What are we looking for?
Quality U.S. stocks that also pay a solid dividend, using similar guidelines as those in our article two weeks ago that focused on the Canadian market.
We screened the U.S. universe of stocks and American depositary receipts (ADRs) using the following criteria:
- Market capitalization greater than US$1-billion;
- Positive three-month and 12-month change in the economic value-added (EVA) metric – a positive figure shows us that the company’s profits are increasing at a faster and greater pace than the costs of capital. The EVA is the economic profit generated by the company and is calculated as the net operating profit after tax minus capital expenses;
- Positive 12-month change in the economic performance index (EPI) and a current EPI greater than one – this ratio is return on capital to cost of capital;
- Average annualized five-year return on capital (ROC) must be greater than 10 per cent;
- Future-growth-value-to-market-value ratio (FGV/MV) is between 40 per cent and minus 70 per cent. The range was selected to eliminate stocks that are at an exaggerated premium or discount as that would increase risk. This ratio represents the proportion of the market value of the company that is made up of future growth expectations rather than the actual profit generated. The higher the percentage, the higher the baked-in premium for expected growth and the higher the risk;
- Dividend yield greater than 2 per cent.
For informational purposes, we have also included recent stock price and one-year return. Please note that some ratios may be reported at end-of-previous quarter.
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 stocks, U.S. stocks and ADRs).
What we found
We got a pretty interesting list of 15 companies, shown in the accompanying table ranked by 12-month EVA. One in particular that grabbed my attention is Lam Research Corp. A designer, manufacturer and marketer of semiconductor equipment, Lam has one of the strongest 12-month EVA trends. In addition, considering the slump in its stock price this year, the stock is currently trading at a low premium (FGV/MV) of 9.9 per cent. In addition, average five-year ROC is robust at 15.5 per cent.
The only company from our list trading at a discount is Eastman Chemical Co., a global specialty chemical company that produces a vast range of advanced materials and chemicals for daily use. Its EVA 12-month growth was quite significant, but slowed down over the past quarter. On the other hand, Eastman’s dividend growth is healthy as the company recently declared a dividend increase for the ninth consecutive year.
Readers are advised to conduct further research before investing in any of the securities shown here.
Noor Hussain is an analyst and account executive for Inovestor Inc.