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What are we looking for?

Sustainable dividends from top conglomerates with the potential to unlock their holding company discounts.

The screen

General Electric Co. shares moved up this week after the industrial conglomerate announced plans to break itself into three publicly traded companies.

The stock’s rise reflects the anticipated narrowing of GE’s “holding company discount.” That’s the tendency for multifaceted conglomerates to trade for less than the total value of their various parts.

Holding companies often see their share prices rise when they opt to break themselves up into their constituent businesses. It’s harder for the market to overlook the asset value of pure-play firms.

We started with our extensive list of dividend-paying Canadian and U.S. companies, before singling out conglomerates offering steady growth prospects – as well as breakup potential. We then applied our TSI Dividend Sustainability Rating System to home in on top dividend payers. Our system 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;
  • 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. The TSI Best ETFs for Canadian Investors is the latest. TSI Network is also affiliated with Successful Investor Wealth Management.

What we found

Five conglomerates in the spotlight after GE’s breakup

Ranking*CompanyTickerDiv. Sustain. RatingPointsDiv. Yld. (%)Mkt. Cap. ($ Bil.)**1Y Ttl. Rtn. (%) Recent Price ($)**
1Atco Ltd.ACO-X-TAbove Average94.34.77.141.43
23M Co.MMM-NAbove Average83.3104.97.9182.42
3Honeywell Int'l Inc.HON-QAbove Average81.7156.811.6225.41
4Danaher Inc.DHR-NAbove Average80.3213.833.8302.03
5Power Corp. of Cda.POW-TAbove Average74.228.951.742.73

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 five stocks: Montreal-based Power Corp. of Canada holds controlling interest in Great-West Lifeco Inc., IGM Financial Inc. and much more. Calgary-headquartered Atco Ltd. owns 53 per cent of Canadian Utilities Ltd., all of Atco Structures & Logistics, and 40 per cent of Neltume Ports, of Santiago. Honeywell International Inc., based in North Carolina, already spun off two subsidiaries to shareholders in 2018, but its remaining operations are still dispersed across aerospace, building technologies and so on. Global conglomerate 3M Co., with headquarters in Minnesota, sells a wide array of products with little overlap, and so has a lot of breakup potential. Washington-based Danaher Inc. has made breakup moves in the past but still has a varied range of businesses, from diagnostics and life sciences to environmental services, well-positioned for hiving off as stand-alone firms. (Note: Danaher’s meagre yield reflects its 34-per-cent share price gain over the past 12 months.)

We advise investors to do additional research on any investments we identify here.

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

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