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What are we looking for?

Profitable and undervalued Canadian large-caps.

The screen

It may come as a surprise to many but 2016 was the best year for the Canadian equity market since 2009. The S&P/TSX composite total return index posted a return of 21.1 per cent for the year. Materials and energy sectors led the way with returns of 41.2 per cent and 35.5 per cent, respectively. Health care was the only sector in negative territory, generating a loss of 78.5 per cent following the collapse of Valeant Pharmaceuticals.

Today, we'll look at larger Canadian dividend payers that are profitable and still potentially undervalued. My colleague Lawrence Ullman and I used Morningstar CPMS to find no more than one company per sector out of a universe of the 100 largest by market capitalization and the best mix of:

  • Forward earnings yield (which is the inverse of the price-to-earnings ratio);
  • Return on equity (ROE).

Qualifying companies must have positive estimated earnings for the upcoming year. The real estate sector was excluded due to differences in valuation methods.

More about the Ullman Group

The Ullman Group is an independent provider of strategic private capital management services to high-net-worth individuals, corporations, endowments, charities and foundations.

What we found

We used CPMS to perform a back-test starting Dec. 31, 2006, reselecting an equally weighted portfolio of up to 10 companies at the start of each year. No stocks qualified from the health care sector this year.

Over the full period, this strategy would have generated an annualized total return of 7.3 per cent compared with 4.7 per cent for the S&P/TSX composite total return index. Investors favoured smaller and riskier stocks last year, so it's no surprise this strategy would have underperformed in 2016, though it still would have generated a total return of 15.3 per cent compared with 21.1 per cent for the index.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Investors should contact a professional or do their own research before investing in any of the stocks shown here.

Craig McGee, CFA, is a portfolio manager and Lawrence Ullman, MBA, is a director, wealth management and portfolio manager with the Ullman Group at Richardson GMP in Toronto. Richardson GMP Ltd. is a member of Canadian Investor Protection Fund. Richardson is a trademark of James Richardson & Sons Ltd. GMP is a registered trademark of GMP Securities LP. Both used under licence by Richardson GMP Ltd.

Select large-cap dividend payers

RankCompanySymbolMarket Cap ($ Mil.)EPS Yield (%)ROE (%)Div. yield (%)
1Magna Int'l Inc. MG-T22,85612.721.42.2
2Quebecor Inc.QBR.B-T4,5686.881.80.5
3Constellation SoftwareCSU-T12,7144.9111.30.9
4CI Financial Corp.CIX-T7,8217.228.84.7
5Dollarama Inc.DOL-T11,6734.1136.20.4
6Cdn Pacific Railway Ltd.CP-T28,7856.230.01.0
7Teck Resources Ltd.TECK.B-T16,06020.21.40.4
8Atco Ltd.ACO.X-T5,1347.010.62.6
9Keyera Corp.KEY-T7,6204.218.53.9

Source: Morningstar Canada