What are we looking for?
North American securities trading at reasonable valuations, with a history of growing dividends, and the excess cash necessary to enhance shareholder value.
The screen
We screen for large-cap companies providing a sustainable and consistent income stream with the potential to grow dividends, while maintaining the versatility needed to invest in their business through production expansion, developing new products or reducing debt. Our screen is based on the following criteria:
Dividend yield greater than or equal to the S&P/TSX composite index (for any Canadian stocks), or S&P 500 (3 per cent and 2.5 per cent, respectively);
Free cash-flow yield greater than dividend yield (operating cash flows after accounting for capital expenditures are greater than the amount needed to sustain current dividends);
Price-to-earnings ratio less than the S&P/TSX or S&P 500 (17 and 20, respectively);
Trading price less than the average broker target price.
The dividend five-year compound annual growth rate (CAGR) and the projected dividend growth rate are included for information purposes.
More about Thomson Reuters
Thomson Reuters delivers trusted news and intelligent information to more than one billion people in 140 countries every day. Our content, software and technology support the way professionals work in a rapidly changing, ever more complex world. Thomson Reuters Eikon is the platform used by financial and corporate clients to access top research, portfolio analytics, charting and screening for every asset class.
What did we find?
The screen highlights the 10 largest companies by market cap (local currency) that fit our criteria.
While technically not one of our screening criteria, if we look at projected dividend growth, it's interesting to note Cisco Systems Inc. leads the pack at 14.2 per cent. This is driven by Cisco's improving operating margins and expected earnings growth as the company continues to focus on key segments such as wireless and security.
While Cisco has increased its dividend at a 51-per-cent CAGR over the past five years, the company still maintains a 40-per-cent dividend payout ratio (not shown) – leaving plenty of room to expand its dividend offering.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Khaled Eniba works in the financial and risk unit of Thomson Reuters and specializes in banking and research.