Four more years: That’s what Prime Minister Stephen Harper and his Conservative Party earned at the polls on Monday, May 2.

The PM has been in power since early 2006 as leader of a minority government. Longtime Canadian Edge readers will remember the Conservatives’ famous flip-flop on income trusts, when they imposed a specified investment flow-through (SIFT) entity-level tax beginning in 2011. That was after pledging during an election campaign that winter not to mess with the popular investment vehicle.

Fortunately, since then the government has been almost universally pro-business and pro-investor, slashing corporate taxation and limiting regulation. US investors have benefitted by the end of the 15 percent withholding tax on dividends paid to IRA accounts, though execution remains spotty due to continuing confusion in the brokerage community.

With a solid 167 votes of 308 total seats in Canada’s House of Commons, the Conservatives are no longer in danger of being pulled down by a joint opposition effort. That means theoretically Mr. Harper will be able to push whatever policies he wants until 2015, when the Constitution of Canada requires him to hold new elections.

In practice, however, the government isn’t likely to veer much from its successful policies of the past five years. For investors on both sides of the border, that means more of the same friendly fiscal, legal and regulatory environment.

A favorable election result, of course, doesn’t guarantee profits in Canadian stocks in coming years. Investors have universally lauded the Conservatives’ win. But they also sold off Canadian stocks and the local currency following the vote, due to concerns about the global economy and commodity prices in particular.

Most important of all to investors’ returns is the performance of individual company businesses. The best Canadian companies would find a way to make money, even if what’s now the No. 2 party–the left-leaning New Democrats–should happen to take power one day. Similarly, companies that make mistakes as businesses will be punished by the market place, no matter how many favors the Conservatives do for Canadian corporations the next four years.

Some companies, however, are most definitely major beneficiaries from this vote. For one thing, not having to worry about a sudden election and the risk of major policy shifts is very salutary for long-term planning and investment. That’s critical for the development of major infrastructure projects in Canada, particularly the resurgent oil sands.

All companies will also benefit from the continuation of Conservative Party tax policies, which took the benchmark rate down to 18 percent last year and will reduce it to 15 percent next year. That’s by far the lowest rate in the developed world.

Below I explore these and other issues that were decided in this week’s election, at least for the next four years. I highlight the likely winners and the companies that aren’t positioned to fare as well.

Counting the Votes

First, let’s take a look at Canada’s post-election political map. Five parties now hold seats in the House of Commons, where essentially all of the important decisions are made.

The biggest winner from the vote is of course Mr. Harper’s Conservative Party of Canada. The party beat projections and pre-election polls by turning back a last-week surge by the surprising New Democratic Party (NDP), and then staging their own run to grab the majority they’ve sought since taking power as a minority government five years ago.

The 167 votes won are 13 more than the 154 needed to maintain a majority government. That makes it next to impossible to dethrone before the next constitutionally mandated election in 2015, at least barring a major split in the party ranks.

Politics are famous for making fools of those who expect certainty. But given that the NDP is now the leading alternative, even one defection to the opposition looks to be highly unlikely.

The PM himself won reelection with a 63 percentage point win in his home riding, which is roughly the equivalent of a US Congressional district. His party, however, won just 39.7 percent of the national vote. That was only 1.96 percentage points more than it took during the last election in 2008, when they won just 143 seats. And it’s also below the 40 percent threshold commonly considered a minimum for winning a majority.

Conservatives won a landslide number of seats largely because of the near-total demise of what were the No. 2 (Liberals) and No. 3 (the Bloc Quebecois) parties before the election. The twin graphs–named, inconveniently from a grammarian’s perspective–“Before” and “…And After” tell the story.

Outside of Quebec–which controls nearly a quarter of the seats in Parliament–the party won 49.7 percent of the vote and 161 of the 233 available seats. That alone is enough for an electoral majority. But the real story was the loss of 43 seats by both the Liberal Party and the Bloc Quebecois, 66 of which were picked up by the New Democrats.

