Many of the best investors ever were value investors, and I for one, don’t think that’s a coincidence.

Value investing works for a number of different reasons. Buying a stock for less than its intrinsic value creates a scenario where the underlying company has multiple paths towards becoming a profitable investment. The stock could go higher based solely on improved sentiment. It could increase because earnings are better than expected (or, often, are less bad than expected). Or it go higher because other investors appreciate the value, causing prices to increase.

In short, there are a lot of good things that can happen when an investor purchases a stock for under intrinsic value. Buying things at a discount is a good thing; just ask any shopper.

The problem with value investing is it it very often accompanied by a poor outlook. Here’s what happens:

  • A stock will fall, often for a good reason
  • Other investors will sell their stock because it has fallen
  • Investors search for a reason for the second (or continued fall)
  • They create a narrative, which can often push the price down more in the short-term
  • This creates a “falling knife” situation, which investors almost universally avoid

It’s hard to buy a stock when most everyone else hates it, a feeling that’s often underestimated until it’s time to pull the trigger and actually buy the investment. But as top investors like Benjamin Graham, Walter Schloss, Peter Lynch, Seth Klarman, and, of course, Warren Buffett, have taught us, it’s often the most profitable time to buy.

Let’s take a closer look at a handful of top value stocks in Canada for 2024, dirt-cheap stocks that are trading at low valuations. These stocks might be beaten down, but they have plenty of life left in them. And, because you’re reading this on Canadian Dividend Investing, these stocks also pay dividends, with a few yielding in excess of 5%.

Artis REIT

Artis REIT (TSX:AX.un) is a diversified real estate investment trust (REIT) that owns retail, office, industrial, and residential property. Headquartered in Winnipeg, the portfolio spans 121 properties in both Canada and the United States, consisting of 14 million square feet of leased space. Approximately 50% of rents come from office buildings, with 30% coming from industrial space and 20% from retail.

The company is cheap for a number of different reasons. It is a diversified REIT in a market where investors prefer more specialized choices. Many of Canada’s top REITs have stuck to one type of asset class — like Granite REIT owning industrial space and Choice Properties owning grocery-anchored retail. It also has a great deal of office exposure in a world where many investors are convinced office is going to zero.

Artis is ran by Samir Manji, who is also the REIT’s largest shareholder. Manji’s real estate resume is impressive; he was the founder, Chairman, and CEO of Amica Mature Lifestyles Inc., which was eventually sold to Ontario Teachers’ Pension Plan in 2015. His record is more mixed running Artis, with critics saying the company’s strategy of selling off properties is flawed, and they also question Artis’s investments in other publicly-traded REITs.

These criticisms — plus the office exposure — are partially why Artis shares have struggled so much. The stock is down some 50% since peaking in 2022, falling to below $6 at one point. The name has recovered somewhat, but it still trading at less than $7 as I write this. Artis’s management, meanwhile, is persistent in saying shares are worth more than $15 each.

Manji has a plan to bridge the gap between Artis’s anemic share price and its much higher net asset value. The company is selling off many of its assets, using the proceeds to repurchase what it views as undervalued shares. Since 2021, when the company announced its plan, it has sold more than 80 different buildings, shrinking the portfolio by about 40%. It used just about every nickel generated by those sales to repurchase shares, but the plan hasn’t worked out quite as well as hoped.

Artis is cheap on just about every measure. As mentioned, it trades at less than 50% of its net asset value. It also trades at approximately 6x 2023’s funds from operations, a REIT’s equivalent of earnings. And, to top it all off, the company pays a $0.05 per month distribution, good enough for a 8.9% yield today. That’s a nice consolation prize for waiting.

Algoma Central

Algoma Central Corporation (TSX:ALC) is a little-known transportation company that can trace its history all the way back to 1899, when it operated a railway that ran north from Sault Ste. Marie, Ontario, to Wawa, which produced pulp and iron ore. These days, Algoma is primarily a Great Lakes shipper, with 84 vessels transporting goods between Great Lakes ports. It also has a 50% interest in a specialty shipper that operates in various niche routes around the world.

Algoma is a delightfully boring company, with the added bonus of featuring high barriers to entry. After all, there’s really only space for one shipper in most of the markets where the company operates, especially on the Great Lakes. It has also spent aggressively to maintain this leadership position, owning a fleet with a replacement value of approximately $2B. Algoma has an enterprise value of just $922M today, suggesting investors who buy in today are getting a discount of more than 50% of the replacement value of the fleet alone.

There’s more. Algoma is been consistently profitable for decades now, growing both the top and bottom lines over time. In 2016, the company generated $391M in revenue and a profit of $0.27 per share. The company is estimated to generate $706M in revenue in 2023 (full-year results aren’t out yet) with earnings of $1.78 per share. That impressive growth is from more favourable shipping conditions, as well as the company buying new, more efficient ships.

Algoma is also cheap from an earnings perspective. The company is projected to earn $1.91 per share in 2024 and increase that to $2.03 per share in 2025. Shares currently trade hands at under $15 each, putting shares at under 8x forward earnings. It pays a generous 4.8% dividend, and it has more than doubled its dividend since 2016.

Finally, I should note Algoma’s largest shareholder. The company is controlled by the Jackman family, who hold approximately 58% of shares through various holding companies. Although the Jackman family is hardly a household name, they are famous in Canadian value investing circles, controlling an empire that’s estimated to be worth more than $2B.

