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What are we looking for?

Canadian stocks that are selected with the intention of maximizing shareholder yield.

The screen

It is common to hear that an important factor to consider when investing in a stock is the quality of the company's management. While this intuitively makes sense, most investors don't have the ability to meet with key executives to discuss how they are running their firms. So how can the average investor measure quality?

One method is by using shareholder yield. Shareholder yield measures the amount companies distribute to their shareholders. It consists of three components:

  1. Share buybacks – company repurchases shares from its shareholders.
  2. Debt repayment – company pays down outstanding debt, increasing shareholder equity (all else equal).
  3. Cash dividends.

Today I'm showcasing a strategy that selects stocks based on the amount of shareholder yield they produce, as measured by the three components listed above. The strategy ranks stocks solely on the amount of share buybacks a company has made in the past year.

In order to qualify, stocks must be in the top 15 per cent of the universe and have positive values for:

  • Share buybacks in the past year;
  • Debt repayment in the past year;
  • Dividend momentum (change in dividends across the last year).

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers.

What we found

I used Morningstar CPMS to backtest this strategy from March, 2006, to August, 2017. During this process, a maximum of 20 stocks were purchased. Stocks were sold if their rank fell below the top 25 per cent of the universe. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 12 per cent while the S&P/TSX Total Return Composite returned 5 per cent across the same period.

Downside deviation (measured as the variability of negative returns) was 6.2 per cent compared with the S&P/TSX, which had a downside deviation of 9.4 per cent. Stocks that qualify for purchase into the strategy today are listed in the accompanying table. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Emily Halverson-Duncan is an account manager for CPMS at Morningstar Research Inc.

Canadian companies maximizing shareholder yield

RankCompanyTickerMarket Cap. (S Mil)Dividend Yield (%) 1 Yr Debt BuybackDividend Momentum (%)1 Yr Share Buyback (%)
1Diversified RoyaltyDIV-T 333.9 7.620.223.066.52
2Thomson Reuters Corp.TRI-T 39,573.2 3.050.161.554.53
3Maple Leaf Foods Inc.MFI-T 4,357.2 1.300.0217.654.21
4Dominion Diamond Corp.DDC-T 1,411.4 0.001.003.374.01
5COGECO Inc.CGO-T 1,178.4 1.710.0815.351.74
6Saputo Inc.SAP-T 16,381.3 1.510.0511.111.70
7Quebecor Inc.QBR.B-T 5,605.5 0.470.0326.671.00
8Imperial Oil Ltd.IMO-T 31,991.0 1.690.417.020.43
9Toronto-Dominion BankTD-T 124,706.9 3.560.048.490.37
10Newfoundland CapitalNCC.A-T 306.5 4.170.1433.330.35
11Cogeco CommunicationsCCA-T 3,031.1 1.920.1010.530.25
12Empire Company Ltd.EMP.A-T 4,164.9 1.750.062.480.14
13Suncor Energy Inc.SU-T 68,937.1 3.080.085.170.09
14Stantec Inc.STN-T 3,887.0 1.460.279.200.08
15Vecima Networks Inc.VCM-T 220.7 2.230.094.760.05
16TransAlta RenewablesRNW-T 3,527.2 6.680.032.330.04

Source: Morningstar Canada

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