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What are we looking for?

My team member Allan Meyer and I highlight one of our favourite valuation metrics, free-cash-flow-to-enterprise-value, by analyzing Canadian dividend payers using our investment philosophy focused on safety and value.

The screen

We started with Canadian-listed equities with a market capitalization of $1-billion or more. Market cap is a safety factor, generally larger companies are more stable and liquid.

Dividend yield is the projected annualized dividend divided by the share price. Some investors, particularly retirees, have a thirst for income and many of our clients are in retirement or saving for it. Allan and I also love to get paid while we wait for price appreciation, and dividends generally reflect safety and stability. All securities listed yield 2 per cent or more.

Dividend payout ratio is the dividend payment divided by earnings. A lower number is better. We’ve capped payout at 100; anything above could be a warning sign.

Debt-to-equity is our final safety measure. It is the debt outstanding divided by shareholders’ equity. A smaller ratio is preferred.

Free-cash-flow-to-enterprise-value (FCF/EV) is a valuation metric. FCF is the cash left over for investors after all expenses, reinvestments and capital expenditures, while EV is a measure of the company’s value excluding its cash. The higher the number, the better the value. All securities listed have a FCF/EV of 4 per cent or more and the list is sorted on this metric, from highest to lowest. In our opinion, “free cash flow is king” because it is more difficult to manipulate compared with other accounting metrics such as earnings.

Earnings momentum is the change in annual earnings over the last quarter. A positive number implies earnings are increasing, which is a proxy for capital appreciation and dividend hikes while the opposite is true for a negative number.

Lastly, we’ve provided the 52-week total return to track recent performance.

What we found

Aecon Group Inc. has the highest FCF/EV and scores well generally for safety and value. Evertz Technologies Ltd., Westshore Terminals Investment Corp., Magna International Inc., Labrador Iron Ore Royalty Corp. and BCE Inc. look interesting on most measures. BCE is also the largest name by market cap. Husky Energy Inc. has the highest dividend yield, but has the most negative earnings momentum. Northland Power Inc. has the highest debt, but looks attractive otherwise. High debt levels are typical for utilities such as Northland.

Investors should contact an investment professional or conduct further research before buying any of the securities listed here.

Select TSX-listed dividend stocks

CompanyTickerMkt. Cap. ($ Bil.)Div. Yld. (%)Div. Payout Ratio (%)Debt/Equity (%)FCF/EV (%)Earns. Momentum (%)Recent Close ($)52W Ttl. Rtn. (%)
Aecon Group Inc.ARE-T1.13.240.678.325.10.017.971.5
Transcontinental Inc.TCL-A-T1.45.438.782.014.4-7.016.43-20.0
Corus Entertainment Inc.CJR-B-T1.04.829.2108.514.36.05.05-8.0
Labrador Iron Ore RoyaltyLIF-T1.44.639.80.011.2-0.321.94-18.2
Magna International Inc.MG-T21.62.825.941.010.9-2.269.926.4
Leon's Furniture Ltd.LNF-T1.33.440.623.69.8-1.516.6217.3
CI Financial Corp.CIX-T5.43.032.5105.29.2-0.924.3631.5
Westshore Terminals Invstmt.WTE-T1.04.131.945.
Pason Systems Inc.PSI-T1.25.497.10.08.6-11.814.01-26.4
Canadian Natural ResourcesCNQ-T46.63.843.064.58.4-2.839.4816.0
Recipe Unlimited Corp.RECP-T1.12.449.685.57.5-11.218.85-28.9
TFI International Inc.TFII-T3.72.325.2146.86.0-0.345.5620.7
Evertz Technologies Ltd.ET-T1.
Husky Energy Inc.HSE-T8.36.043.631.75.5-22.38.29-43.4
BCE Inc.BCE-T58.15.292.8124.15.4-0.364.4618.9
Northland Power Inc.NPI-T6.03.870.2697.55.42.531.2634.6
Ovintiv Inc.OVV-T5.62.35.760.35.2-2.321.73-48.1
IGM Financial Inc.IGM-T9.55.773.4200.44.5-2.239.7623.4
Rogers Communications Inc.RCI-B-T33.53.049.6211.74.4-3.166.16-4.4

Source: Eikon & Wickham Investment Counsel Inc.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

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