What are we looking for?
Canadian defensive stocks with high economic performance and healthy leverage ratios.
The screen
We have screened the Canadian defensive sectors (consumer staples and utilities) using five criteria. It is normal that companies in the more capital-intensive utilities sector generate lower return-on-capital (ROC) and higher debt-to-equity ratios than consumer-staples stocks, so the reader will note I used different values to reflect this:
- An economic performance index, or EPI (return on capital divided by cost of capital) above 1.0. An EPI ratio of 1.0 or more indicates a company's capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- An ROC of 10 per cent or greater for the consumer staples sector, and 8 per cent or greater for the utilities sector;
- A debt-to-equity ratio of 100 per cent or less for the consumer staples sector, and 150 per cent or less for the utilities sector;
- Positive free-cash-flow-to-capital. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good; 5 per cent and above is excellent;
- All companies had to pay dividends.
The dividend yield, price-to-earnings ratio and market capitalization were added to the table for information purposes.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Only six Canadian companies from the consumer staples sector and one from the utilities sector made our screen. Alimentation Couche-Tard Inc. and Metro Inc. stand out with the two highest EPIs, along with low debt-to-equity ratios and high free cash flows. Lassonde Industries Inc. also generates very high amounts of cash through its operations, but the stock is very thinly traded, making it difficult to enter and exit positions without paying an important bid-ask spread.
Emera Inc. is definitely worth mentioning, as it is the only utility company showing up in our results. Even if its debt-to-equity ratio appears to be high, it remains quite low compared with its sector average (293 per cent). Its dividend yield of 4.25 per cent is also the highest of this group, an interesting characteristic for someone looking for income.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.