What are we looking for?
Sustainable dividends from top conglomerates with the potential to unlock their holding company discounts.
The screen
Earlier this month, industrial conglomerate General Electric Co. GE-N spun off its renewable energy and power unit GE Vernova Inc. GEV-N and handed out shares to its investors. At the same time, General Electric changed its name to GE Aerospace, with its share price jumping on the news.
The stock rise reflects the 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 easier for the market to assess the value of “pure-play” firms.
We started with our extensive list of dividend-paying Canadian and U.S. companies, before singling out the conglomerates with steady growth prospects and 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, and the TSI Dividend Advisor. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated five stocks: Montreal-based Power Corp. of Canada POW-T holds controlling interest in Great-West Lifeco Inc., IGM Financial Inc. and much more. Calgary-headquartered ATCO Ltd. ACO-X-T owns 52.7 per cent of Canadian Utilities Ltd. but also ATCO Structures & Logistics and 40 per cent of Neltume Ports, which operates 18 ports in South America. Honeywell International Inc., HON-Q based in North Carolina, already spun off two subsidiaries to shareholders in 2018 (Resideo Technologies Inc. and Garrett Motion Inc.), but its remaining operations are still dispersed across aerospace, building technologies and so on. Global conglomerate 3M Co. MMM-N, with headquarters in Minnesota, sells a wide array of products with little overlap and so has a lot of breakup potential. In fact, it just spun off its health care unit as Solventum Corp. Washington-based Danaher Inc. DHR-N has made breakup moves in the past but still has a varied range of businesses well-positioned for hiving off as standalone firms.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.
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Scott Clayton