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Number Cruncher Extra

Number Cruncher Extra: Kirkland Lake Gold, IA Financial Corporation and Toromont Industries

OVERVIEW
In our system, Kirkland Lake Gold, Toromont Industries and IA Financial Corporation have an overall score higher than 60 which implies a positive outlook. These stocks are all clasified as quality because of their long-term track record. All stocks are classified as growth stocks as well because of their high growth in sales and profitability over the last years, but Toromont Industries is also classified as bad value because of its expensiveness determined by its price-to-book  and price/earnings ratio. Kirkland Lake is identified as a low risk stock because of its low beta. In portfolio construction, gold miners are often seen as a great diversification tool because of their low correlation or even negative correlation with the market.

A GOOD PERFORMANCE SPREAD IS KEY
The performance spread is the difference between the return on capital and the cost of capital. A company with high volatility will have a cost of capital higher than a less volatile one. This is why the price/earnings for highly cyclical stocks is often low, the market wants to be rewarded by taking higher risk. A company with high return on capital while maintaining a low cost of capital creates value.

Ia Financial Corporation and Kirkland had times where their cost of capital was higher than their return on capital while it never happened for Toromont Industries. If you are looking at quality, the latter seems the best of the list.


Ia Financial Corporation was slighly destroying value in 2015, but it reversed since. The company generated a return on capital higher than its cost of capital overall, but the company is vulnerable to lower interest rates because of its business in life insurance. Also, a bear market means lower fees from their advisors, This is why IA Financial Corporation is already down more than 50% since the start of the crisis. The company is correctly priced if we consider that it will generate a return on capital of 0% in 2020 and one of 10% in the long-term which should be considered as a conservative scenario.

 


If we look at peers, Kirkland seems affordable because it is at the right compared to the Y axis and produce high value because it is a lot higher than the X axis. That is exactly the kind of stock that you want. On the other hand, we need to be careful because the last 12-month has been incredible for Kirkland. This may overstate the company’s sustainable performance, but it still has a great long-term track record.

 

If you have any questions about the article, feel free to contact Anthony :
Amenard@Inovestor.com

If you would like to sign up for a free trial and learn how Inovestor can benefit you, contact Olivier:
Olamothe@Inovestor.com

 

Opportunities might arise during bear markets

WHAT ARE WE LOOKING FOR?

From February 20, to March 5, 2020, the S&P 500 was down more than -15%, officially landing in the market correction territory. As the COVID-19 continues to spread in new territories, global supply chains are being disrupted, and companies are readjusting their forecasts. Mainland China is the most impacted with 111,363 confirmed cases and a death rate of 3.7% (as of 09/03/2020). Although we are facing a lot of uncertainty in the global economy and the financial markets, this might be a good opportunity for investors to buy stocks at a discounted price.

Today we will be looking at US fundamentally-sound stocks that are trading at a discount, giving the recent market correction.

THE SCREENER

  • market cap: $1B – we are only looking for large cap companies
  • Current SP Score: A minimum score of 50. The SP Score is a scoring system model, based on a 12-factor algorithm, which focuses on quality and value. The weights for quality and value are 75% and 25%, respectively.
  • Price 20-day Change (%): Stocks that are down at least –15% in the past 20 days. A 15% drop is considered a market correction
  • Increase in NOPAT over 24 months: at least 5% increase in NOPAT over the last 24 months. We are looking for companies that can increase the profitably of the business
  • Positive EVA: We are looking for companies with positive EVA only. Economic Value Added (EVA) is a measure of true economic profit created by a company. The higher Economic Value Added, the more value a company generates for its shareholders.
  • Increase in Sales over the last 24 months: At least a 7% increase in sales over the last 2 years. We are looking for company that can scale and grow the business
  • Dividend yield: At least a yield of 3%. This is an indicator that the company can distribute their profits with the shareholders

 

 

WHAT WE FOUND

We found 10 companies that were potentially affected by the market correction but appear to have strong fundamentals.

