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Globe Investor

Number Cruncher

Stock screens for investment ideas from professional investors. Exclusive to subscribers of Globe Unlimited.

Dividends today ... but what about tomorrow? Add to ...

*Editor's Note: After this stock screen was published in Thursday's Report on Business, we discovered that the data can't be relied upon. For the correct version, see the stock screen that appeared in Friday's paper:

What are we looking for?

We are in the thick of second-quarter financial reporting season and stocks are swinging up or down depending on the amount of earnings per share they deliver. So today we focus on earnings per share and one way to use the metric to weigh the desirability of a stock.

More about today's screen

The dividend coverage ratio is calculated by dividing a company's share profit by its dividend and helps determine which businesses have the greatest ability to raise payouts to shareholders and which may have to cut their dividends.

Colin Cieszynski, analyst and education manager at CMC Markets Canada, is helping us make sense of second-quarter results this week and he uses the dividend coverage ratio in his analysis. A ratio of less than one means that the company is not earning sufficient money to pay its dividend, he says.

In calculating the stocks with the highest and lowest dividend coverage ratio, Mr. Cieszynski excluded income trusts because they pay distributions from cash flow rather than net income. The dividend yield, calculated by dividing a company's dividend by its share price, provides an indication of the market's expectations of future dividend policy.

A low coverage ratio with a high yield suggests that the market may already be pricing in a dividend cut. A low coverage ratio and a low yield suggest the Street does not expect a dividend cut. Not surprisingly, high coverage companies all have low yields, pointing to room for a dividend hike, Mr. Cieszynski explains.

What we found

Manulife Financial and Sun Life, the country's two largest insurers, offer juicy dividends but look like prime candidates for cuts, based on the dividend coverage ratios. Remember that Manulife, greatly exposed to equity markets through its variable annuity and segregated funds business, already chopped its payout last year. Canadian Imperial Bank of Commerce stands out as the only big bank with a ratio of less than one and Manitoba Telecom Services Inc. stands out as the only telecom on the list. On the flip side, two energy plays, Talisman Energy and Imperial Oil, looked nicely placed to offer a dividend hike.

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