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Number Cruncher Thirteen TSX stocks whose dividends appear unsustainable

What are we looking for?

A few weeks ago, we pinpointed U.S.-listed companies that may have unsustainable dividends. Today, we will do the same for the Canadian market. We search for companies that are struggling to cover their costs and whose profits have been declining over the past couple of years, but where the dividend yield remains significant.

The screen

We screen the Canadian companies for unsustainable dividends using the following criteria:

  • Market capitalization greater than $1-billion;
  • A 12-month and 24-month change in the net operating profit after tax (NOPAT) metric that is less than or equal to zero. NOPAT is a measure of operating efficiency that excludes the cost and tax benefits of debt financing by simply focusing on the company’s core operations net of taxes;
  • Dividend yield equal to or greater than 3 per cent;
  • Economic performance index (EPI) less than one. This is the ratio of return on capital to cost of capital, representing the wealth-creating ability of the company. A ratio above one is key for sustainable investment opportunities;
  • Free-cash-flow-to-capital ratio. This ratio gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio but today we will focus on a ratio below 5 per cent.

We have also included recent stock price and the one-year return. Please note that some metrics shown, including dividend yield, are based on an end-of-quarter reporting.

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More about Inovestor

Inovestor for Advisors is a fundamental analysis research platform specializing in the economic value-added (EVA) method. It helps advisers save time in identifying good investment opportunities and communicate them easily to their clients through client-friendly reports. In addition, Inovestor allows investors to generate lists of the best companies, to track their portfolio’s performance and obtain in-depth analysis on more than 13,000 companies (Canadian stocks, U.S. stocks and American depositary receipts).

What we found

Crescent Point Energy Corp. has suffered the greatest decline in price on our list; the stock has fallen 50.6 per cent over the past year. Crescent Point also had one of the largest slumps in NOPAT over the past 12 months – 6.6 per cent. Even though profits are negative, costs of capital are not being covered efficiently (as shown by the negative EPI) and the company is not generating any cash (given by the FCF/capital of minus 0.4 per cent), Crescent Point still has a dividend yielding 8.7 per cent.

WestJet Airlines Ltd. has experienced a consistent drop in NOPAT over both the 12- and the 24-month horizon, supporting the 18-per-cent price drop over the past 12 months. On the other hand, WestJet’s dividend yield has grown by 46 per cent, to 3.11 per cent in December, 2018, from 2.12 per cent in December, 2017.

Readers are advised to conduct further research before investing in any of the securities shown below.

TSX-listed stocks whose dividends may be unsustainable

CompanyTickerRecent Price($)Market Cap. ($Mil)NOPAT 12M Chg (%)NOPAT 24M Chg (%)Div. Yield (%)1Yr Return (%)EPIFCF/Capital (%)
Thomson Reuters Corp.TRI-T78.53                              39,382.3 -5.0-4.03.044.20.64.6
Hydro One Ltd.H-T20.91                              12,461.1 -2.7-2.84.5-0.80.40.6
RioCan REITREI-UN-T26.15                                7,978.3 -0.8-0.86.112.00.73.0
First Capital Realty Inc.FCR-T21.19                                5,399.8 -0.8-0.14.65.20.74.4
AltaGas Ltd.ALA-T17.90                                4,926.5 -2.1-2.515.0-26.2-0.2-11.9
Arc Resources Ltd.ARX-T9.30                                3,287.0 -1.0-2.07.4-35.00.54.4
Pattern Energy Group Inc.PEGI-T30.18                                2,959.2 -0.2-0.58.631.9-0.12.4
Crescent Point Energy Corp.CPG-T4.44                                2,442.7 -6.6-1.08.7-50.6-0.4-0.4
WestJet Airlines Ltd. WJA-T19.19                                2,186.7 -4.3-4.93.1-18.00.41.3
Crombie REITCRR-UN-T14.15                                2,144.8 -0.90.07.113.20.91.1
Artis REITAX-UN-T10.95                                1,645.6 -0.7-0.110.7-18.20.83.5
Mullen Group Ltd.MTL-T12.25                                1,284.1 -3.5-2.44.9-18.70.21.2
Valener Inc.VNR-T26.12                                1,025.7 -0.6-1.26.029.30.92.2

Source: Inovestor for Advisors

Noor Hussain is an analyst and account executive for Inovestor Inc.

Editor’s note: Each of the dividend yields of companies shown in the accompanying table were based on the end-of-fiscal-quarter reporting, and calculated using the closing price at that time. Three of the 13 companies listed have since cut their dividends.
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