Skip to main content
number cruncher

What are we looking for?

Large cap Canadian companies that have growing earnings, and are reinvesting these earnings for future growth.

The screen

As the markets continue to speculate on an eventual turnaround for oil prices, and our currency sits at historically lower levels, investors looking for exposure to companies that continue to grow can use this screen to generate some ideas.

Morningstar CPMS defines reinvestment rate as the earnings per share of a company, less dividends, divided by the adjusted book value of a company's equity.

The reinvestment rate is a common measure of growth, and is the rate at which a company is expected to reinvest earnings back into the business. Investors can look at both trailing reinvestment rates as well as expected reinvestment rates (based on consensus estimates for EPS, and the expected dividends). This week, I used CPMS to look for large cap Canadian companies with the best combination of the following factors:

– Trailing reinvestment rate;

– Expected reinvestment rate;

– Five-year normalized earnings growth (which measures the annual compound growth of EPS averaged over the past five years);

– Three-month earnings estimate revisions;

Stocks were screened to remove names with market capitalization of less than $900-million.

More about Morningstar

Morningstar Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used CPMS to back-test this strategy from December, 1991, to January, 2015. During this process, 10 stocks were purchased and equally weighted with a maximum of three stocks per sector. Stocks would be sold if they fell outside the top 50 per cent of the database, or if the three-month earnings estimate revision dropped below a negative 10-per-cent threshold. (A negative figure denotes a revision downward.)

Over this 24-year period the strategy produced an annualized return of 15.3 per cent, while the S&P/TSX composite total return index returned 8.9 per cent. Stocks that qualify today are listed in the accompanying table.

Investors are always advised to conduct independent research before purchasing stocks listed here.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

Re-investment rates of Canadian large caps