Editor’s Note: Please see our analysis of the latest earnings from our Dividend Champions in the Portfolio Update section following the article below.

While the U.S. Federal Reserve is poised to hike interest rates at next week’s meeting, it’s worth remembering that most of the world’s major central banks are currently in easing mode.

Aside from fending off the specter of disinflation or outright deflation, perhaps these policymakers see something on the horizon that their U.S. peers don’t.

The Bank of Canada (BoC), which had been one of the developed world’s more hawkish banks following the downturn, is one of them.

After holding its benchmark overnight rate at 1.0% for just over four years, the longest pause in about 60 years, the central bank has cut rates by a quarter-point twice this year, bringing its overnight rate to 0.50%.

At current levels, short-term rates are just a quarter-point above the record low in 2009, at the height of the Global Financial Crisis.

Of course, there’s a very good reason for such accommodative monetary policy. The BoC is trying to provide a sufficient cushion to offset the shock from the collapse in commodities prices.

Although the energy sector accounts for about 10% of Canadian gross domestic product (GDP), that figure doesn’t fully capture how the sector’s growth flowed throughout the country’s economy. For instance, prior to crude oil’s crash, energy sector spending accounted for about one-third of the country’s total business investment.

Central bank chief Stephen Poloz expects the Canadian economy to continue rebounding and finally reach full capacity by mid-2017, but he’s also prepared for the risk of another unforeseen shock that could rock the country’s economy. Despite his overall optimism, Poloz acknowledged, “ … we’re paid to worry, and to be prepared.”

But for those in the secular stagnation camp, Poloz disagrees. Instead, he sees weak global growth as cyclical rather than secular, though he concedes that “the cycle is proving to be longer than usual.”

Borrowing from famed economist John Maynard Keynes, Poloz believes that the global economy suffers from a lack of “animal spirits,” the sort of confidence that inspires risk-taking entrepreneurs to drive new growth.

So what might the BoC do in the event of another economic shock? In a speech before the Empire Club of Canada this week, Poloz described the four tools in the bank’s unconventional monetary policy toolkit: forward guidance, large-scale asset purchases, funding for credit, and negative interest rates.

Forward guidance is essentially a form of public relations. The bank signals its stance on monetary policy for a specific period in order to remove uncertainty. That helps keep a lid on long-term rates, while giving key economic players the confidence to invest in new growth.

Although the BoC has never made large-scale asset purchases, its U.S. counterpart has extensive experience with what is otherwise known as quantitative easing. In the wake of the downturn, the Fed undertook three successive rounds of quantitative easing, buying vast quantities of long-term bonds in order to keep key rates down.

Funding for credit is a tool that ensures crucial sectors of the economy still have access to capital in the event of a lending freeze. Here, too, the BoC has never implemented such a measure, but fellow countrymen at the Canada Mortgage and Housing Corporation, which bought insured mortgages from lenders during the downturn, could provide a few tips.

But the measure that’s garnered the most headlines by far is what Poloz had to say about negative interest rates. During the crisis, the BoC put a line in the sand at the 0.25% level for its overnight rate.

At the time, the bank’s policymakers were concerned about how various money markets might adapt to rates at zero or below. Since then, they’ve seen peers at other institutions, such as the European Central Bank, implement such measures and watched the markets adjust accordingly. Consequently, the new line in the sand is -0.50%.

Though it does strike us as odd timing for a customarily cautious central banker to explain in depth how he might respond to yet another economic shock—commodities prices have slumped even further in recent weeks—we’ll chalk it up to navel-gazing wonkishness.

Others in the financial media, however, were quick to pronounce doom. But that would be at odds with the bank’s own forecasts, which project GDP to grow by 2.0% next year and a further 2.5% in 2017.

The Dividend Champions: Portfolio Update

By Deon Vernooy

Canadian banks have now finished reporting results for the final quarter of their fiscal year. Last week, we discussed decent results from Bank of Nova Scotia (TSX: BNS, NYSE: BNS), Bank of Montreal (TSX: BMO, NYSE: BMO) and Royal Bank of Canada (TSX: RBC, NYSE: RY). This week, Dividend Champions holding Toronto Dominion Bank (TSX: TD, NYSE: TD) gets it turn.

TD Bank reported an adjusted 16% increase in quarterly earnings per share and hiked the dividend by 9% compared to the same period last year. For the full financial year, profits increased by 8% and the dividend by 9%.

The adjustments made to fourth-quarter reported profits included a C$349 million charge for business restructuring and a US$51 million charge related to the acquisition of the Nordstrom credit card portfolio. Without the adjustments, earnings per share increased by 4% in the quarter.

The restructuring charges for the full year amounted to C$686 million and will result in an expected C$600 million (about 4%) of annual cost savings when fully realized by 2017.

The mainstay of TD Bank remains the Canadian retail business, which increased profits by 8% for the full year, as a result of higher loan and deposit balances, strong insurance results and lower credit losses. Despite a further decline in net interest margins, the profitability of this business remains exceptional, with a return on equity of 42% for the full year.

The U.S. retail operation also improved its U.S. dollar profits by 5%, while the U.S. stockbroker, TD Ameritrade increased profits 9% for the full year.

Provisions for credit losses jumped by 47% in the last quarter due to flooding in South Carolina and the Nordstrom credit card portfolio acquisition.

During the year, the number of bank branches was reduced by 2% and full-time employees were cut by 4%. The return on equity for this operation remains low, at 7.8%, when compared to the Canadian retail operation. Improvement in the profitability of the U.S. retail operation remains a major challenge for the bank.

The bank also announced a plan to buy back up to 9.5 million shares (0.5% of issued shares), which may be bought over a one-year period starting this week.

Numerous risks face TD Bank in the current environment of falling commodity prices and sky-high residential real estate prices in Canada. However, we believe that TD has an excellent franchise, that their risks are well managed, and that the U.S. operations hold upside potential.

The dividend yield is an attractive 3.7%, with good growth prospects. The valuation is reasonable in absolute and relative terms, and we estimate the current fair value at C$60/US$44.

WestJet Airlines (TSX: WJA, OTC: WJAVF) reported traffic results for November that indicated a load factor of 78.6%, which was 1.9% lower than a year ago. For the first 11 months of the year, the load factor was 80.1%, slightly lower than the previous year.

One explanation for the lower load factor is the 5.1% increase in capacity so far this year, which was not quite matched by the 3.3% rise in passenger traffic.

The company also ascribes the lower load factor to softness in “… certain southern and Alberta markets.” This probably reflects economic weakness from the oil shock in that resource-rich part of the country.

We also note that the load factor at Air Canada was 78.6% in November, but that capacity has increased by 9.6% so far this year. The carrier’s passenger traffic is up by 9.9%, clearly posing a stronger level of competition for WestJet than before.

WestJet remains cheap in absolute terms and also relative to other low-cost airlines. We remain holders of the stock in the Dividend Champions Portfolio and estimate the fair value of the company at C$25/US$19. The dividend yield is now 2.7%, with strong growth prospects.