TICKER Company RECENT PRICE ($) MKT CAP ($MIL.) CURRENT SP SCORE NOPAT ($) NOPAT CHG. 24M (%) EVA ($) SALES CHG. 24M (%) DIV. YIELD (%) 20D PRICE RETURN(%) 1YR PRICE RTN.(%)
CSCO Cisco Systems, Inc. 39.68 168282.88 57 12558.94 5.70 2178.16 7.19 3.05 -18.80 -22.87
VNO Vornado Realty Trust 52.35 9998.10 56 3717.36 12.19 2109.23 156.51 3.97 -20.95 -20.40
CMA Comerica Incorporated 44.81 6367.30 70 1207.15 6.88 196.67 15.81 3.74 -26.94 -39.57
SNV Synovus Financial Corp. 25.58 3764.29 71 607.47 9.44 241.97 67.08 3.06 -30.05 -26.86
SHLX Shell Midstream Partners Lp 15.1 3522.67 56 602.33 8.54 453.59 7.00 8.36 -24.31 -4.31
MCY Mercury General Corporation 44.31 2452.91 55 320.09 7.14 214.03 13.53 5.16 -17.49 -18.24
EVR Evercore Inc Class A 61.67 2415.98 73 360.46 6.86 221.71 17.08 3.00 -23.93 -27.67
PAGP Plains Gp Holdings Lp Class 12.2 2222.09 63 2304.97 6.24 803.80 26.32 7.28 -24.03 -40.62
GEF-B Greif Class B 37.07 2197.23 53 483.68 6.44 291.95 29.21 3.71 -24.47 -11.99
CADE Cadence Bancorporation Class 12.06 1538.83 56 217.18 7.29 4.67 99.04 3.86 -25.88 -29.36

 

Cisco Systems is one of the global players in the Network and Cloud industry. They have been increasing their revenue year-over-year as well as their operating margins. One of the strategies put in place to boost revenues is to offer new products targeted to small businesses This could be a game changer, as we see the rise of small businesses in North America. Although the company beat Q2 earning, the stock dropped due to fears of COVIS-19, as 40% of their sales is outside the US. Given its potential, the stock price has been trading at the same price level as February 2018 – this might be a good buying opportunity.

Vornado Realty Trust is a real estate investment trust formed in Maryland, with its primary office in New York City. The company invests in office buildings and street retail in Manhattan. They have been constantly distribution a stable dividend yield of around 3.9%. The company has been increasing the net profit margin, ROE and ROA over the last 3 years. They are the largest owner of LEED-certified property in the US, with more than 27 million square feet of LEED-certified properties. With a solid balance sheet and a strong market presence in the US, Vornado might be trading at a discount given a rent drop of -21% last 20 days

 

For more details about Vornado Realty Trust and Cisco Systems, performance, readers can subscribe to the Investor for Advisor platform for free: https://www.inovestor.com/en-CA/store/

Number Cruncher Extra: Arista Networks Inc

Following our article in the Globe and Mail, here is a Number Cruncher Extra for our readers about our top pick of the week Arista Networks Inc.

In our system, Arista Networks comes out with a positive outlook of 58. The performance score is close to 78 showing a strong performing company while the risk score of 47 displays a medium risk company. Arista Networks had sale growth of 30,8% annually and earnings growth of 74.7% in the last 5 years. The performance spread, which represents the difference between the return on capital and the cost of capital, grew by 12.3% in the last five years and is now close to 14%.

Here, we can see the company continues to add value through its EVA and the trailing twelve months NOPAT grew at almost every quarter. The NOPAT exploded in the last 5 years from $162.7M$ to 876.1M$. The return on capital is higher than 5 years ago, but the cost of capital increased also because of the volatility of the stock. The performance spread is still higher than 5 years ago showing a company that creates value for their shareholders.

 

Compared to peers, the stock does well overall and is often in the top of the list for the quality, value, growth and risk factor. first of a list of 10 companies, Arista Networks does particularity well on the quality factor.

Seeking solid transportation stocks in the wake of virus disruptions

WHAT ARE WE LOOKING FOR?

The Wuhan coronavirus has dominated news headlines for the past few weeks. Worldwide, there have been more than 40,000 cases of 2019-nCoV confirmed and more than 900 deaths reported, mostly in China. In the markets, the outbreak has affected multiple sectors, with many disruptions to manufacturing and trade. Notably, many stock prices in the transportation sector are down, especially ones operating in Asia.

Today, we look for companies in the transportation sector that have been affected during the virus outbreak, but which might still have solid fundamentals.

