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What are we looking for?

Last week’s sharp market downturn reminded us of the not so distant, painful memories of the market correction in February and March.

As the saying goes, stocks take the staircase up and the elevator down. This is why investors can make use of defensive stocks to protect their portfolios and limit their downside. Utilities and telecommunications stocks can be great defensive holdings. Today, we will look at Canadian and U.S. large caps in the telecom and utilities sectors. Dividends are a key component of these sectors, so we will focus on companies with a sustainable payout.

The screen

We screened companies focusing on the following criteria:

  • Market capitalization greater than $5-billion;
  • Four-year annual dividend growth higher than 6 per cent. A company whose dividend is increasing should see its total return follow the same trend;
  • Growth in net operating profit after taxes (NOPAT) over 24 months. The company needs to increase its operating income to have a sustainable growth in its dividend;
  • StockPointer (SP) Performance Score of more than 65. The score mainly takes into account risk-adjusted return on capital and free cash flow per share. A great score means the company has a good profitability to increase its dividend. The score varies between zero and 100.

For informational purposes, we have also included recent stock price, dividend yield, one-year price return and dividend payout ratio.

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). For more details about these defensive stocks, please subscribe the Inovestor for Advisors platform for free.

What we found

BWX Technologies Inc., a U.S. supplier of nuclear fuel and components, has the highest SP Performance Score of our filtered list. Its dividend grew at an average annual rate of 22.6 per cent over the past four years. Its revenue grew by more than 6 per cent annually over the past five years and return on capital went to 19.1 per cent from 8.5 per cent over that period. With a dividend payout of 24.8 per cent, we see room for future increases.

Media conglomerate Quebecor Inc. increased its dividend in the past four years by an average annual 66.5 per cent. The lack of investment opportunities may be the reason behind this decision, in which case increasing the dividend instead of making bad investments could be viewed as a wise decision. The payout ratio is the lowest on our list at 16.8 per cent, leaving further room for additional increases without jeopardizing the business’s sustainability.

Telus Corp., one of the Big Three mobile phone operators in Canada, has the second-largest market capitalization of our screen (the largest market cap, belonging to American Water Works Co. Inc., is shown in U.S. dollars). Telus also shows stable and high returns on capital, which are reflected in its SP Performance Score of 69.7. The company seems a safe choice. Although its four-year annual dividend growth rate is considerably lower than either BWX or Quebecor, Telus’s strong market share and economies of scale should allow it to continue to increase its dividend in the future.

Investors are advised to do further research before investing in any of the companies shown in the accompanying table.

Utilities and telecom companies with sustainable payout

CompanyTickerSectorMkt. Cap. ($ Mil.)*4Y Ann. Div. Growth (%)24M NOPAT Chg. (%)SP Perform. ScoreDiv. Payout (%)Div. Yld. (%)1Y Price Rtn. (%)Recent Price ($)*
BWX Technologies Inc.BWXT-NUtilities5,60022.6287.524.81.317.558.79
Quebecor Inc.QBR-B-TTelecom7,45066.50.570.0016.82.7-8.629.5
Telus Corp.T-TTelecom29,7807.40.969.7645-4.523.3
Portland Gen'l ElectricPOR-NUtilities3,9906.42.768.861.33.5-19.344.63
Fortis Inc.FTS-TUtilities23,8606.71.668.1383.7-151.39
Canadian Utilities Ltd.CU-TUtilities8,4908.91.866.759.65.6-18.531.02
American Water WorksAWK-NUtilities23,040.0010.10.866.356.81.79.1127.29
CMS Energy Corp.CMS-NUtilities16,690.

Source: Inovestor

* Figures shown in native currency.

Christian Godin is a portfolio manager at Inovestor Asset Management.

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