What are we looking for?
My colleague Rob Belanger and I thought it would be interesting to take a look at low beta, or lower volatility, North American companies.
A new report from researchers at New York University and AQR Capital Management identified two main reasons for the success of Warren Buffett’s Berkshire Hathaway: leverage – and the fact the portfolio contains only low beta stocks.
We ranked those companies based on a beta of less than one, meaning these corporations are less volatile than the market as a whole. Only companies with price-earnings ratios of less than 17 are included, and free cash flow is larger than $300-million. They all have a minimum of $1-billion market cap, and the return on equity is greater than 15 per cent. The dividend yield is more than 1 per cent, and the price to book ratio is less than 3.5. We are looking for a high number for return on equity and free cash flow, and a low price/book ratio.
What we found
The screen identified only 32 companies in all of North America, and we are showing the top 20. Canada’s BCE and Telus topped the list, and Bank of Montreal scored the best of all of Canada’s banks. Cheerios maker General Mills was No. 3 and Spam manufacturer Hormel Foods also made the cut. The top oil company, Exxon Mobil, came in at number 27, just ahead of Royal Bank of Canada and Coca-Cola. Companies that you thought would be very volatile, aren’t, such as Canadian National Railway and Amgen.
Admittedly, in the case of Berkshire Hathaway, returns would have been unspectacular without borrowed money. According to the recent study, Berkshire leveraged its capital by 60 per cent, on average, significantly boosting portfolio returns.
While most of us will not borrow money to invest, it is worth remembering that while investors expect more reward from high beta stocks, over the long haul the opposite is true: Low beta stocks outperform their high beta counterparts.
Low beta stocks
|General Mills Inc.||GIS-N||0.58||15.1|
|Plains All Amer. Pipeline||PAA-N||0.59||15.4|
|Hormel Foods Corp.||HRL-N||0.75||16.1|
Source: Wickham Investment Counsel Inc., Bloomberg
|Company||Ticker||Beta||P/E||FCF (in billions $)||Market cap (in billions $)||ROE %||Dvd. yld. %||P/B|
|General Mills Inc.||GIS-N||0.58||15.1||1.77||25.29||22.96||3.37||3.4|
|Plains All Amer. Pipeline||PAA-N||0.59||15.4||0.85||14.68||15.93||4.85||2.4|
|Hormel Foods Corp.||HRL-N||0.75||16.1||0.32||7.62||17.47||2.08||2.7|
|Cdn. National Railway||CNR-T||0.77||15.8||1.27||37.7||23.48||1.72||3.4|
|Bank of Montreal||BMO-T||0.78||9.3||31.38||38.05||15.85||4.93||1.5|
|Booz Allen Hamilton||BAH-N||0.78||8||0.32||1.83||25.15||2.84||1.8|
|Bank of Nova Scotia||BNS-T||0.85||11.6||36.18||63.08||19.38||4.28||1.9|
- Bce Inc$58.640.00(0.00%)
- Telus Corp$39.840.00(0.00%)
- General Mills Inc$61.93-0.29(-0.47%)
- IGM Financial Inc$39.130.00(0.00%)
- Plains All American Pipeline LP$21.65-0.68(-3.05%)
- Target Corp$80.18+0.06(+0.07%)
- Shaw Communications Inc$23.320.00(0.00%)
- Bristol-Myers Squibb Co$71.92-0.04(-0.06%)
- Hormel Foods Corp$38.53-0.18(-0.46%)
- Humana Inc$177.610.00(0.00%)
- Canadian National Railway Co$77.140.00(0.00%)
- Bank of Montreal$81.660.00(0.00%)
- Booz Allen Hamilton Holding Corp$27.62-0.01(-0.04%)
- Quest Diagnostics Inc$74.40-0.75(-1.00%)
- UnitedHealth Group Inc$132.54+0.44(+0.33%)
- Amgen Inc$158.22-0.77(-0.48%)
- Chimera Investment Corp$14.21+0.16(+1.14%)
- Cardinal Health Inc$79.13-0.37(-0.47%)
- Bank of Nova Scotia$65.170.00(0.00%)
- Updated May 2 4:00 PM EDT. Delayed by at least 15 minutes.