A review of the recently ended third quarter shows that the best performing sectors, in both Canadian and U.S. markets, were those that are particularly interest-rate sensitive, such as utilities (up 9 per cent and 6 per cent in the quarter, respectively) and real estate (up 7.4 per cent and 4.9 per cent). Today we focus on utilities. The sector has benefited from the recent decline in long-term interest rates and the market appetite for yielding assets, and it operates largely under the umbrella of long-term contracts. Hence, in our screen we look for defensive utility companies that have an attractive history of dividend growth.
For the Globe and Mail this week, we look for utility companies with the power to generate dividend growth.
We screened the North American utility stock universe by focusing on the following criteria:
- Market capitalization greater than $5-billion;
- A low beta – a stock with a beta less than one is considered less volatile than the market and ultimately giving companies a defensive edge;
- Three-month growth in net operating profit after tax (NOPAT). A measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
- A current economic performance index (EPI) equal to or greater than one – this ratio is the return on capital to cost of capital. It gives shareholders an idea of how much return the company is generating on each dollar spent; an EPI of one would indicate that return of capital are just sufficient to cover the costs of capital.
- Dividend yield greater than 2 per cent and dividend growth over one-, two- and four-year periods;
- A positive 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profit is increasing at a faster and greater pace than the costs of capital. The EVA is the economic profit generated by the company and is calculated as the NOPAT minus capital expenses.