TransAlta

TransAlta (TSX:TA) is an independent power producer headquartered in Calgary with 76 power generation facilities located in Canada, the United States, and Australia, which collectively produce some 6,400 MW of electricity each year. It can trace its roots back to Alberta in the 1910s.

The company was a standout dividend grower for years in the 1990s and 2000s, before running into problems in the 2010s. It had a bunch of operational issues that temporarily hurt earnings, and the portfolio was overly reliant on coal-fired power, which even in the 2010s was the fuel of the past, not the future. The company then spun out many of its renewable power assets into a separate stock, causing many investors to sell their shares in exchange for the greener subsidiary. It all culminated in dividend cuts and more than a decade of lackluster performance.

But TransAlta has been doing some good things recently. It has completed the transformation of its coal-fired power plants to natural gas. It purchased all the outstanding shares of TransAlta Renewables, bringing that investment back into the fold. It has also been moving to lock in contracted rates for much of its power, rather than depending on the whims of the floating rate world. It also kept debt debt around $3B despite making some pretty substantial moves.

TransAlta is set to gush free cash flow going forward, telling investors to expect it to generate between $450M and $600M in FCF in 2024. TransAlta’s shares, meanwhile, have a market cap of just over $3.3B. That gives us a price-to-free cash flow ratio of just 7x on the low end of projected free cash flow, and a ratio of just 5.5x on the top end. No matter how you slice it, TransAlta is cheap.

The company’s dividend isn’t very exciting, but it does offer a 2% yield which has been growing steadily since 2016. The company is also repurchasing shares, buying more than 22M shares since 2016, or a little less than 10% of its total float. It’s not huge, but every little bit helps.

Transcontinental

Transcontinental (TSX:TCL.A)(TSX:TCL.B) is a family-owned Canadian printing company that operates in the packaging and printing sector. Traditionally the company printed magazines, newspapers, and advertising material, but that business has slowly died off over the years. It diversified into packaging, mainly the production of different plastic products geared towards consumer goods. It also owns a smattering of media assets, although they account for just 4% of total revenues.

The company has invested heavily in its packaging division, growing it to 28 plants and more than 4,000 employees, with locations in Canada, the United States, Latin America, the UK, and New Zealand. Approximately 80% of revenues come from the 17 plants it has in the United States.

Unfortunately, Transcontinental’s foray into packaging isn’t exactly going to plan. Revenue peaked at a little over $3B in 2019, dropping some 15% in 2020. The top line has recovered since then, but still hasn’t cracked the $3B mark again. Analysts predict stagnant revenues for 2024 and 2025, too.

Earnings are a similar story. Transcontinental’s cash flow from operations peaked at $539M in 2018; it hasn’t surpassed $500M since — and it fell to just under $250M in 2023. Management has an ambitious plan to increase cash flows, which includes cutting a bunch of non-core expenses, selling off some non-core operations, and selling some $100M worth of real estate. Investors disappointed with years of lackluster performance are taking a wait-and-see approach with this turnaround plan, but this author thinks it has promise.

Even if Transcontinental doesn’t improve its cash flow, shares are still cheap. The company has a total market cap of just over $1.1B, putting shares at under 5x trailing cash flow from operations. It also pays a generous 6.7% dividend, a sustainable yield with a payout ratio of approximately 40% of cash flow.

Altagas

Altagas (TSX:ALA) is a leading North American midstream energy company, focused on the processing, transportation, and storage of natural gas. It also has a robust utilities business, serving 1.6M residential, commercial, and industrial customers with natural gas in the District of Columbia, Maryland, Virginia, and Michigan.

Unlike oil and especially coal, the future looks relatively bright for natural gas. Sure, it’s a fossil fuel, but it burns cleaner than the alternatives, and use is expected to continue to grow over the next 5-10 years, with potential declines after that — provided the future of renewable energy sources plays out as expected. That’s a big if.

Canadian natural gas also has a big short-term catalyst — the opening of the LNG export terminal in Kitimat, which is expected to happen in 2025. This is expected to export 1.84 Bcf/d, a significant amount of demand that will be, in part, processed by the various natural gas processing facilities owned by Altagas in Alberta.

Turning to the company’s utility division, this delivers highly predictable cash flow with a fairly steady level of growth. The company’s rate base has grown by 9% per year since 2019, with population growth in its utility areas expected to stay robust going forward. It also has various plans in place to improve returns from this part of the business, including making operations more efficient and improvements in rates allowed by regulators.

Put it all together and Altagas is expected to earn approximately $2.50 per share in 2024, with about half those earnings earmarked to pay dividends. That puts shares at just over 11x forward earnings. That’s not as cheap as the rest of the stocks on this list, but is still a great price to pay for a company with nice assets, what should be steadily growing earnings, and a solid management team. And the dividend is a robust 4.1%, with expected growth in that payout to be between 5-7% per year.

The bottom line

In a world where sexy growth stocks like Microsoft, Costco, or Constellation Software trade for eye-popping valuations, it’s easy to dismiss cheap stocks like the ones I’ve talked about above. But these unsexy names could very well be poised to outperform, simply because they’re so cheap. Plus, they all pay generous dividends, payouts that look to be quite sustainable, which helps in case the share price doesn’t cooperate.

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