What are we looking for?
Profitable companies in defensive sectors selling at a reasonable price.
Despite a small decrease in inflation in Canada, a few points force us to stay conservative. The decrease was mainly due to cyclical factors such as gasoline prices. Inflation is still at 7.6 per cent and the Bank of Canada is expected to continue to tighten financial conditions through its monetary policy. Consequently, we think the market surged too much following the decline in headline inflation. We believe that defensive stocks are attractive given the recent rise in cyclical stocks.
The screen (add this screener here)
We screened Canadian stocks in the consumer staples, telecommunications and utilities sectors, focusing on the following criteria:
- Market capitalization higher than $1-billion;
- StockPointer (SP) score higher than 60. The score mainly considers risk-adjusted return on capital, earnings per share growth, and free cash flow per share. The score varies between zero and 100. A score above 60 implies a better than average company;
- Relative economic performance index (Rel. EPI) higher than 0.8 – Rel. EPI is a multistep calculation that compares the profitability of a company with its valuation and cost of capital. Higher profitability, a lower valuation and a lower cost of capital increase the ratio. Ninety-five per cent of the time the ratio falls between zero and two and is not meaningful below zero, which implies a negative return on capital. A ratio of 0.8 indicates economic performance in the top 20 per cent of the Canadian universe;
- Three-year annualized dividend growth higher than 3 per cent.
For informational purposes, we have also included one-year dividend growth, return on capital, price-to-earnings and price-to-book ratios, one-year price return and dividend yield. Please note that some ratios may be shown as of end of the previous quarter.
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What we found
|TICKER||NAME||PRICE||MKT VALUE ($ MIL.)||SP SCORE||REL. EPI||3Y ANN. DIV. GRTH (%)||1Y DIV. GRTH (%)||ROC (%)||P/E||P/B||1Y PRICE RTN. (%)||DIV YLD. (%)|
|EMP-A-T||EMPIRE CO. LTD. CLASS A||38.41||10089||76||1.38||10.9||15.4||8.6||13.7||1.18||-6.8||1.7|
|QBR-B-T||QUEBECOR INC. CLASS B||28.91||6795||74||1.37||60.6||21.1||7.0||11.3||0.94||-7.8||4.2|
|WN-T||GEORGE WESTON LIMITED||154.88||22408||72||1.27||6.4||13.1||7.5||13.7||1.87||14.4||1.7|
|ACO-X-T||ATCO LTD. CLASS I||47.9||5468||65||1.23||5.2||3.0||5.8||14.8||1.16||12.9||3.9|
|NWC-T||NORTH WEST COMPANY INC.||34.65||1660||76||1.20||4.5||4.3||17.2||11.7||2.92||-5.1||4.3|
|H-T||HYDRO ONE LIMITED||35.36||21171||64||0.95||5.0||5.0||6.2||20.7||1.87||12.5||3.2|
|L-T||LOBLAW COMPANIES LIMITED||117.31||38364||71||0.89||7.7||13.6||9.1||19.6||2.53||32.2||0.4|
Empire Co. Ltd., owner of the supermarket chain Sobey’s, top our list with a relative EPI of 1.38. Moreover, its SP score, at 76, is tied with North West Co. Ltd. for highest of our names, and Empire also has second-highest one-year dividend growth at 15.4 per cent. The company ranks higher than other grocery chains on our screen, such as Metro Inc. and Loblaw Cos. Ltd., owing to Empire’s significantly lower valuation on a P/E or P/B basis. The market seems cautious to award credibility to the company’s recent strong results.
Quebecor Inc., a telecom primarily serving Quebec, has the highest three-year and one-year dividend increase at 60.6 and 21.1 per cent. It also has the second-highest relative EPI at 1.37, reflecting its lower valuation. The company trades at the lowest P/E and P/B of our screen, at 11.3 and 0.9, respectively. Despite its recent plan to acquire Freedom Mobile, which would expand Quebecor’s wireless operations nationally, the market didn’t particularly react to the news. The market could fear the impact of the acquisition on the balance sheet or doubt the management’s ability to succeed in this breakthrough outside of Quebec.
Atco Ltd., an electricity, logistics and energy infrastructure company, is fourth in our list, the highest-ranking name from the utilities sector. Its performance metrics are generally less impressive than either Quebecor or Empire, but like the other utilities stocks on our list (Hydro One Ltd., Fortis Inc.), Atco provides stable results and is a candidate to weather almost any storm.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
For more details about these stocks, subscribe to the Inovestor for Advisors platform for free: inovestor.com/en-CA/store/
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
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