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Seven large-cap dividend stocks with exceptional earnings quality

What are we looking for?

North American equities with strong earnings quality that provide a healthy dividend.

The screen

As November winds down and 2017 nears to a close, there is no doubt that investors will reflect on the past year as one of uncertainty. Only in the past few weeks some of the major global headlines included: Robert Mugabe's resignation after a 37-year rule in Zimbabwe; major renegotiations of the North American free-trade agreement; Saudi Arabia purging and arresting some of its own members in the royal family; and a brand new digital currency taking hold in the global economy. Investors looking forward to 2018 and reviewing their portfolio might want to purchase securities that can provide a solid dividend and are unlikely to surprise the market on an earnings miss.

Today, we searched for North American companies that have a market capitalization of more than $100-billion (U.S.), pay a dividend yielding at least 2.5 per cent and have quality earnings that are likely to persist. For this measure we used StarMine's Earnings Quality Rank, which is a model that produces a score out of 100 and measures earnings sustainability across four factors: accruals (the difference between cash earnings and reported earnings), cash flow, operational efficiency and the company's use of exclusions. ("Exclusions" is a measure of the degree to which reported earnings reflect operating earnings; companies will report "special items" and "other exclusions," and both can have a negative impact on future earnings growth.)

Stocks in our screen had to have an Earnings Quality Rank above 80.

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What did we find?

Notable companies in the resulting screen include:

  • Philip Morris International, which scored highest in both yield and earnings quality. The tobacco company pays a 4.1-per-cent dividend and had an Earnings Quality Rank of 99. The company also had the third-highest operating profit margin in our list at 40.5 per cent.
  • PepsiCo Inc., which had the second highest Earnings Quality at 96. The global food and beverage company posts a 2.7-per-cent dividend, but had a lower operating profit margin than many of the companies that surfaced in our screen.
  • Amgen Inc., which ranked third in terms of Earnings Quality at 92. The biotechnology manufacturer has a very strong operating profit margin of 42.6 per cent and provides a dividend yield of 2.6 per cent.

Investors are encouraged to do their own research before investing in any stocks listed here.

Paul Hoyda, CFA, is a market specialist in the financial and risk division of Thomson Reuters and specializes in governance, risk and compliance.

Select dividend stocks with strong earnings quality

CompanyTickerMarket Cap ($Mil U.S.)Div. YieldEarnings Quality Region RankOperating Profit MarginFree Cash Flow ($Mil U.S.)
Philip Morris International Inc.PM-N159,265.44.1%9940.5%162
PepsiCo Inc.PEP-N163,418.52.7%9615.6%2,020
Amgen Inc.AMGN-Q122,526.42.6%9242.6%6,128
Procter & Gamble Co.PG-N223,937.33.1%9121.5%1,687
Coca-Cola Co.KO-N193,689.93.2%9014.6%-2,138
Merck & Co Inc.MRK-N147,549.93.5%8212.2%654
Altria Group Inc.MO-N125,616.13.7%8184.7%10,800

Source: Thomson Reuters Eikon

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