The New Democrats picked up 30.63 percent of the popular vote, more than all the other parties combined outside the Conservatives. And their surge also split the vote in former opposition strongholds, such as Ontario for the Liberals, making them suddenly winnable for Conservatives.

In the US, Republicans and Democrats squabble about details of government but generally fight over the political center, which is usually where the votes are. In Canada, however, the parliamentary system makes it possible for parties to win or at least accumulate a great deal of power much further on the right or left of the political spectrum.

In the New Democrats’ case, that’s decidedly to the left. NDP Leader Jack Layton made no bones about his priorities during the campaign, mainly a sharp reversal of the multi-year decline in corporate tax rates, vastly expanded government spending, renegotiation of the North American Free Trade Agreement and much tougher environmental regulation. Mr. Layton is also on the record favoring a dramatic scaling back of development of Canada’s oil sands.

All are reversals from current Conservative policies. But the NDP’s late surge to within a few percentage points of the ruling party in pre-election opinion polls likely galvanized voters on the right to turn out, even as it also spooked the markets in the days before the vote. That was almost surely also a factor helping the Conservatives earn the majority.

It’s hard to believe now that a little more than six years ago, the Liberals–known historically as the “Grits”–were actually in power with a majority and the Conservatives were the leading opposition. But after this election Liberals face a sharp challenge to remain relevant in national politics.

Leadership may fall to Liberal MP Justin Trudeau, who retained his Montreal riding of Papineau even as his party lost half its seats in Quebec. Mr. Trudeau is the son of the late Pierre Trudeau, the charismatic prime minister who ruled Canada during the 1970s.

The younger Trudeau is playing it coy on assuming the party’s reins, quoted in recent press reports as saying “If I follow my father’s example, I have to be a good parent before being a good prime minister.”

In any case, the next four years will provide plenty of opportunity to burnish his credentials, but little potential to pick up seats.

That leaves the NDP and Jack Layton as the leading opposition. And that almost surely means more clear-cut policy distinctions with the ruling party than the center-left Liberals have offered the past five years. The NDP’s victory was even more at the expense of Bloc Quebecois, as it won 58 seats in Quebec to reach its total of 101. The Bloc, meanwhile, now has just four seats, making it scarcely more relevant than the Green Party, which has one seat.

Like the Liberals’ Michael Ignatieff, Bloc leader Gilles Duceppe suffered the ignominy of losing his seat in Parliament. That he’d held the seat since winning a by-election in 1990 was particularly telling about the party’s fortunes and an electorate that’s become increasingly impatient with its separatist bent. Under Mr. Duceppe’s leadership the Bloc peaked at 42 seats in Parliament after the 2006 election, but the slide that began in 2008 is now complete.

As Associate Editor David Dittman pointed out in CE Weekly, all this makes Canada’s new political calculus a lot more like the binary, zero sum game we operate under in the US. Like the filibuster-proof Democratic Party majorities US President Obama held from 2009-10, the Prime Minister simply doesn’t need the help of any his vanquished foes.

Used to governing as a minority for five years, he’s likely to find the going a lot easier the next four for that reason alone. On key challenge will be avoiding being seen as going too far in certain policy choices, thereby confirming the worst fears of the opposition (still more than 60 percent of voters) that Conservatives were really closet extremists all along.

No doubt some will try to make that stick. Mr. Harper, however, will no doubt be much aided by having Mr. Layton as a foil, rather than a moderate Liberal Party. Mainly, it’s hard to imagine any Conservative Members of Parliament considering defecting from the party, knowing the potential alternative.

And despite his charisma and the huge victory won by his party, there are questions about Mr. Layton’s ability to keep a caucus in line that’s full of neophytes and socialists. Any missteps will be opportunities for Mr. Harper to further burnish the Conservative’s status as not only the party in firm control of government but also as Canada’s “natural” ruling party, a mantle formerly claimed by the Liberals and now up for grabs.

Lower Taxes = Higher Dividends

So what does this mean for investors? Mainly, we can look forward to at least four more years of what’s one of the world’s most stable, investor-friendly environments.

