The stock exchange in Frankfurt, Germany, on March 15, 2023.STAFF/Reuters
For retired investors, shares in banks, telecom and energy companies are golden geese. They dependably crank out ever-increasing dividends, funding the lifestyles of those who have left the work force.
The golden geese are ailing.
As any senior who is currently loaded up on BCE Inc. BCE-T or Toronto-Dominion Bank TD-N shares knows, stocks kicking off decent yields are taking a beating. Part of the downturn stems from the spike in interest rates. Part of the problem is poor execution by management. Over time, these shall pass. Rates will fall and CEOs, or their successors, will improve performance.
What’s here to stay? A series of government policy shifts – higher capital-gains taxes, hikes in capital requirements at banks, carbon taxes and “quixotic” telecom regulation – which combine to reduce the returns investors can expect from Canada’s flagship public companies, according to a report released on Monday by CIBC World Markets.
“The high-yielding stocks in the banking, communications and energy sectors typically underpin Canadian retirement investment portfolios,” said Ian de Verteuil, head of portfolio strategy at CIBC, in the report. “Policies that pressure return on equity in these sectors can directly reduce the ability of these companies to grow dividends, and retiree income, over time,” he said.
Over the past decade, banks, telecom and energy companies generated more than half the profits from S&P/TSX-listed companies. The only member of this trio to outperform the S&P/TSX benchmark over the last five years – oil and gas producers – did so as an unintended consequence of government policy. Mr. de Verteuil said energy companies “see little opportunity to re-invest in Canada and have moved to aggressively return profits to shareholders.”
Governments change policies with an eye to benefiting the public, not public companies. Mr. de Verteuil – a former bank analyst – acknowledged Canada has been well served by well-capitalized banks. He agreed that carbon taxes are the most effective tool for reducing emissions and that cellphone users win when four national telecom companies fight to offer the lowest wireless prices.
At the same time, big shifts in policy have equally significant effects on investors’ portfolios, and their behaviour.
When Finance Minister Chrystia Freeland raised capital-gains taxes in the recent federal budget, she predicted the move would only affect about 40,000 individuals annually. CIBC’s analysis shows that number “understates” the impact of the hike, as a different cohort of Canadians will be hit with higher bills each year, when they sell investments, businesses or family cottages.
“The reality is that equity investing for some Canadians has become less attractive,” said Mr. de Verteuil. “It should come as little surprise that both individual and institutional investors are increasingly eschewing Canadian equities in favour of foreign assets.”
Giving Canadians more reasons to move their money out of public companies would be bad public policy. Individual investors are now the key backers of many Canadian businesses. CIBC estimates they account for 35 to 45 per cent of shareholders in domestic public companies.
Retirees looking abroad for income would only be following a trail blazed by some of the country’s most sophisticated investors.
The eight largest domestic pension funds have, on average, less than 10 per cent of their assets in Canadian equities. To fund the retirements of countless plan members, these funds are major investors in foreign markets and alternative asset classes such as private debt, infrastructure, real estate and private equity.
When it comes to mutual funds, retirement savers are also voting with their feet. Ten years ago, domestic mutual fund owners parked 55 per cent of their equity investments in Canadian stock funds. They now allocate just 29 per cent of their savings to domestic equity funds, shifting money to international and U.S. fund managers.
To summarize the government-imposed headwinds facing telecom companies, Mr. de Verteuil said: “Regulatory trade-offs in the future need to be more acutely considered.” That message should resonate in all sectors.
The challenge facing the federal government is one of balance – weighing a desire for additional tax revenue or increased regulation against the overall health of the economy. The scales are now out of whack. Investors who depend on income to fund their retirements – and that’s all of us – are facing diminished returns.
Andrew Willis