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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. We thought this might be an advantageous time for investors to seek yield, quality, safety and value (of course) as they prepare and rebalance their portfolio for the summer doldrums.

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 offer more stability and trading liquidity.

Dividend yield is the projected annualized dividend divided by the share price. Some investors, particularly retirees, have a thirst for income or yield and many of our clients are in retirement or saving for it. Also, dividends generally reflect safety and stability. All securities listed yield more than 2 per cent.

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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 an FCF/EV of 5 per cent or more and the list is sorted on this metric from highest to lowest. We favour free cash flow because it is often more difficult to manipulate compared with other accounting and valuation metrics.

Earnings momentum is the change in annual earnings over the past quarter. A positive number implies earnings are increasing, which is a proxy over the long term 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

Canadian dividend payers

CompanyTickerMkt. Cap. ($ Bil.)Div. Yld. (%)Div. Payout (%)Debt/Eqty. (%)FCF/EV (%)Earns. Mom. (%)52W Ttl. Rtn. (%)Recent Close ($)
Leon's Furniture Ltd.LNF-T1.72.924.148.325.517.065.022.09
Finning International Inc.FTT-T5.02.753.677.014.91.855.630.60
Westshore Terminals Invst.WTE-T1.24.432.238.612.91.518.518.48
B2Gold Corp.BTO-T6.33.322.44.312.9-4.5-9.86.03
North West Co. Inc.NWC-T1.74.035.681.812.611.641.435.86
Transcontinental Inc.TCL-A-T1.64.151.267.812.50.476.022.20
Cascades Inc.CAS-T1.42.415.9117.712.5-6.7-1.613.66
Canadian Tire Corp. Ltd.CTC-A-T12.42.330.4159.212.120.866.2201.45
Aecon Group Inc.ARE-T1.13.947.342.210.7-10.322.918.17
Mullen Group Ltd.MTL-T1.23.755.267.810.614.3101.812.89
Evertz Technologies Ltd.ET-T1.24.886.510.29.2-16.08.715.24
Cogeco Inc.CGO-T1.42.323.8423.99.1-3.814.394.13
CI Financial Corp.CIX-T4.73.231.7160.08.86.129.822.46
Quebecor Inc.QBR-B-T8.13.338.7548.38.73.410.732.85
Parkland Corp.PKI-T6.23.094.5207.17.3137.76.241.05
Intertape Polymer GroupITP-T1.72.746.3160.86.813.8134.328.40
Northland Power Inc.NPI-T9.22.999.3486.16.6-32.425.840.73
Cogeco Comm. IncCCA-T5.62.229.1137.66.2-1.019.0117.98
Labrador Iron Ore RoyaltyLIF-T3.08.679.10.06.017.5127.546.25
Atco Ltd.ACO-X-T5.14.180.9239.95.23.618.544.63
Superior Plus Corp.SPB-T2.74.795.2192.65.187.265.415.50
Rogers CommunicationsRCI-B-T32.33.263.1222.15.11.811.163.74

Source: Refinitiv Eikon & Wickham Investment Counsel Inc.

Leon’s Furniture Ltd. has the highest FCF/EV and scores fairly well for safety and value. Labrador Iron Ore Royalty Corp. has the biggest yield, no debt, and solid earnings momentum. North West Co. Inc., Transcontinental Inc., Westshore Terminals Investment Corp. and Mullen Group Ltd. also look interesting on most measures. Parkland Corp. has the best earnings momentum but the dividend payout and debt levels are on the high side. Note that increased debt levels are typical for utilities and telecom providers such as Northland Power Inc., Quebecor Inc., Cogeco Inc. and Atco Ltd.

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

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

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