What are we looking for?
Mid and large cap companies in Canada with sound financial health that are viewed as solid yield plays as Canada's economy weakens.
The screen
The Bank of Canada lowered interest rates twice so far in 2015. This trend could continue if economic growth in Canada continues to decrease. In fact, on July 31, Statistics Canada released its monthly GDP figure for May, which showed that real GDP contracted 0.2 per cent for the month – a fifth consecutive monthly decrease in real GDP. Although investing in bonds tends to be favourable during times of economic hardship, corporate and government bond yields in Canada are currently at depressed levels and therefore considered unattractive to investors. Finding stocks with sound financial stability that have a history of growing dividends are an alternative to investing in debt during periods of negative economic growth.
The screen focuses on companies that are headquartered in Canada, with a market capitalization above $1-billion, and that have a compounded annual growth rate in dividends per share of more than 9 per cent over the past five years. To factor in financial stability, we're looking for companies with a StarMine SmartRatios Credit Risk model score of 90 or higher (out of 100). The SmartRatios Credit Risk model provides a view of a firm's credit condition and financial health by analyzing accounting ratios related to profitability, leverage, interest and debt coverage, liquidity, and growth and stability. Lastly, the screen excludes all real estate investment trusts (REITs).
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What did we find?
The results identified 10 companies that meet the screening criteria. Magna International Inc., an automotive supplier with manufacturing operations, product development, engineering and sales in approximately 28 countries, tops the list with the highest compounded annual growth rate in dividends per share over the past five years. Magna recently acquired Getrag, one of the world's largest automotive transmission suppliers, for €1.75-billion ($2.5-billion). Although this type of acquisition has some financial risks related to leverage, the company expects to remain in its targeted debt-to-EBITDA ratio range of between 1.0 and 1.5 times. (EBITDA represents earnings before interest, taxes, depreciation and amortization.)
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Patrick Gattuso works in the financial and risk unit of Thomson Reuters and specializes in asset management.