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Number Cruncher Where free cash flow is king: 17 TSX dividend stocks offering safety and value

What are we looking for?

My associate Allan Meyer and I thought we would 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.

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 are more stable and diverse.

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

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Dividend payout ratio is the dividend payment divided by earnings. A lower number is preferred and could also signal the ability for a dividend increase. We’ve capped payout at 100, anything above that figure could signal the potential for a dividend cut.

Debt-to-equity is our last safety measure. It is the debt outstanding divided by shareholders’ equity. A smaller ratio indicates a company has lower levels of debt or leverage.

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 a FCF/EV of 4 per cent or better and the accompanying table is sorted on this metric from highest to lowest. In our opinion, “free cash flow is king” because it is more difficult to manipulate compared with other accounting metrics such as earnings.

Earnings momentum is the change in annual earnings in this quarter over the previous quarter. A positive number implies earnings are increasing, and vice versa for a negative number. Lastly, we’ve provided the one-year total return to track recent performance.

What we found

Aecon Group Inc. has the highest FCF/EV and scores well across the board for safety and value. Evertz Technologies Ltd. and TFI International Inc. also look interesting on most measures. Pason Systems Inc. has the best earnings momentum and no debt, but their dividend payout ratio is on the high side.

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

Select TSX dividend stocks, ranked by free-cash-flow-to-enterprise-value ratio

CompanyTickerRecent Price ($)Market Cap ($Bil)Div. Yield (%)Div. Payout (%)Debt/Equity (%)FCF/EV (%)Earns Momentum (%)1Yr Total Return (%)
Aecon Group Inc.ARE-T18.341.13.250.978.315.6810.81.3
Leon's Furniture Ltd.LNF-T14.451.13.935.823.614.801.6-11.6
Methanex Corp.MX-T75.065.82.318.696.513.69-6.15.5
CI Financial Corp.CIX-T17.984.44.052.0105.211.27-0.8-33.9
Transcontinental Inc.TCLa-T17.301.55.138.289.49.63-3.9-34.3
Canadian Natural Resources Ltd.CNQ-T37.4145.04.063.564.59.58-20.2-1.6
Evertz Technologies Ltd.ET-T16.341.34.481.60.37.0111.3-0.5
Canadian Western BankCWB-T29.642.63.635.082.46.792.7-12.0
Suncor Energy Inc.SU-T44.8171.03.771.339.46.66-14.09.4
WSP Global Inc.WSP-T70.507.42.162.946.16.371.121.9
Westshore TerminalsWTE-T21.791.52.937.60.05.950.01.9
TMX Group Ltd.X-T82.924.63.043.732.75.871.811.2
Pason Systems Inc.PSI-T20.141.73.695.10.05.7532.714.6
TFI International Inc.TFII-T40.093.42.426.2101.35.3311.328.0
WestJet Airlines Ltd.WJA-T19.762.32.869.885.95.18-16.7-17.2
BCE Inc.BCE-T58.3152.45.496.2119.85.183.89.4
IGM Financial Inc.IGM-T33.668.16.770.6200.44.90-1.2-10.8

Source: Eikon & Wickham Investment Counsel Inc. 

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

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