Unlike some observers, we don’t expect big changes in Canada’s social welfare system, which forms a general point of agreement among the parties. There are some possible changes on the margins and private companies are likely to gain a larger role. But there’s little hue and cry for bigger changes–such as a US-style privatization–and only political risk for anyone who tries such an extreme measure.

Removing the threat of being toppled, however, does give Mr. Harper carte blanche to continue and even possibly accelerate his vision of fiscal policy. Front and center is the program of corporate tax reduction, which will take Canada’s top rate down to 15 percent by Jan. 1, 2012, lowest among the Group of Seven. A budget tabled in March will likely be passed with only minor adjustments, and a fiscal plan to get back to surplus by 2014-15 will continue. Further cuts in corporate taxes may follow.

When Mr. Harper’s Finance Minister Jim Flaherty announced a new tax on income trusts on Halloween night 2006, he set off a selling wave for one major reason: Investors worried higher taxes would make it more difficult for trusts to pay dividends.

As it turned out, those fears proved way overblown for well-run companies. Most trusts did wind up converting their structure from trusts to corporations. But more than a third of them didn’t touch their dividends. Those that did make cuts did far less than feared. And a growing number are actually back to increasing payouts again.

That companies wanted to maintain dividends and keep investors happy was never in question. But their ability to hold the line has much to do with the Conservative Party’s relentless reduction of tax rates. Even what have been punitive SIFT tax rates are being reduced. And the government has cut the combined federal/provincial burden as well.

Now, with taxes continuing to come down and companies confident in the duration of lower rates, the result should be faster investment and dividend growth across the board. And even those that don’t boost will still face a lower burden covering their current payouts, which means more money left over to build business and boost balance sheets.

The result is another reason to look for accelerating dividend growth among companies in the How They Rate universe, particularly among the former income trusts as they adjust to paying taxes. That includes companies that actually cut their distributions as part of the conversion process.

Of course, taxes aren’t the only factor that determines the level of dividends a company will pay. But several oil-related former trusts are already ramping up dividends again, including Bonterra Energy Corp (TSX: BNE, OTC: BNEFF) and Canadian Oil Sands Ltd (TSX: COS, OTC: COSWF), which boosted payouts 8.3 and 50 percent, respectively, last month.

The bottom line: Higher earnings and cash flows inevitably induce dividend-paying companies to pump up their payouts. And there’s no better catalyst for long-term stock market gains than a rising yield.

A low tax rate coupled with consistent legal and regulatory policy also promotes investment, from both domestic and foreign sources. The Harper government has become progressively less enamored of foreign takeovers of major Canadian natural resource companies. That became clear during Australian giant’s BHP Billiton Ltd’s (NYSE: BHP) ultimately unsuccessful takeover bid for Potash Corp of Saskatchewan (NYSE: POT) last year.

The PM never officially disapproved the deal. But he did little to override the distinctly anti-BHP political tide in Saskatchewan, where the local authorities did reject the bid.

On the other hand, neither Ottawa nor Saskatoon has been anything but supportive of BHP’s plans to develop potash reserves on its own, including its purchase of exploration permits. That’s also the approach taken as Americans, British, Chinese, Koreans and others have invested in Canada’s other natural resources, including the oil sands.

Those policies are a sharp contrast to those of many other resource-rich nations, particularly in the developing world. The Democratic Republic of the Congo, for example, served notice to foreign investors that it won’t hesitate to change the rules of the game at any time when it effectively confiscated assets of Canada’s First Quantum Mineral Ltd (TSX: FM, OTC: FQVLF) last year. Bolivia, Ecuador, Venezuela and others have done much the same, as government grab for a bigger piece of the pie. Even Australia has become suspect, thanks to the Labour Party’s push to jack up resource company taxes.

These countries’ contrast with Canada will keep money foreign money flowing over the next four years. The result will be greater development of resource-rich areas, with profits flowing to a range of companies including energy infrastructure operators, resource producers, project designers and developers, regional retailer and real estate investment trusts, banks, communications companies and others.

