CPX:CC - 3 No-Brainer Stocks to Buy in a Correction
2023-08-23 10:30:00 ET
A market correction is defined as a market decline of more than 10% and less than 20%. The Canadian stock market (using iShares S&P/TSX 60 Index ETF as a benchmark) is only down approximately 8% from its peak in 2022. That said, certain stocks have fallen more than that, which could be a good opportunity to buy the dip .
Grab big dividends from a big Canadian bank stock
It’s a no-brainer to grab big dividends. The big Canadian bank stocks have been good investments for the long term. Bank of Nova Scotia ( TSX:BNS ) has been the worst-performing bank stock, likely because of its higher-risk international exposure, given today’s not-so-rosy economic environment with generally high inflation and interest rates. The bank generates approximately 40% of its revenues predominantly from Latin America, including in Chile, Mexico, and Peru.
BNS Price to Book Value data by YCharts
At $61.62 per share at writing, Bank of Nova Scotia stock trades at close to its book value. A return to 1.6 times book value implies a price target of north of $92 (upside of 49%). It also offers a fabulous dividend yield of almost 6.9%.
Although its earnings are expected to fall in a higher-risk economic environment, its dividend continues to be covered. This fiscal year, it’s estimated to have a payout ratio of about 64% of net income.
In the past 10 fiscal years, Scotia increased its adjusted earnings per share (EPS) and dividend per share by about 5.9% and 6.4%, respectively. Let’s be more conservative and project a 5% EPS growth rate going forward. It would approximate long-term total returns of roughly 12% without valuation expansion.
Another +6% dividend
Here’s another dividend stock that offers a yield of over 6%. Capital Power ( TSX:CPX ) has corrected approximately 19% from its 2022 peak. The independent power company has increased its dividend by about 6% per year over the last decade. This matches the 6% dividend hike it declared this month. This dividend has an ex-div date of September 28, 2023, and is payable on October 31. Investors must own the stock before September 28 to get this dividend.
At $39.72 per share at writing, the 12-month analyst consensus price target suggests the undervalued stock trades at a discount of about 20%. In other words, near-term upside potential of about 25% is possible. Moreover, it also yields 6.2%, which is good income.
Tech stock with good growth potential
The last no-brainer stock to buy is Open Text ( TSX:OTEX ). It is a strong free cash flow generator. The tech stock trades at a discount because of multiple reasons, including higher interest rates and the Micro Focus acquisition.
Higher interest rates have increased the cost of capital as well as made fixed-income investments more competitive against dividend stocks for investors’ capital. Particularly, the tech stock only offers a dividend yield of about 2.6%.
At $51.27 per share at writing, the stock is discounted by about 24% according to the analyst consensus. The company has taken on higher debt levels for the massive Micro Focus acquisition. Open Text last reported a net leverage ratio of 3.5 times, which it plans to bring down to three times by the end of fiscal 2025. Notably, prior to the acquisition, Open Text’s net leverage ratio was two times.
The tech stock’s five-year dividend-growth rate is about 12%, but it declared a dividend hike of 2.9% this month. This verifies management’s priority to reduce debt. Because the Micro Focus acquisition is large and complex, investors are also exposed to integration risk. If things go well, the stock could double in three to five years.
The post 3 No-Brainer Stocks to Buy in a Correction appeared first on The Motley Fool Canada .
Fool contributor Kay Ng has positions Bank Of Nova Scotia and Open Text. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy .
2023