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What are we looking for?

Following earnings season, we seek out companies that continue to operate with healthy and positive characteristics – Canadian stocks that are of a high quality, yet have low volatility compared with the broader market.

The screen

This strategy uses the Inovestor for Advisors platform to screen our Canadian universe using the following criteria:

  • A market capitalization of $500-million or more;
  • A beta of one or less. A stock with a beta less than one is considered less volatile than the market;
  • A return on capital greater than or equal to 12 per cent, reported as of last quarter’s end;
  • A cost of capital less than 10 per cent, reported as of last quarter’s end;
  • A positive sales change over 12 months and 24 months;
  • A positive free-cash-flow-to-capital ratio. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to stimulate growth, distribute or increase dividends, reduce debt, etc. A positive figure is what we are looking for. (Note: Some FCF/capital ratio data were not available.)
  • Dividend-paying companies with a payout variation greater than or equal to zero in each of the past four years (not shown);
  • A positive share-price return over one year.

For informational purposes, we have also included the recent share price and economic valued-added (EVA) variation over one and two years. EVA measures the momentum of the wealth-creating ability of the company. Note that EVA is the net operating profit after tax, or NOPAT, minus capital charge (cost of capital times the amount of invested capital);

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Please note that some ratios shown are based on an end-of-quarter reporting and the one-year price change is reported as of last month’s end.

More about Inovestor

Inovestor for Advisors is an equity research platform based on the economic profit approach. It aids advisers in quickly identifying attractive investment opportunities and easily communicating them to their clients. In addition to providing detailed reports on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts), Inovestor allows investors to create personalized filters and build custom portfolios.

What we found

Our screen gave us a list of 14 companies, with financial and consumer-discretionary stocks well represented. Two companies not belonging to either one of those sectors caught our attention. The first is Toromont Industries Ltd., a construction-equipment dealer. Toromont has experienced solid growth in sales and dividend payout and possesses an interesting future-cash-flow-to-capital ratio of 20.5 per cent, one of the highest on the list. The company’s positive EVA variation signifies it is in a healthy state to continue growing at a similar pace.

MTY Food Group Inc., a franchisor and operator of fast-food restaurants, also holds interesting features. Essentially, the return to capital of 21 per cent versus a cost of capital of 8 per cent puts the company in a strong position for profitability. MTY is continuing to acquire new restaurants at the same pace on an annual basis, supporting the EVA increase over the past 12 and 24 months and the dividend payout growth over each of the past four years.

Noor Hussain is an account executive for Inovestor Inc.

Select Canadian-listed dividend stocks

Company Ticker 1Yr Return (%) Market Cap ($Mil) Cost of Capital (%) EVA 12M Variation (%) EVA 24M Variation (%) R/C (%) Sales 12M Change (%) Sales 24 M Change (%) FCF / Capital (%) Recent Price ($) Beta Div. Yield (%)
Royal Bank of Canada RY-T 8.9 145,972 9.9 -0.05 -0.07 16.2 11.9 22.19 n/a 101.30 0.97 3.7
Toronto-Dominion Bank TD-T 20.4 142,754 8.7 0.35 0.71 15.6 13.3 22.74 n/a 77.39 0.74 3.4
Canadian National Railway Co. CNR-T 17.2 84,754 8.4 1.27 1.29 18.9 4.4 9.32 3.4 115.50 0.82 1.6
Brookfield Asset Management BAM-A-T 17.7 54,631 9.0 6.68 7.19 29.3 68.8 123.82 n/a 57.08 0.80 1.4
Canadian Tire Corp. CTC-T 6.6 16,309 5.6 -0.29 0.22 12.6 4.9 9.22 2.1 251.53 0.06 1.3
Enbridge Income Fund Holding ENF-T 3.3 5,812 8.6 5.94 6.27 14.4 38.7 99.67 n/a 33.10 0.71 6.7
Toromont Industries Ltd. TIH-T 43.5 5,399 8.1 1.23 1.28 14.1 58.4 63.2 20.5 66.43 0.77 1.5
Stella-Jones Inc. SJ-T 1.0 3,057 7.3 0.28 -0.85 13.2 6.0 10.23 7.8 44.07 0.57 1.0
Transcontinental Inc.  TCL-B-T 25.1 2,449 7.2 1.00 0.54 13.5 0.8 1.15 8.1 31.79 0.60 3.1
Enghouse Systems Ltd. ENGH-T 48.3 2,148 6.2 -0.95 -0.54 18.3 7.6 12.23 15.0 79.22 0.20 1.0
Canfor Pulp Products Inc. CFX-T 130.3 1,775 7.3 5.48 5.44 27.1 19.7 15.84 21.9 27.20 0.50 1.0
Tricon Capital Group Inc. TCN-T 9.9 1,545 9.1 14.15 6.50 22.0 168.6 151.3 n/a 11.54 0.82 2.5
Mty Food Group Inc. MTY-T 18.8 1,407 8.0 1.72 3.27 21.0 11.2 103.66 10.0 55.92 0.81 1.1
Andrew Peller Ltd. ADW-B-T 50.4 733 5.9 0.44 0.73 14.8 6.21 9.36 0.3 17.00 0.03 1.1

Source: Inovester

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