THE SCREEN

We screened the North American companies by focusing on the following criteria:

  • The transportation subsector of the industrials sector;
  • As the coronavirus developments have been dominant in the news for the past 20 days or so, we filtered stocks that are down at least 5 per cent during the same period;
  • A minimum market cap of US$1 billion, as we are targeting large-cap companies only;
  • A positive change in earnings for each share over the past 12 months;
  • A positive 12-month change in sales – a positive figure shows that there is growth and progress in the company’s operations;
  • A positive 12-month change in the economic value-added (EVA) metric – a positive figure shows that the company’s profits are increasing at a faster and greater pace than its costs of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses. For informational purposes, we have also included recent stock price, dividend yield and one-year return. Please note that some ratios shown may be as of the end of the previous quarter.

WHAT WE FOUND

We found 14 companies that were potentially affected by the coronavirus news but appear to have strong fundamentals. Here are three of note.

Air Canada: With a market cap of $12.1 billion, the stock price is down 10.7 per cent in the past 20 days. However, sales are up more than 7 per cent over the past 12 months, with a 525-per-centchange in the EVA metric. The company will be announcing their fourth quarter and full year 2019 financial results on Feb. 18.

Singapore Airlines Ltd.: The company is owned by Temasek Holdings (Private) Ltd., the government of Singapore’s sovereign wealth fund. The stock is down around 7 per cent in the past 20 days. However, Singapore remains a strong global financial hub and the government established strong measures to contain the virus. The stock has sound fundamentals and a good dividend yield of 3.3 per cent, it has low risk, with a beta of 0.44, and is currently trading below book value, with a price-to-book-value ratio of 0.7.

United Airlines Holdings Inc.: United Airlines has the second- biggest market cap on our list, at more than US$20 billion. The stock is down 9 per cent in the past 20 days. The company’s fourth-quarter results, released on Jan. 21, narrowly exceeded Wall Street’s estimates. Although the company doesn’t distribute dividends, it had an average earnings-a-share growth of 30.6 per cent over the past five years. Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

 

Company TICKER MKT CAP ($MIL.) 20D PRICE RETURN(%) SALES CHG. 12M (%) EVA CHG 12M (%) EPS CHG 12M (%) DIV. YIELD (5) RECENT PRICE ($) 1YR PRICE RTN.(%)
United Airlines Holdings, In UAL                                             20,158.07                                                     (8.97)                                                        4.74                                                   641.03                                                        3.85                                                            –                                                     79.48                                                   (14.29)
Scorpio Tankers Inc. STNG-N                                               1,263.43                                                   (38.28)                                                     14.90                                                   338.50                                                        5.40                                                        1.34                                                     21.73                                                     24.61
Seaspan Corporation SSW-N                                               2,704.24                                                   (10.75)                                                     12.07                                                   215.14                                                        0.30                                                        4.70                                                     12.54                                                     29.78
Sats Ltd SPASF                                               3,589.39                                                   (12.30)                                                     27.69                                                     86.92                                                        0.01                                                            –                                                        3.21                                                     (6.52)
Singapore Airlines Ltd. SINGF                                               7,288.54                                                     (7.34)                                                        2.84                                                   154.47                                                        0.01                                                        3.33                                                        6.15                                                   (15.20)
J.b. Hunt Transport Services JBHT-Q                                             11,951.09                                                     (5.51)                                                        6.39                                                     64.37                                                        0.27                                                        0.89                                                   112.52                                                        0.83
Hamburger Hafen Und Logistik HHULY                                               1,740.29                                                     (5.89)                                                        2.11                                                   363.62                                                        0.16                                                            –                                                     12.42                                                     10.63
Frontline Ltd. FRO-N                                               1,377.33                                                   (37.85)                                                     18.84                                               1,641.11                                                        2.00                                                            –                                                        7.80                                                     70.10
Fraport Ag Frankfurt Airport FPRUY                                               7,072.56                                                     (9.28)                                                     10.39                                                     16.66                                                        0.76                                                            –                                                     38.28                                                     (5.66)
Euronav Nv EURN-N                                               2,077.03                                                   (24.24)                                                     55.39                                                   746.57                                                        1.12                                                            –                                                        9.44                                                     26.99
Cosco Shipping Holdings Co., CICOF                                               4,413.43                                                   (16.28)                                                     36.74                                                     15.43                                                        0.02                                                            –                                                        0.36                                                     (7.90)
Comfortdelgro Corporation Li CDGLF                                               3,390.04                                                   (10.06)                                                        1.34                                                     53.85                                                        0.01                                                            –                                                        1.57                                                     (9.77)
A.p. Moller – Maersk A/s Cla AMKBF                                             25,105.01                                                   (12.01)                                                        6.99                                                     17.32                                                     28.23                                                        2.02                                               1,235.95                                                     (8.88)
Air Canada AC-T                                             12,096.75                                                   (10.69)                                                        7.77                                                   525.40                                                        2.66                                                            –                                                     45.46                                                     49.41

