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Alvin Lau is an investment analyst at Longview Asset Management Ltd. in Toronto.
What are we looking for?
Companies that buy back their own shares for cancellation. We performed a similar screen last week for U.S.-based companies. Today, we look at Canadian-based companies.
At Longview, one of the things we look for in companies is a strong track record of capital allocation. There are five ways a company can allocate excess cash: invest in existing operations, acquire a new business, pay down debt, issue dividends – or buy back its shares for cancellation.
Share buybacks only create long-term value for ongoing shareholders if they are done when the stock is undervalued and when no better investment opportunities are available.
Done right, buybacks allow ongoing shareholders to increase their ownership in a company and enjoy a concomitant increase in the value of their shares over time. Unlike dividends, the buyback of undervalued shares allows shareholders to enjoy gains without paying tax in any particular year as the value of their investment grows.
To limit our results to high quality companies, we have included a return-on-capital measure in our screen.
The screen
My colleague Kelly Brown and I used the S&P Capital IQ Screener to find companies that have:
- at least 10 per cent fewer shares outstanding than five years ago;
- a return on capital of greater than 10 per cent;
- a market capitalization greater than $300-million.
More about S&P Capital IQ
S&P Capital IQ offers a set of tools for fundamental analysis of global securities as well as idea generation and work flow management. Its Web- and Excel-based platform provides access to real-time and historical information.
What did we find?
A smaller group than we found in the United States. Five Canadian companies, listed in the accompanying chart, have repurchased a significant amount of their shares, including some that have done so when their shares were undervalued.
Rogers Communications Inc., for example, has reduced its share count by 19 per cent over the past five years in a disciplined manner. This means shareholders who owned Rogers stock in 2008 and held on have seen the value of their investment increase more than the growth in the value of the company as a whole – all on a tax-deferred basis.
None of these companies is guaranteed to beat the market, but screens such as this can be useful for identifying potential investment ideas. Before investing in any of these companies, do your own research.