What are we looking for?
Dividend-paying companies that could benefit from rising commodity prices while having minimal exposure to the war in Ukraine.
The screen
Inflationary pressures from elevated stimulus during the pandemic, coupled now with Russia’s war with Ukraine, have resulted in skyrocketing commodity prices and inventory shortages. To cite a few examples, year-to-date, WTI crude oil is up 36.7 per cent, gold up is 6.6 per cent and aluminum has risen 21.1 per cent. This is in stark contrast to the broader markets, where companies traded on a Canadian exchange are down an average 5.2 per cent, year-to-date.
One strategy in the face of higher commodity prices is to invest in commodity producers and, simultaneously, lower geopolitical risk by avoiding any companies that derive substantial portions of their revenue from Russia or Ukraine.
To begin our analysis, we used FactSet’s Universal Screening tool to pull all publicly traded companies listed on any Canadian exchange. We further narrowed down our list using the parameters below:
- Market capitalization greater than $100-million;
- Company must currently pay a dividend;
- Net income greater than zero in last reported annual period – to indicate profitability;
- Estimated annual net income and free cash flow growth greater than 20 per cent, according to sell-side brokers – to indicate substantial projected growth;
- Classified within the energy or non-energy materials sectors, according to FactSet – to indicate sectors on the supply-side of commodity production;
- Combined revenue exposure of less than 1 per cent to either Russia or Ukraine, according to FactSet’s proprietary geographic revenue exposure algorithm;
Last, we ranked the 19 remaining companies (top 10 are displayed) by dividend yield.
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What we found
Six of our top 10 companies operate in the oil and gas space, which is not surprising given the recent spike in oil prices and our requirement for high expected earnings and cash flow growth. And while we did not explicitly screen for it, all the companies that passed our screen have a positive total return this calendar year, as energy and materials have been bright spots in an otherwise harsh stock market.
Aura Minerals Inc., a gold exploration and development company, topped our screen with an 11.8-per-cent annual dividend yield and an anticipated surge in 2022 free cash flow by 396.8 per cent. Despite the hefty dividends paid out in 2021, sell-side analysts are expecting a smaller dividend yield in 2022 of 3.5 per cent (not shown) because of rising capital expenditure costs.
Intertape Polymer Group Inc., a provider of industrial packaging and protective products, ranked 10th on our screen and is the only company on our list that does not operate in the metals and mining or oil and gas space. (It is part of the manufactured products subsector, part of the non-energy materials sector.) Its robust forecast growth is owing to optimism around its recent success in passing on rising costs to its customers. Additionally, it has had the strongest year-to-date performance of any company passing our screen, at 50 per cent – owing in part to Intertape’s recent agreement to be acquired by Clearlake Capital Group LP for $40.50 a share, in an all-cash transaction.
The information in this article is not investment advice. FactSet assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained above.
Full disclosure: The author personally owns shares in Suncor Energy.
Arjun Deiva, CFA, is a vice-president at FactSet Canada’s consulting division.
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Editor’s note: Intertape Polymer Group's strong year-to-date performance is due, in part, to Intertape’s recent agreement to be acquired by Clearlake Capital Group LP for $40.50 a share, information was not included in a previous version of this article.
Arjun Deiva, CFA