China Investment Corp (CIC)–that country’s leading sovereign wealth fund–now owns 5.2 percent of Penn West Petroleum Ltd (TSX: PWT, NYSE: PWE).

It also owns 45 percent of a partnership to develop Penn West’s Peace River oil sands property, by virtue of an CAD817 million investment. CIC also owns 17.2 percent of Teck Resources Ltd (TSX: TCK/B, NYSE: TCK), by virtue of a CAD1.5 billion investment to help the latter pay off debt.

Both companies have already greatly benefitted from the financial aid from abroad. Penn Wes Petroleum, highlighted in Portfolio Update, remains a strong buy up to USD30.

And four more years of Mr. Harper and his Conservatives dramatically reduces the risk of a negative regulatory change to restrict foreign companies’ ability to earn a fair return. That’s set to promote even more investment going forward, greater development and faster growth for beneficiaries like Penn West.

Perhaps the biggest beneficiary will be Canadian oil sands development. As “The Road to Energy Security…” shows, investment has ramped up sharply in recent years, despite a brief interruption during the financial crisis of 2008. Now it’s picking up steam again, as higher oil prices and improved technology make more potential bitumen reserves economic to exploit and political turmoil and horrific weather conditions threaten to shut down production elsewhere.

Before the Conservative Party gained a majority in Ottawa this week, there was a risk dramatic new environmental regulation would at least slow oil sands development. Producers have made strong improvements in areas like waste disposal and water usage. But there have nonetheless been accidents as well as environmental damage from the wear and tear on the land.

Added to that is the risk of carbon dioxide (CO₂) regulation, which has been adopted in much of the world. Even the US is putting a variant into place, albeit a generally flexible one, via new Environmental Protection Agency rules on power plants.

Carbon regulation did become a genuine bone of contention during the election, with the NDP actually taking the stance that oil sands development should be curtailed on that basis. Four more years of Conservatives in control–this time with a majority–nullifies concerns of such radical action. That’s a major plus for any company considering an investment in the oil sands, as well as in the burgeoning business of developing the country’s oil and gas shale reserves.

From the point of view of Canadian independent and renewable energy producers, the policies of the Left of carbon regulation add up to green in more ways than one. Ironically, they stand to prosper even more under the Conservatives, who have taken the line that CO₂ reduction is best achieved by investing in low- and zero-emission technologies.

Other companies benefitting from the continued benign-to-pro business regulatory environment include communications companies and banks. The former is now likely to find itself open for the first time to foreign investment that will fuel growth and push up stock prices. The latter will continue to enjoy the government’s cooperation, even as companies use their strength to successfully extend their reach abroad.

Over the long haul the Canadian dollar’s value follows the prices of the country’s natural resource exports. Having a Conservative majority certainly won’t guarantee a bull market for oil. Just ask followers of the last Tory to command a Parliamentary majority, Brian Mulroney, during the 1980s.

Mr. Mulroney led the Conservative Party to the largest majority in history in 1984, largely by parroting the pro-business/pro-investor policies of then-US President Ronald Reagan. By the time he left office in 1993, however, his personal popularity was lower than that of any Prime Minister in Canadian history. The Conservative Party, meanwhile, faced a multiyear struggle to maintain its existence.

Mr. Mulroney did leave a lasting legacy, inking the North American Free Trade Agreement in 1992 that was later signed by President Clinton. He also worked tirelessly to integrate Native Americans into national life, as well as to integrate Quebec.

When he left power, however, he was thoroughly disgraced. And in my view the main reason was the multiyear decline in commodity prices globally, which turned the Canadian economy from powerhouse to chronic underperformer. For its part, the Canadian dollar rallied initially as commodity price staged a revival in 1986-87 and then crashed into a multi-decade bear market, finally bottoming in 2001 at a value of barely USD0.60.

That’s a pretty clear indication that the Canadian dollar’s future to 2015 depends a lot more on how oil prices do than Mr. Harper’s policies. All else equal, however, a move toward fiscal balance, lower tax rates and rising commodity exports to developing Asia–all Conservative Party policies–is bullish for the loonie. And that means steady increases against the US dollar in coming years, lifting the US dollar value of Canadian stocks and dividend streams.

