What are we looking for?
North American equities with strong earnings quality that provide a healthy dividend.
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 $100-billion (U.S.), pay a dividend yielding at least 2.5 per cent and have quality earnings that are likely to persist. For this measure we used StarMine's Earnings Quality Rank, which is a model that produces a score out of 100 and measures earnings sustainability across four factors: accruals (the difference between cash earnings and reported earnings), cash flow, operational efficiency and the company's use of exclusions. ("Exclusions" is a measure of the degree to which reported earnings reflect operating earnings; companies will report "special items" and "other exclusions," and both can have a negative impact on future earnings growth.)
Stocks in our screen had to have an Earnings Quality Rank above 80.
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What did we find?
Notable companies in the resulting screen include:
- Philip Morris International, which scored highest in both yield and earnings quality. The tobacco company pays a 4.1-per-cent dividend and had an Earnings Quality Rank of 99. The company also had the third-highest operating profit margin in our list at 40.5 per cent.
- PepsiCo Inc., which had the second highest Earnings Quality at 96. The global food and beverage company posts a 2.7-per-cent dividend, but had a lower operating profit margin than many of the companies that surfaced in our screen.
- Amgen Inc., which ranked third in terms of Earnings Quality at 92. The biotechnology manufacturer has a very strong operating profit margin of 42.6 per cent and provides a dividend yield of 2.6 per cent.
Investors are encouraged to do their own research before investing in any stocks listed here.
Paul Hoyda, CFA, is a market specialist in the financial and risk division of Thomson Reuters and specializes in governance, risk and compliance.
Select dividend stocks with strong earnings quality
|Company||Ticker||Market Cap ($Mil U.S.)||Div. Yield||Earnings Quality Region Rank||Operating Profit Margin||Free Cash Flow ($Mil U.S.)|
|Philip Morris International Inc.||PM-N||159,265.4||4.1%||99||40.5%||162|
|Procter & Gamble Co.||PG-N||223,937.3||3.1%||91||21.5%||1,687|
|Merck & Co Inc.||MRK-N||147,549.9||3.5%||82||12.2%||654|
|Altria Group Inc.||MO-N||125,616.1||3.7%||81||84.7%||10,800|
Source: Thomson Reuters Eikon
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