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Number Cruncher

An antidote to dividend delirium Add to ...

What are we looking for?

U.S. stocks with growth potential.

Consider today’s hunt for growth to be a useful counterbalance to the current fascination with dividends. So many investors are now smitten with the idea of reaping large yields that some attractive companies without big dividend payouts may be getting overlooked.

More on today’s screen

Craig McGee, senior consultant at CPMS, a division of Morningstar Canada, constructed a stock screen based on the CPMS U.S. Earnings Growth strategy.

This approach to picking stocks looks for U.S. companies that have high returns on equity. A high ROE is usually a sign of a company with a fundamentally profitable business proposition and the ability to generate cash internally.

To make the cut, a company had to have a market capitalization of at least $1-billion (U.S.). It also had to have improving expectations as measured by such things as upward revisions to earnings estimates and positive earnings surprises.

The strategy required dividend payout to be less than 50 per cent of expected earnings – a sign that management is re-investing most of its profits in future growth.

More about CPMS

CPMS provides quantitative North American equity research and portfolio analysis to primarily institutional clients.

It covers more than 700 Canadian and 2,200 U.S. stocks, and spends a great deal of time adjusting for unusual accounting items in each company’s quarterly results to make sure screens can perform correctly.

What we learned

The Earnings Growth strategy is up 16.2 per cent from the start of the year to Feb. 17 while the S&P 500 is up only 8.6 per cent. The growth strategy’s red-hot start to 2012 suggests that some investors may be turning their attention to finding companies that can grow their earnings in a difficult economic environment.

Over the 10 years ended Jan. 31, 2012, the Earnings Growth strategy has produced an annualized total return of 11.9 per cent. The S&P 500 had annualized returns over that same period of only 3.5 per cent. While it’s highly unlikely this degree of outperformance can continue, it serves as a useful reminder that investors should factor growth prospects into their buying calculations. Remember, though, to do your own research before buying any of the stocks listed here.

Note to table

Grades (A, B, C, etc.) are relative to 2,287 securities in the CPMS U.S. database.

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