Winners and Losers

When it comes to low taxes and less intrusive regulation, every company in the Canadian Edge How They Rate coverage universe will benefit. Other Conservative Party policies, however, will benefit companies and industries disproportionately.

Policies that strengthen the Canadian dollar intentionally or unintentionally, for example, will continue to hurt companies that book their costs in loonies and their revenue in US dollars. I’ve highlighted many of these over the years as companies to avoid, and performance has been generally dismal.

Happily, many have used the strong loonie to better match up costs with revenue streams, such as moving production facilities to other lands. But some are routinely hurt by the weakness of the US dollar. One of these is former Portfolio Holding CML Healthcare Inc (TSX: CLC, OTC: CMHIF). CML is a sell as of this issue, as I detail in Portfolio Update.

Another is Food and Hospitality company Ten Peaks Coffee Company Inc (TSX: TPK, OTC: SWSSF), which manufactures decaffeinated coffee via a patented process but is forced to compete with rivals from countries with cheaper currencies. Royal Host Inc (TSX: RYL, OTC: ROYHF) was forced to eliminate its distribution this year, as the falling US dollar has hit tourism and so reduced revenue from its resorts.

In contrast, other companies with hefty US dollar revenue, like Atlantic Power Corp (TSX: ATP, NYSE: AT), have managed to hedge their receivables against currency swings. But because it pays dividends in Canadian dollars, I always watch even this rock-solid Conservative Holding carefully to ensure it makes the right moves.

That also goes for fellow Portfolio picks Ag Growth International Inc (TSX: AFN, OTC: AGGZF), Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF), Extendicare REIT (TSX: EXE-U, OTC: EXETF), IBI Group Inc (TSX: IBG, OTC: IBIBF), PHX Energy Services Corp (TSX: PHX, OTC: PHXHF), RioCan REIT (TSX: REI-U, OTC: RIOCF) and TransForce Inc (TSX: TFI, OTC: TFIFF). All have consistently managed currency exposure very well and have grown robustly in the US for many years, enriching shareholders.

Clearly, management knows what it’s doing when it comes to hedging exposure. For my part, however, I always make sure they still do, every time they report earnings.

The rest of the Canadian Edge Portfolio Holdings have no direct US dollar exposure. Every boost in the Canadian dollar means what amounts to an automatic dividend increase in US dollar terms. Note that this also applies to energy producers, despite the fact that their product is priced in US dollars. That’s because the Canadian dollar’s value tracks that of oil. A rising loonie does push up costs, but oil’s price almost always keeps pace and then some, pushing up revenue even more.

Turning to more bullish matters, the Harper victory is a plus for all oil sands producers. One of these is Athabasca Oil Sands Corp (TSX: ATH, OTC: ATHOF), which currently trades below the CAD18 per share price at which it debuted last April despite solid progress on a range of projects. Buy Athabasca Oil Sands up to USD16.

Athabasca’s main drawbacks are the lack of current production and no dividends, which makes it suitable only for more aggressive, patient investors. An equally explosive company whose prospects are closer to being realized is MEG Energy Corp (TSX: MEG, OTC: MEGEF). The company’s first-quarter 2011 output more than doubled over last year’s tally, even as production costs fell more than 60 percent to CAD14.72 per barrel of oil equivalent.

That per barrel of oil equivalent number is less than half that of rival oil sands producers and promises big things for MEG going forward. So does management’s plan to increase production 10-fold by 2020. Buy MEG Energy up to USD55.

Finally, those who want a dividend oil sands play are still best off with Canadian Oil Sands Ltd (TSX: COS, OTC: COSWF). The former income trust boosted its quarterly dividend by 50 percent to CAD0.30 per share as of the May 31 payment. That’s a clear sign the Syncrude joint venture–run by the Canadian unit of Exxon Mobil (NYSE: XOM)–is back on track toward ramping up output for coming years, that costs are again under control and profits are rising. Canadian Oil Sands is a buy up to USD33.

