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What are we looking for?

Canadian equities with a strong free-cash-flow yield and conservative dividend-payout ratio.

The screen

With volatility returning to the markets in the early months of 2018, it is important that investors in the stock market remain focused on keeping a portfolio of high-quality companies with strong underlying cash flows. Maintaining a defensive posture such as this will position portfolios well should volatility continue to be a major theme for the year ahead.

Today, we focus on high-quality Canadian companies that are generating strong underlying free cash flow and have conservative dividend-payout ratios. To do this, we used the Screener application of Thomson Reuters Eikon to provide the filter. We are looking for Canadian companies with a market capitalization of more than $1-billion, a free-cash-flow yield of 5 per cent or greater and a dividend-payout ratio of less than 55 per cent. To ensure that we do not pay too high of a valuation for these companies, we also added a screen to pick companies with an enterprise-value-to-EBITDA ratio equal to or less than 12 times. (EBITDA represents earnings before interest, taxes, depreciation and amortization.)

More about Avenue Investment Management

Avenue Investment Management, founded in 2003, is a private-client investment firm managing segregated portfolios for high-net-worth individuals, foundations and private corporations throughout Canada. Avenue manages both equity and fixed-income portfolios and focuses on minimizing investment risk and maximizing the predictability of returns over the long term.

What did we find?

Our screen returned nine companies fitting the profile we are looking at. Here are three of note:

  • Loblaw Cos. Ltd. scored the highest in free-cash-flow yield and also had one of the lowest dividend-payout ratios. Since the integration of Shoppers Drug Mart in 2014, Loblaw has improved its free-cash-flow profile and has been able to return capital to shareholders through increasing share buybacks. Loblaw is also well positioned with its strong presence in the discount category through No Frills and is making smart investments in digital with its click-and-collect program for selling groceries online.
     
  • Leon’s Furniture Ltd. had the second-highest free-cash-flow yield in our universe and has been able to grow its market share since it acquired the Brick in 2012. Leon’s should also benefit in gaining market share from the closing of Sears Canada.
     
  • Western Forest Products Inc. should continue to benefit from increasing demand for its high-quality wood products in both the United States and Asia. The company has been able to use its free cash flow to reduce leverage on its balance sheet while also paying a modest dividend.

Investors are advised to do their own research or consult with a professional before investing in any of the companies shown here.

Bryden Teich, CFA, is a partner and portfolio manager at Avenue Investment Management.

Select Canadian-listed equities with strong free-cash-flow yield

CompanyTicker Market Cap ($Mil)FCF Yield (%) EV To EBITDA Div. Yield (%)Payout Ratio (%)1Yr Return (%) Recent Price ($)
Loblaw Companies Ltd.L-T24,750.110.07.91.624.9-4.463.99
Leon's Furniture Ltd.LNF-T1,351.69.48.62.333.5-1.217.74
Magellan Aerospace Corp.MAL-T1,170.09.47.91.214.714.520.10
Atco Ltd.ACO.X-T4,917.69.27.42.749.8-4.542.94
TMX Group Ltd.X-T4,137.27.311.92.248.09.874.70
Western Forest Products Inc.WEF-T1,054.16.75.73.034.534.82.67
Intertape Polymer Group Inc.ITP-T1,177.86.510.03.451.2-12.920.03
Gildan Activewear Inc.GIL-T8,517.75.712.01.021.419.938.82
New Flyer Industries Inc.NFI-T3,485.05.010.81.231.431.455.36

Source: Thomson Reuters Eikon

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