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What are we looking for?

Stocks with sustainable dividends that are ready to benefit from recent – and friendly – takeovers.

The screen

An acrimonious takeover bid for Canada’s Teck Resources Ltd. continues to grab headlines. But that offer by mining giant Glencore PLC has likely overshadowed quieter – much friendlier – acquisition deals for other large firms.

While these transactions mostly carry some level of risk, many are poised to significantly expand revenue and earnings for the companies that successfully complete them. At the same time, the takeovers have the power to bolster already sustainable dividends for shareholders.

Any growth-by-acquisition strategy is inherently riskier than internal growth, since it carries an above-average chance of unpleasant surprises. That’s because a buyer of something rarely knows as much about it as the seller. However, top acquirers can cut that risk by focusing on buying profitable, well-managed firms or assets that fit well with their current operations.

Our search started with a list of U.S. and Canadian stocks with significant recent acquisitions poised to further elevate their prospects – and their dividend sustainability. We then applied our TSI Dividend Sustainability Rating System. It awards points to a stock based on key factors:

  • One point for five years of continuous dividend payments – two points for more than five;
  • Two points if it has raised the payment in the past five years;
  • Two points if it has raised the payment in the past five years;
  • One point for management’s commitment to dividends;
  • One point for operating in non-cyclical industries;
  • One point for limited exposure to foreign currency rates and freedom from political interference;
  • Two points for a strong balance sheet, including manageable debt and adequate cash;
  • Two points for a long-term record of positive earnings and cash flow to cover dividends;
  • One point if the company’s an industry leader.

Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above-average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.

More about TSI Network

TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor, and the TSI Dividend Advisor. TSI Network is also affiliated with Successful Investor Wealth Management.

What we found

Stocks that may benefit from recent acquisitions

Ranking*CompanyTickerDiv. Sustain. RatingPointsDiv. Yld. (%)Mkt. Cap. ($ Bil.)**1Y Ttl. Rtn. (%) Recent Price ($)**
1Pfizer Inc.PFE-NHighest104.0235.9-22.141.37
2T. Rowe Price Group Inc.TROW-QAbove Average84.425.4-23.3110.41
3OpenText Corp.OTEX-TAbove Average72.514.1-2.452.14
4CF Industries Holdings Inc.CF-NAbove Average72.115.2-29.877.06
5Xylem Inc.XYL-NAbove Average71.318.622.0103.49
6Superior Plus Corp.SPB-TAverage66.82.2-9.810.64
7B2Gold Corp.BTO-TAverage53.86.1-5.05.72

Source: Dividend Advisor

*Ranking is determined by TSI Dividend Sustainability Score. Where overall points are the same, analysts considered P/E, dividend yield and industry outlook to decide final placements. **Share price and market cap are in native currency

Our TSI Dividend Sustainability Rating System generated seven stocks.

Waterloo, Ont.-based OpenText Corp. added to its software offerings with recent acquisition of Micro Focus International PLC for about $5.8-billion.

Toronto-based propane distributor Superior Plus Corp. announced late last year the purchase of Certarus Ltd. for $1.05-billion. That Calgary-based company operates mobile storage units to bring green fuels to customers.

Gold miner B2Gold Corp., headquartered in Vancouver, recently announced the acquisition of Sabina Gold & Silver Corp. for $1.1-billion. Sabina’s main asset is the Back River gold project, located in Nunavut.

Deerfield, Ill.-based CF Industries Holdings Inc. is now adding to its fertilizer business by acquiring the Waggaman ammonia production facility in Louisiana for US$1.68-billion.

Washington-based Xylem Inc., a maker of water technology and equipment, is adding to its growth prospects with the US$7.5-billion acquisition of Evoqua Water Technologies Corp. That company is a North American leader in water treatment.

T. Rowe Price Group Inc., headquartered in Baltimore, Md., sells mutual funds and wealth management services. It recently diversified its offerings with the purchase of Oak Hill Advisors for US$4.2-billion. Oak Hill arranges financing for distressed businesses.

And finally, Pfizer Inc., headquartered in New York, has agreed to acquire Seagen Inc. for a whopping US$43-billion. Seagen specializes in treatments for various forms of cancers.

Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.

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