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What are we looking for?

Growing Canadian mid-cap stocks that also distribute their profits.

Investors can be doubly rewarded by companies that can distribute a part of their net income to shareholders without penalizing growth. The reason could be that the company is able to grow organically without too much capital, with only time needed to build an incredible company. Mid-caps can offer the best of both worlds: enough stability to distribute dividends while having higher growth potential than large caps.

The screen

We screened Canadian stocks focusing on the following criteria:

  • Market capitalization between $2-billion and $5-billion;
  • Three-year dividend growth rate higher than 5 per cent – and this is how our table is ranked;
  • Five-year average return on capital higher than 10 per cent – we want companies that can sustain their dividends with robust profitability;
  • Two-year cumulative growth in net operating profit after tax (NOPAT) higher than 5 per cent – we want companies able to grow their business while distributing a dividend.

For informational purposes, we have also included dividend payout ratio, five-year annual sales growth rate, price-to-earnings ratio, one-year price return and dividend yield. Please note that some ratios may be shown as of end of previous quarter.

More about Inovestor

Inovestor for Advisors is a fundamental-analysis research platform specializing in the economic value-added (EVA) approach. With Inovestor, advisers can quickly identify attractive investment opportunities, outsource their stock picking by using model portfolios, and easily communicate investment decisions with clients through client-friendly reports. In addition, Inovestor allows users to create personalized filters, build custom portfolios and carry out in-depth analysis on more than 13,000 companies (Canadian and U.S. stocks and American depositary receipts).

What we found

Best of both worlds: Growing mid-cap stocks with sustainable dividends

CompanyTickerMkt. Cap. ($ Mil.)3Y Div. Grth. Rate (%)5Y ROC (%)2Y NOPAT Grth. (%)Div. Payout (%)5Y Sales Grth. (%)P/EDiv. Yld. (%)1Y Price Rtn. (%)Recent Price ($)
Labrador Iron Ore RoyaltyLIF-T2,401.988.117.063.2102.018.96.416.014.637.53
Goeasy Ltd.GSY-T2,521.441.626.9231.615.518.510.31.756.7152.85
Enghouse Systems Ltd.ENGH-T2,471.021.118.931.938.210.326.81.4-29.644.48
Stelco Holdings Inc.*STLC-T2,475.620.541.5734.95.724.52.62.235.132.02
Stella-Jones Inc.SJ-T2,575.614.511.833.519.710.310.91.8-13.839.94
E-L Financial Corp. Ltd.ELF-T3,388.314.511.7454.22.02.52.71.113.6913.75
Equitable Group Inc.EQB-T2,394.012.116.448.89.012.78.61.130.570.35
First National Fin'l Corp.FN-T2,576.85.841.338.260.010.511.85.50.842.97
Canadian Western BankCWB-T3,455.85.112.224.631.07.210.43.130.338.66

Source: Inovestor 

* Stelco figures for return on capital and sales growth reflect a four-year history.

Labrador Iron Ore Royalty Corp. has increased its dividend by 88.1 per cent annually in the past three years and the 16-per-cent dividend yield and P/E of 6.4 unquestionably catch the eye. Despite that extreme payout, the company has the second-highest five-year sales growth rate of our list at 18.9 per cent. It’s worth noting that iron ore prices fell by 63.2 per cent between May and November largely owing to concerns over Evergrande and the Chinese real estate market, but, since the November bottom, the price has risen by 57.4 per cent. (The high yield should not be taken as a signal of trouble, but neither should investors treat the current payout as “normal.” It will depend on the iron ore price, which is a good indicator of profitability/growth for the company.)

Enghouse Systems Ltd., a software and services company, may not have the best price momentum right now, but it has the key attributes of a dividend grower: a dynamic industry, high and sustainable return on capital of 18.9 per cent, sustained dividend growth, 21.1-per-cent annual growth in the past three years, and solid management. The company paid a special dividend of $1.50 in January, 2021. According to management, there were few opportunities for acquisitions. As it turned out, the Canadian technology sector has fallen by 7.8 per cent on a total return basis over the past 12 months as of Jan. 21, while the S&P/TSX has climbed 18.2 per cent. Distributing a special dividend was probably the best decision available to maximize shareholder value.

Stella-Jones Inc., a producer and marketer of pressure-treated wood products, shows a relatively low dividend payout and NOPAT growth rate, but these figures don’t reflect that, since 2019, the company has bought back $207-million worth of shares in addition to distributing $113-million in dividends. With lumber futures back to about US$1,140, the near-term outlook of the residential lumber division, which represents 25 per cent of the company’s revenue, may be better than management had anticipated in November when prices were around US$650.

Anthony Ménard, CFA, is vice-president of data management at Inovestor.

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