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What are we looking for?

Large-cap Canadian companies offering robust economic performance and high free cash flows.

The screen

We have screened our Canadian universe of stocks using the following criteria:

-A minimum market cap of $1-billion;

-An economic performance index, or EPI (return on capital divided by cost of capital), of 1.0 or higher. An EPI ratio of 1.0 or more indicates a company's capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);

-A return on capital of 12 per cent or higher;

-A five-year average return on capital of 12 per cent or higher;

-A free-cash-flow-to-capital ratio of 5 per cent or higher. This ratio gives a sense of how well the company uses the invested capital to generate free cash flow, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good, 5 per cent and above is excellent;

-A positive annualized dividend growth rate over one-, two-, three- and four-year horizons;

-All companies must pay a dividend.

More about StockPointer

StockPointer is a fundamental analysis tool based on an EVA (economic value-added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 7,500 companies (Canadian stocks, U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.

What did we find?

A dozen companies fit our list of criteria. Open Text and Enghouse Systems, the only two IT companies of the group, come up as the two highest economic performers by far with EPIs of 4 and 3.4 respectively. They also generate the two highest returns on invested capital. Even though their dividend yields are on the low side, they are partly compensated by above-average dividend growth rates.

Canadian National Railway and Gildan Activewear both present interesting dividend-grower profiles, each with a steady ROC – in line with their five-year average ROC – and very stable annual dividend growth rates around 20 per cent and 25 per cent, respectively, over the past four years.

Investors are advised to do additional research prior to investing in any of the companies mentioned.

Jean-Didier Lapointe is a financial analyst at Inovestor Inc.

Large cap Canadian stocks with a robust performance

CompanyTickerMarket Cap. ($Mil)EPIR/CR/C 5Yr Avg.FCF/Capital1Yr Div. Growth Rate2Y Div. Growth Rate3Y Div. Growth Rate4Y Div. Growth RateDividend Yield
Open Text Corp.OTEX-T11,5404.026.5%17%5.3%17.7%26.2%36.1%NA1.4%
Enghouse Systems Ltd.ENGH-T1,5203.423.5%23%9.7%16.7%18.3%20.5%21.1%1.1%
Jean Coutu GroupPJC.A-T3,6802.515.2%23%6.7%9.3%10.5%13.1%14.9%2.4%
Cara Operations Ltd.CARA-T1,5902.221.0%14%17.3%110.3%NANANA1.5%
Toromont Industries Ltd.TIH-T3,6802.119.3%21%15.5%5.9%9.5%11.5%10.7%1.6%
Canadian National RailwayCNR-T74,3902.014.0%14%8.7%20.0%22.5%20.4%18.9%1.7%
Ritchie Bros. AuctioneersRBA-T4,4802.014.0%13%15.6%13.8%21.8%19.6%17.2%2.1%
Saputo Inc.SAP-T17,7501.914.9%15%13.8%7.6%7.9%9.0%9.3%1.3%
Lucara Diamond Corp.LUC-T1,2001.623.4%23%22.7%50.0%22.5%NANA3.2%
Magna International Inc.MG-T20,5401.514.6%16%9.6%15.8%25.5%25.5%24.5%2.8%
Gildan Activewear Inc.GIL-T8,1501.513.0%15%13.4%24.3%27.7%28.4%27.2%1.4%
Centamin PlcCEE-T3,4801.117.0%16%20.0%468.2%157.6%NANA8.9%

Source: StockPointer