 

*Currency figures for AC in Canadian dollars

10 Canadian midcap stocks with good momentum

What are we looking for?

At least until Monday’s pullback, the S&P/TSX Composite Index has been on a great run, rising more than 3 per cent this year as of Friday’s close. Investor sentiment driven by expectations of a positive earnings season, a stable economic outlook and the China-U.S. Phase 1 trade deal have helped the market reach new record highs in 2020. Investor sentiment, driven by expectations of a positive earnings season, a stable economic outlook and the China-U.S. Phase 1 trade deal, have helped the market reach new record highs in 2020.
Today, we look for Canadian mid-cap stocks that had a good run in the short term, and where price gains are supported by fundamentals such as sales and profitability.
The screen
We screened the Canadian companies by focusing on the following criteria:
•Market capitalization greater than $500-million and lower than $3-billion;
•Price change over one month higher than 2 per cent – we are looking for companies with a positive momentum in the very short-term;
•Price change over three months higher than 6 per cent – we are looking for companies with a positive momentum in the short-term;
•A return on capital more than 7 per cent – we want to find profitable companies that have a good return on investment;
•Sales growth higher than 10 per cent over 12 months – we are looking for a growing company. (Sales growth of 10 per cent may seem like a lot, but smaller companies can grow more easily than big ones);
For informational purposes, we have also included recent stock price, dividend yield and one-year price return. Please note that some ratios may be reported at the end of the previous quarter.
What we found
We found 10 companies with these criteria, with the accompanying table ranked by 12-month sales growth. K92 Mining Inc. tops the table, realizing huge sales growth over the past year. The return on capital is also a lot higher than our threshold, sitting at 50.9 per cent. Note: Results can be quite volatile for mining companies and we need to be careful with the short track record of this company.
Aside from K92 Mining, Wall Financial Corp. and Heroux-Devtek Inc. have had big years, with 72.9 per cent and 51.1 per cent, respectively, in sales growth. Wall Street Financial has shown strong price momentum over the past three months while Heroux-Devtek has done quite respectably over the past month.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Ticker Name PRICE ($) EXPECTED DIV. YIELD (%) MARKET CAP. ($M) 3M PRICE RETURN (%) 1M PRICE RETURN (%) RETURN ON CAPITAL Sales Ch. 12M (%) 1Y PRICE RETURN (%)
KNT-X K92 Mining, Inc. 3.48                                                  –                            740.10                                  35.21                                  20.83                                  50.87                          192.20                                242.86
WFC-T Wall Financial Corporation 35.95                                            5.58                        1,220.62                                  37.51                                    7.06                                  11.86                            72.91                                  39.97
HRX-T Heroux-devtek Inc. 20.08                                                  –                            730.15                                  11.05                                    5.13                                  9.95                            51.07                                  47.72
PEO-X People Corporation 10.48                                                  –                            713.80                                  10.95                                    4.49                                  10.29                            23.17                                  37.68
GSY-T Goeasy Ltd. 73.39                                            1.69                        1,052.71                                  16.77                                    5.52                                  22.18                            22.23                                  94.44
REAL-T Real Matters, Inc. 12.75                                                  –                        1,083.06                                  11.59                                    3.49                                  7.34                            18.46                                273.33
ATZ-T Aritzia, Inc. 25.08                                                  –                        2,733.08                                  13.46                                  31.65                                  26.96                            15.47                                  16.16
ENGH-T Enghouse Systems Limited 52.25                                            0.85                        2,860.03                                  32.00                                    8.45                                  18.63                            12.54                                  45.10
HCG-T Home Capital Group Inc. 33.76                                                  –                        1,935.50                                  27.90                                    2.43                                  7.96                            11.59                                128.89
ET-T Evertz Technologies Limited 18.3                                            3.94                        1,405.47                                    7.40                                    2.46                                  17.89                            10.65                                  10.32

