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number cruncher

What are we looking for?

My associate Allan Meyer and I thought we would search for value among Canadian dividend payers using our investment philosophy focused on safety and value. We are highlighting one of our favourite valuation metrics: free cash flow to enterprise value.

The screen

We started with Canadian-listed equities with a market capitalization of $500-million or more. Free cash flow to enterprise value (FCF/EV) is a valuation metric. The higher the number, the better the value. All securities must have a FCF/EV of 0.05 or better. (FCF is a measure of the cash left over to all investors including debtholders after all expenses, reinvestments and capital expenditures; EV is simply a measure of a company's total value excluding cash and cash equivalents.)

In Allan's opinion, "If I could only use one valuation metric it would be FCF/EV. Free cash flow is king." Some investors, particularly retirees have a thirst for income. Allan and I like to get paid while we wait and dividends generally reflect safety and stability.

Yield is based on the current share price divided by the projected dividend payments over the next year. All securities listed yield 2 per cent or more. The dividend payout ratio is the dividend payment divided by earnings. A lower number is preferred and implies the dividend is safer. It could also signal the ability for a future dividend increase. We've capped payout at 100 as anything above could signal the potential for a dividend cut.

Earnings momentum is the change in annual earnings over the past quarter. A positive number indicates earnings are increasing, the opposite is true for a negative number. This figure could also hint at potential future dividend raises (or cuts). Lastly, we looked at debt to equity. A smaller ratio indicates a company has lower levels of debt and can be viewed as a sign of safety. A number under 100 implies a company has enough equity to pay its debt obligations. Generally, we prefer companies under 150, but this varies across industries and sectors as many other metrics do.

What did we find?

Sun Life, Genworth and Medical Facilities look interesting as they have low payouts and debt levels, attractive value and positive earnings momentum. The debt levels on Cogeco and TransForce should be noted.

Investors should contact an investment professional or conduct further research before buying any of the securities listed here.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

Canadian dividend payers

CompanyTickerMarket Cap ($-mil)FCF/EVYield (%)Dividend Payout Ratio (%)Earnings Momentum (%)Debt/Equity (%)
Thomson ReutersTRI-T39,5930.053.4163.0123.6764.00
Great-West LifecoGWO-T35,3680.123.9647.410.8622.00
Sun Life FinancialSLF-T25,9780.193.9143.473.7222.13
Power FinancialPWF-T22,9660.134.9050.461.4443.27
Power Corp CdaPOW-T13,9660.154.3846.64-6.5922.63
Intact FinancialIFC-T12,2170.062.5336.27-1.0119.95
Cogeco Commun.CCA-T3,2090.062.4630.792.22169.88
Genworth MI CanadaMIC-T2,9560.235.3440.783.1012.65
TransAlta RenewablesRNW-T2,8020.067.1033.9251.2439.36
TransForce Inc.TFI-T2,2380.083.3940.610.38159.07
Transcontinental-ATCL.A-T1,5830.123.6235.55-1.3736.53
Corus Ent. Inc.-BCJR.B-T1,4300.109.6424.560.2346.39
Superior Plus Co.SPB-T1,4170.087.3077.64-13.73118.99
Westshore TerminalsWTE-T1,3270.103.3522.7822.980.00
Intertape PolymerITP-T1,0930.073.6643.7024.2370.52
Valener Inc.VNR-T8300.075.0826.501.5315.74
Medical FacilitiesDR-T5160.188.7265.68120.9730.76

Source: Bloomberg, Wickham Investment Counsel