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What are we looking for?

Canadian-listed companies proving themselves to shareholders.

The screen

This week, I home-in on companies that have shown, fundamentally, that they are working to enhance shareholder returns. Investors know well that price appreciation and depreciation of a stock is often attributed to market sentiment on a stock, but the company does have control over how it structures itself to enhance shareholder yield. To find companies that are excelling in this regard, I first rank stocks in the Morningstar CPMS Canadian database (which today consists of 701 companies) by the following metrics:

  • Dividend yield (higher figures preferred);
  • Share reduction over the past four quarters (calculated as the latest reported shares outstanding as a percentage of what was outstanding four quarters ago, lower figures preferred);
  • Debt reduction over the past four quarters (latest reported total debt of the company as a percentage of what it was four quarters ago, lower figures preferred);
  • Free cash flow yield (calculated as the cash flow from operations minus capital expenditures as a percentage of enterprise value, higher figures preferred);
  • Five-year variability of earnings per share (a statistical measure that shows how steady a company’s earnings have been over the last five years, lower figures preferred).

To qualify, companies must have a payout ratio on earnings less than 80 per cent, or a payout ratio on operating cash flow less than 60 per cent. These figures imply that the company has not stretched itself too thin in order to pay a dividend. Companies must also have a market capitalization of more than $110-million (this figure eliminates the bottom one-third of stocks from our database by size).

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More about Morninstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from March, 2006, to June, 2018. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than three for each economic sector. Once a month, stocks were sold if their rank fell below the top 40 per cent of the ranked universe or if the payout ratio on earnings breached 100 per cent and the payout ratio on cash flows breached 80 per cent, signalling that the company is no longer able to pay a sustainable yield. When sold, the positions were replaced with the highest-ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 10.8 per cent, while the S&P/TSX Composite Total Return Index gained 5.5 per cent. In calendar year 2008, the strategy lost 21.5 per cent, while the S&P/TSX Composite Total Return declined 33 per cent.

Canadian-listed stocks working to enhance shareholder returns 

Rank Company Symbol Sector Mkt. Cap. ($ Mil.) 5Y EPS Deviation FCF Yield (%) Div. Yield (%) Debt Reduction/Last 4Q (%) Share Reduction/Last 4Q (%) Payout Ratio on EPS (%) Payout Ratio on CF (%) Recent Close ($) Price Chg. from Month-End, 12M Ago (%)
1 Richelieu Hardware Ltd. RCH-T Industrials 1,589.8 1.7 1.7 0.9 -88.0 -0.3 19.4 16.3 27.52 -15.3
2 TFI International Inc. TFII-T Industrials 3,660.8 6.3 2.2 2.0 -4.9 -3.8 32.2 18.3 41.66 42.4
3 Canfor Pulp Products CFX-T Materials 1,705.7 27.3 7.8 1.0 -100.0 -1.8 7.2 6.9 26.19 121.3
4 Dream Office REIT D-UN-T Real Estate 1,415.0 7.6 1.1 4.3 -17.1 -32.1 68.5 111.8 23.57 18.1
5 Cdn. Pacific Railway Ltd. CP-T Industrials 34,992.0 6.3 2.1 1.1 -1.0 -2.0 19.8 14.0 247.62 25.8
6 Sleep Country Canada ZZZ-T Cons. Discret. 1,156.9 10.1 4.3 2.4 -4.2 -1.7 40.2 29.8 31.23 -17.6
7 Element Fleet Mgmt. EFN-T Financials 2,308.8 27.6 1.7 4.9 -1.6 -2.2 41.7 15.0 6.05 -35.7
8 Empire Co. Ltd. EMP-A-T Cons. Staples 4,659.8 16.5 7.6 1.6 -10.8 -0.1 27.3 14.4 26.90 32.5
9 Teck Resources Ltd. TECK-B-T Materials 18,511.4 72.1 13.2 0.6 -4.9 -0.6 4.2 2.9 32.37 19.3

Source: Morningstar Canada

Today, only nine stocks qualify for purchase and they are listed in the accompanying table. It is always recommended to speak to a financial adviser or investment professional before investing.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

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