What are we looking for?
The companies on the S&P/TSX that generate the highest economic profits for the shareholders while offering above-average dividend growth rates.
The screen
Although we have screened the S&P/TSX composite index with only five criteria, do not be fooled, as they are very challenging.
- Return on capital above 15 per cent;
- An economic performance index, or EPI (return on capital divided by cost of capital) above 1.2. 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);
- All companies have to pay a dividend;
- One-year dividend growth above 5 per cent;
- Four-year annualized dividend growth rate above 5 per cent.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA model to quickly and easily identify strong 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 custom filters and portfolios.
What did we find?
Only 13 companies (5.3 per cent) of the S&P/TSX composite fill our requirements.
Interestingly, this 13-stock group showed a better price performance than the benchmark on Aug. 24, the worst day for the market since October, 2008.
While the S&P/TSX composite index dropped 3.07 per cent on that day, this group "only" lost 2.48 per cent. But short-term price action isn't all.
For long-term investors, this portfolio offers an extremely high return on capital, a very decent dividend yield (2.01 per cent), combined with an outstanding dividend growth rate both in the short and long term.
To help you compare the group's metrics and statistics against its benchmark, we added two lines at the end of the table provided.
For those interested in seeing the results for the U.S market, feel free to get in touch with us.
Jean-Didier Lapointe is a financial analyst at Inovestor Inc.