As the exclusive provider of transportation/pipeline services to Syncrude/Canadian Oil Sands, Pembina Pipeline Corp (TSX: PPL, OTC: PBNPF) is a longtime favorite of mine. The company has also greatly expanded its business serving other oil sands producers the same way, including with the Nipisi and Mitsue pipelines on track to be in service later this year.

The only problem I’ve had with the stock of late is it’s well above my buy target of USD22. It will almost surely grow into that higher price in coming years, as will other picks trading above target. For now, however, the better oil sands infrastructure plays are builder Bird Construction Inc (TSX: BDT, OTC: BIRDF), transporter/services company Mullen Group Ltd (TSX: MTL, OTC: MLLGF) and cleanup firm Newalta Corp (TSX: NAL, OTC: NWLTF).

Bird continued to grow during the recession of 2008-09 by focusing on public sector contracts. Now it’s building order backlog by forging into a wide range of private sector contracts, as well as needed public infrastructure in the oil sands region. Buy Bird Construction up to USD12. Note the stock has split 3-for-1 since the April issue.

Mullen enjoyed a 31.9 percent jump in first-quarter revenue on the strength of its oil sands growth and has boosted capital spending by 50 percent to keep that growth going in 2011 and beyond. Earnings were up 89 percent excluding one-time items, supporting the doubling of the dividend in April. Buy Mullen Group, which covers its distribution by nearly a 2-to-1 margin with distributable cash flow, up to USD23.

Newalta won’t report its first-quarter 2011 numbers until May 9, a day before Bird. But the oil sands region’s need to clean up after itself is a potential goldmine for the recycling and energy/industry site remediation specialist. And the stock has a long way to go before reclaiming its 2008 heights, despite posting the highest revenue in its history last quarter. Buy Newalta up to USD13.

Artis REIT (TSX: AX-U, ARESF) and Northern Property REIT (TSX: NPR-U, OTC: NPRUF) are real estate investment trusts with deep roots in Canada’s resource patch and strong growth prospects as well. Both weathered the 2008 downturn well, with Northern Property boosting its distribution last year. Artis reports its first-quarter earnings on May 12, while Northern Property won’t have numbers until Jun. 14. Both remain strong buys up to targets of USD14 and USD28, respectively, in the meantime.

Finally, communications companies are likely to be winners from a continuation of Harper-era policies. As in the US, demand for ever-more connectivity is alive and well in Canada. And communications providers are posting robust profits from adding users for broadband services, both wireless and wireline-based.

My favorite plays on the industry are companies that pay generous and growing dividends and own both wireless and wireline broadband networks. Three buy-rated companies in How They Rate are Manitoba Telecom Services (TSX: MBT, OTC: MOBAF), Rogers Communications (TSX: RCI/B, NYSE: RCI) and Shaw Communications (TSX: SJR/B, NYSE: SJR).

All yield in the 4 to 5 percent range. Rogers and Shaw have both raised dividends recently, Rogers by 10.9 percent in April and Shaw by 4.6 percent in March. Shaw pays monthly. Manitoba Telecom actually cut with its October payment but now boasts solid coverage and upside as its wireless business continues to grow.

All three companies have the advantage of being mid-sized players that are lean yet financially powerful enough to go up against the country’s two largest players, BCE (TSX: BCE, NYSE: BCE) and Telus (TSX: T, NYSE: TU). And their robust profit growth demonstrates their success. Rogers, for example, posted a 17 percent jump in first-quarter earnings excluding items, as it boosted high-speed data revenue by 30 percent. Shaw, which continues to be the beneficiary of insider buying by the Shaw family, saw a 28.5 percent jump in free cash flow.

Four more years of the Harper government ensures none of these companies will encounter serious regulatory hurdles to their growth in an industry that’s proven itself resilient in the worst possible economic circumstances. Buy Manitoba Telecom up to USD32, Rogers Communications up to USD40 and Shaw Communications up to USD20.