Relief washed over the Canadian stock market yesterday, sending the benchmark stock index to its highest level in more than five years, with fund managers saying the rally has further to run.
Companies that pay fat dividends, such as banks and telecoms, powered the advance after the federal government unexpectedly said it will cut taxes on dividends to level the playing field with income trusts.
Income trusts, which had shed about $20-billion in market capitalization since Sept. 19, soared too, with companies such as Clearwater Seafoods Income Fund gaining on euphoria they won't face a new tax regime.
The S&P/TSX composite index rose 162.02 points or 1.5 per cent to 11,081.82, its highest close since September, 2000. Royal Bank of Canada contributed 20 points to the index's gains, while BCE Inc. added 17 points.
"These are sustainable gains," said David Cockfield, who helps manage $1.1-billion at Leon Frazer Associates Inc. in Toronto, especially since U.S. investors will return to the market today after Thanksgiving dinner.
Other reasons? Not only will big cash payouts lure shareholders -- CI Fund Management Inc. already said it's boosting its dividend -- but many investors, both in Canada and abroad, remain bullish about commodity prices.
Mr. Cockfield, meantime, added oil and gas and utilities income trusts yesterday to the 20-per-cent trust position in his portfolio.
Others are rushing back into the beaten-down sector as well, including David Rea, chairman of Davis-Rea Ltd. Investment Counsel, who said his firm had been sitting on the sidelines for the past few months.
"This is an example of a no-loser situation," said Mr. Rea, who manages more than $400-million for wealthy clients. "It relieves that uncertainty and puts some of that $23-billion back into the market."
The day's biggest gainers could be divided into three groups: income trusts, income-trust candidates and high dividend-paying companies.
Among dividend payers, banks accounted for most of the index's rise, led by RBC and Toronto-Dominion Bank.
Some telecommunications stocks, meantime, greeted the news with a major rally. But several analysts sounded a note of caution.
In 2003, telecom stocks soared in the United States as dividend taxes were cut. However, many are now trading below those levels, and observers say operating risks, such as cable competition, are weighing on those stocks. The rally "was short-lived due to deteriorating fundamentals," CIBC World Markets analyst Dvai Ghose wrote yesterday in a report. "We see the same challenges for mainly wireline Canadian telcos like BCE and Manitoba Telecom Services Inc."
BCE shares, which rose 4.8 per cent Wednesday, extended gains, rising 6.4 per cent, its biggest one-day gain in more than 3½ years.
Those companies that have mulled a trust conversion also surged. TSX Group Inc. was the day's biggest gainer on a percentage basis, rising 11.2 per cent. Air Canada owner ACE Aviation Holdings Inc., which had planned to spin its Jazz airline into a trust, also jumped.
The capped income trust subindex advanced 4.6 per cent. Income trusts will be added to the S&P/TSX composite index on Dec. 16, giving the index a further boost, investors said.
Still, not everyone was cracking open the champagne.
"This, it seems to me, is just a last-minute election grab and will for sure have to be revisited in six months," said Al Rosen, head of Accountability Research Corp., an affiliate of Rosen and Associates forensic accountants, who said earlier this week that the tax advantage of income trusts has been overstated.
"If anything, what happened [yesterday] is a great selling opportunity."
Gimme yield
Dividend-rich bank and telecom stocks hoisted Canada's benchmark index to its highest close in more than five years.
Yesterday's top contributors to index gains
| Yesterday'sclose | Change | Index points | |
| Royal Bank of Canada | $90.90 | $3.10 | 20.4 |
| BCE | 29.7 | 1.8 | 16.9 |
| Toronto-Dominion Bank | 61.5 | 1.95 | 14.1 |
| Sun Life Financial | 47.75 | 1.72 | 10.2 |
| Bank of Nova Scotia | 47.1 | 0.85 | 8.59 |
| Bank of Montreal | 61.75 | 1.67 | 8.49 |
| Enbridge | 38.82 | 2.18 | 7.71 |
| Telus | 47.55 | 1.92 | 6.98 |
| TransCanada | 37.4 | 1.4 | 6.92 |
| Power Corp of Canada | 32.39 | 1.88 | 5.94 |
Yesterday's top drags on the index
| Yesterday's close | Change | Index points | |
| Nortel Networks | $3.51 | - $0.09 | - 3.900 |
| Canadian National Railway | 91.89 | - 0.81 | - 2.270 |
| Research In Motion | 77.18 | - 0.82 | - 1.590 |
| Talisman Energy | 57.55 | - 0.39 | - 1.450 |
| Bombardier | 2.69 | - 0.08 | - 1.210 |
| Nexen | 54.01 | - 0.22 | - 0.582 |
| Falconbridge | 35.5 | - 0.15 | - 0.562 |
| George Weston | 95.25 | - 1.10 | - 0.540 |
| Rona | 22.3 | - 0.34 | - 0.395 |
| Gildan Activewear | 3.45 | - 0.63 | - 0.383 |
SOURCES: THOMSON DATASTREAM; BLOOMBERG FINANCIAL SERVICES
S&P/TSX composite index
Yesterday's close: 11,081.82, up 162.02
S&P/TSX income trust index biggest five gainers
CML Healthhcare: +19.51%
Clearwater Seafoods: +15.49%
Davis & Henderson: +12.78
Gateway Casinos: +11.03
Westshore Terminals: +9.65
Biggest five decliners
SFK Pulp Fund: +0.29
Dundee Real Estate: +0.04
Atlas Cold Storage: 0.00
Retirement Residence REIT: -0.46
Calloway Real Estate: -1.25
SOURCES: THOMSON DATASTREAM; BLOOMBERG FINANCIAL SERVICES
© The Globe and Mail
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