Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients. mike@mikebowmangroup.com
What are we looking for?
Quality North American-listed companies with top-notch credit ratings and solid dividend yields.
The screen
One way to find quality companies with solid balance sheets is to look for businesses with good marks from rating agencies such as Standard and Poor's. These credit raters evaluate how likely a company is to be able to pay its bond holders. A company rated AAA is considered the safest bet and each descending letter grade denotes a higher level of credit risk.
Bonds are considered investment grade if they get a rating of BBB; one step down in quality, to BB, denotes non-investment grade, or junk status. Companies that have investment-grade ratings are generally in better financial shape than those with non-investment grades.
My colleague Rob Belanger and I began our screen by looking for companies with an S&P rating of A or better. We then narrowed down our list to include only those companies with a 3 per cent or better dividend yield on the theory that a steady payout usually indicates financial stability.
To make the grade, each company had to pass our return on equity test. ROE indicates how much profit a company generates compared to the money shareholders have invested. We insisted that each company on our list have an ROE greater than 10 per cent.
We have also included the price-earnings ratio, which is one of the most important ratios used by investors. Generally speaking, a low P/E ratio indicates that the company may be undervalued.
What did we find?
The largest and highest rated company on our list, at AA+, is General Electric Co., which makes everything from light bulbs to military engines.
McDonald's Corp. has the highest ROE on our screen. The company serves 70 million people each and every day from its 35,000 restaurants in over 100 countries.
All of Canada's Big Six banks made the list.
The highest P/E ratio belongs to Public Storage. The company owns and operates 2,200 self storage facilities in the United States and Europe.
Great-West Lifeco Inc., IGM Financial Inc. and Power Financial Corp. – all companies under the Power Corp. of Canada umbrella – also made the list.
Investors should consult an investment professional or conduct further research before investing in any of the stocks listed here.