Dividend Paying Stocks in the Gold Sector

WHAT ARE WE LOOKING FOR?
Gold is reaching price highs not seen since 2013, because of dovish central banks and the geopolitical volatility caused by the U.S.-China trade war and, most recently, the U.S.-Iran crisis. Gold is up 21 per cent over the past 12 months. Expect gold miners to report better results in their next quarterly reports. Today, we will be looking more closely at gold miners that pay a dividend. The yield is our proxy for stable operations and we use the change in net operating profit after tax, or NOPAT, to find growing companies.
For the Globe and Mail this week, we look at dividend stocks in the volatile gold sector.

THE SCREEN
We screened the Canadian- and U.S.-listed gold miners by focusing on the following criteria: Market capitalization greater than $1-billion; Dividend yield; 12-month and 24-month change in the company’s NOPAT – appositive figure would indicate that there is growth and progress in operating efficiencies. For informational purposes, we have also included recent stock price, cost of capital (a weighted cost combining equity and debt, expressed as a percentage of total capital) and one-year return. Please note that some ratios maybe reported at the end of the previous quarter.

WHAT WE FOUND
Only 11 gold miners with a market capitalization of more than $1-billion pay a dividend.

Centamin PLC pays the highest dividend by far, but its negative NOPAT change over both 12 and 24 months suggests future dividend growth may not be sustainable. Newmont Goldcorp Corp., Royal Gold Inc., Yamana Gold Inc. and Kirkland Lake Gold Ltd. all show growing NOPAT over the past 12 and 24 months.

As the largest company on our list, suggesting more stable operations than smaller companies in this highly volatile sector, Newmont is well positioned to maintain and increase its dividend. Investors are advised to do further research before investing in any of the companies listed in the accompanying table.

Ticker Name PRICE ($) 1Y PRICE RETURN (%) MARKET CAP. ($BIL) EXPECTED DIV. YIELD (%) LAST QTR DIV. YIELD (%) COST OF CAPITAL (%) NOPAT CH. 24M (%) NOPAT CH. 12M (%)
CEE-T Centamin Plc 2.12 5.37 2.45 4.40 4.00 9.74 -5.61 -3.61
OR-T Osisko Gold Royalties Ltd 12.27 0.5 1.77 1.60 1.62 5.93 0.02 -0.30
NGT-T Newmont Goldcorp Corporation 55.15 28 45.22 1.31 1.48 5.65 1.46 2.07
ABX-T Barrick Gold Corporation 23.29 40.59 41.40 1.08 1.17 5.75 -1.93 0.55
AEM-T Agnico Eagle Mines Limited 77.44 44.66 18.51 1.15 0.91 5.95 -0.88 -0.19
RGLD-Q Royal Gold, Inc. 113.79 33.33 7.46 0.77 0.86 6.20 0.68 1.69
YRI-T Yamana Gold Inc. 4.86 45.4 4.62 1.03 0.79 10.85 0.62 2.26
AGI-T Alamos Gold Inc. 7.5 41.98 2.93 0.70 0.69 9.97 -2.12 -0.86
SVM-T Silvercorp Metals Inc. 7.18 135.59 1.24 0.44 0.65 14.75 -0.32 0.34
BVN-N Compania De Minas Buenaventu 13.97 -14.42 3.54 0.60 0.55 6.57 -7.61 -8.19
KL-T Kirkland Lake Gold Ltd. 58.33 60.15 12.26 0.42 0.31 8.12 4.31 2.86

Retailers that are no Christmas Gifts

What we are looking for?

With Black Friday still fresh in our minds we decided to look at North American retailers that may look tempting based on yield but that face deteriorating economics. More precisely we selected dividend-paying stocks and we screened them based profitability trends and other fundamental quality criteria.

