly REITs, utilities, pipelines and financials. Because we play in some of the small caps and mid-caps, I would say that this fund is much more diversified and have a much higher active share than your typical fund out there.
In terms of metrics of the fund, these are end of July numbers and derived from FactSet. The price earnings ratio of the fund is 13.7 times significantly better than the TSX. You'll see a forward enterprise to EBITDA of 8.6 times versus 16 times for the TSX free cash flow yield of 9.2%, which is one of your best future stock price predictors. And that again, significantly better than the benchmark, the TSX.
Return on equity of 16.1%, return on invested capital of eight and a half percent. Our three year earnings growth rate is 31% and to give you a sense of how good that is, the earnings growth rate of the TSX is 15%, just under 15%. So extremely, extremely strong.
So as you can see with this portfolio, you're getting better growth rates, better earnings growth rates. And remember that our stock price is the present value of those earnings and dividend streams. So you get better dividend stream and get a better earnings growth rate and you get a much cheaper valuation in terms of enterprise value to EBITDA, almost half the valuation as the TSX.
Dividend yield coming into the fund is in the fours. The payout ratio is 61%. That's a little bit higher than usual. We usually try to target 50% and you’ll see that come down in the coming months. And then our five year dividend per share growth rate is about 7%. So these companies are growing their dividends by about seven, just a hair under 7%.
So you can see the metrics of the fund are quite strong. The names in the top ten are obviously quite strong and we’re pretty excited about what the next couple of years holds for this portfolio.
So thank you everybody for watching. If you have any questions, please reach out to your NCM wholesaler at firstname.lastname@example.org.
The information in this video is current as of August 22, 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.