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What are we looking for?

Canadian companies paying yields and buying back shares.

The screen

Dividend-paying portfolios continue to be popular among retail investors, understandably because regular dividends can act as a source of income, especially since bond yields have been low. This said, one must remember that dividends are not the only way companies have the ability to provide value to their shareholders. Companies can also pay back shareholders by buying back shares, thereby increasing the value of shares outstanding. This week, I look for companies that are doing both by ranking the companies in the Morningstar CPMS Canadian database (today consisting of 695 companies) on the following factors:

  • Dividend yield;
  • Share buyback yield (calculated as the value of repurchased shares as a percentage of outstanding shares over the latest reporting period);
  • Free-cash-flow yield (operating cash flow minus capital expenditures divided by enterprise value, a measure to ensure company has cash to pay debt and dividends);
  • Five-year deviation of earnings (a safety measure that looks for companies with consistent earnings, lower values preferred);
  • Five-year historical beta (beta measures a stock’s historical sensitivity to an index, lower beta preferred).

To qualify, companies must have a market cap greater than $110-million (a figure meant to exclude the bottom one-third of companies in our database by size). Additionally, companies must have a dividend payout ratio on cash flows less than 60 per cent or a dividend payout ratio on earnings less than 80 per cent (to ensure a reasonably sustainable yield).

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More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 120 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from January, 2007, to March, 2019. During this process, a maximum of 15 stocks were purchased and equally weighted with no more than four per economic sector. Once a month, stocks were sold if their rank fell below the top 30 per cent of the ranked universe. When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 11 per cent while the S&P/TSX Composite Total Return Index gained 4.8 per cent.

The stocks that qualify for purchase today are listed in the table below. It is always recommended to speak to a financial adviser or investment professional before investing.

Select TSX-listed dividend stocks

RankCompanyTickerMarket Cap ($Mil)5Y EPS Deviation 5Y Historical BetaDiv. Yield (%) Share Buyback Yield (%)Free CF Yield (%)
1CI Financial Corp.CIX-T 4,578.7 4.50.73.814.49.6
2Magna International Inc. MG-T 24,609.2 2.21.42.610.28.3
3Dream Office REITD-UN-T 1,366.8 5.30.94.324.80.8
4Leon's Furniture Ltd.LNF-T 1,128.2 3.50.43.80.314.9
5High Arctic Energy ServicesHWO-T 199.5 23.91.65.04.718.7
6Sun Life Financial Inc.SLF-T 33,021.5 3.70.73.62.012.2
7Canadian Tire Corp.CTC-A-T 9,349.2 3.70.52.86.11.4
8Genworth MI Canada Inc.MIC-T 3,583.5 5.31.35.04.210.0
9BCE Inc.BCE-T 54,156.4 2.40.45.30.74.1
10George Weston Ltd. WN-T 15,579.2 5.00.52.06.63.5
11Norbord Inc.OSB-T 2,630.5 48.91.25.04.815.3
12NFI Group Inc.NFI-T 1,949.0 11.50.45.34.44.7
13West Fraser Timber Co.WFT-T 4,333.9 39.01.11.215.09.8
14Cominar REITCUF-UN-T 2,065.6 5.10.66.31.92.8
15Loblaw Companies Ltd.L-T 24,373.1 4.50.41.84.24.5

Source: Morningstar CPMS

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

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