 

The screen

We screened for consumer discretionary stocks based in North America, specifically, those stocks listed in the subsectors of retailing or consumer durables and apparel. We then added the following criteria:

  • A market capitalization greater than US$1-billion;
  • Stocks must pay a dividend;
  • Return on capital (ROC) of less than 10 per cent in the past 12 months;
  • Declining ROC over the past 24 months;
  • Negative stock price change over the last 12 months;
  • Declining economic value-added (EVA) per share over the past 12 months.
  • Declining sales in the last 12 months.

 

What we found

There are four retailer stocks that meet our criteria in the North American markets. All are U.S.-based brick and mortar retailers: Children’s Place Inc., Bed Bath & Beyond Inc., Gap Inc. and Macy’s Inc. The Children’s Place operates as a children’s specialty apparel retailer with its network of speciality stores. Bed Bath & Beyond operates retail stores that sells domestics merchandise, including bed linens, bath items, kitchen textiles; and home furnishings products. The Gap operates outlets under the Old Navy, Gap, Banana Republic, and other brands. Macys operates department stores under the Macy’s and Bloomingdale’s names as well as a network specialty stores. The reality is that these four retailers are under pressure as online retailers continue gaining market shares.

Topping our list, ranked by dividend yield, is Macy’s. The stock is currently yielding 9.9 per cent. While providing an eye-popping payout, Macy’s is facing profitability challenges as measured by ROC and EVA measures. It is also experiencing declining sales. It will be hard for its board to keep paying this dividend to shareholders unless management succeed in turning around the economics of the business. Given how badly a stock price can react when shareholders are faced with a dividend cut, it’s better to avoid such stocks even if, at first sight, the yield looks attractive.

Investors are advised to do further research before investing in any of the companies shown here.

Ticker Name Price MarketCap Div Yield R/C R/C Ch. 24M Price Var. 12M EVA Ch. 12M Sales Ch. 12M
BBBY Bed Bath & Beyond $         14.58 $1.9B 4.60% -0.64% -11.22% -0.29% -831.39% -5.88%
PLCE Children’s Place $         72.26 $1.1B 3.10% 8.67% -3.59% -45.17% -26.25% -3.04%
GPS Gap, Inc $         16.61 $6.3B 5.84% 9.53% -1.26% -40.44% -101.16% -2.41%
M Macy’s Inc $         15.32 $4.8B 9.86% 6.16% -0.42% -55.79% -441.94% -1.02%

Christian Godin is a portfolio manager at Inovestor Asset Management.

Number Cruncher Extra – Eleven industrial stocks that meet our criteria in the North American markets

In last week’s Number Cruncher written for the Globe and Mail, we looked at high quality industrial names whose short-term operational returns continue to improve. The first company that came up on our screen was Westshore Terminals Investment (WTE).

The above chart shows that WTE’s EVA and Net Operating Profit have been trending upward since the first quarter of 2017, while prices remained within the $20 to $27 range. During the same period, WTE’s rising bottom-line along with decreasing number of shares contributed to diluted EPS to double as shown in the next chart:

Relative to its peers, WTE has an outstanding performance score of 72.9 with a comparably low risk score of 40.1. Its high performance score is attributable to high and increasing Return on Capital and Performance Spread. The company ranked in the 90th percentile in both metrics. Return on Capital was 20.5% as of Sep 2019 while Performance Spread, the difference between Return on Capital and Cost of Capital, amounted to 10.4% as of Sep 2019.

For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.

CLICK HERE

Number Cruncher Extra – Eleven Canadian companies with profit growth

We touched upon Rogers Communication (RCI.B) briefly in the number cruncher written for the Globe and Mail yesterday which focused on Canadian companies with profit growth. What’s interesting with Rogers Communication is that even though profits and EVA have been on a nice incline, the stock price disagreed and has been slipping since March 2019. This occurrence pushed up the stock’s intrinsic value above its current price for the first time in 2 years.

In addition, we can look at the future-growth-value (FGV) graph for a double confirmation as to whether or not the stock is undervalued, overvalued, or fairly valued.  The FGV metric represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth. Take a look at the graph below, during Q1 2019 there was a small premium factored into the stock price. In Q2 that premium disappeared, and the stock was fairly priced. And now, in Q3 – the stock was valued at a discount to its actual potential.

For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.

Number Cruncher Extra – Ten utilities with the power to generate dividend growth

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.
For subscribers to StockPointer, you can select the link below and adjust the screener to your liking.