What are we looking for?
My associate Allan Meyer and I thought we would search for value among Canadian dividend payers using our investment philosophy focused on safety and value. We are highlighting one of our favourite valuation metrics, free cash flow to enterprise 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.
Free cash flow to enterprise value (FCF/EV) is a valuation metric that gives us the cash flow yield. (Enterprise value, calculated as market cap plus debt, minority interest and preferred shares minus total cash and cash equivalents, gives us a better picture of a company's total value than market cap alone.) The higher the yield, the better the value. All securities listed here have a FCF/EV of 4 per cent or better and the list 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.
Some investors, particularly retirees, have a thirst for income and many of our clients are in retirement or saving for it. Mr. Meyer and I also like to get paid while we wait and dividends generally reflect safety and stability. Dividend yield is the projected annualized dividend payments divided by the current share price. All securities listed yield 2 per cent or more.
Dividend payout ratio is the dividend payment divided by earnings. A lower number is preferred and implies safety in the dividend. It could also signal the ability for a future dividend increase. We've capped payout at 100 as anything above could signal the potential for a dividend cut.
Earnings momentum is the change in annual earnings over the previous quarter. A positive number implies earnings are increasing, the opposite is true for a negative number. This could also hint at potential future dividend raises, or cuts.
Lastly, we looked at debt to equity. A smaller ratio indicates a company has lower levels of debt and can be viewed as a sign of safety.
What did we find?
Transcontinental, Leon's Furniture, and TMX Group show value and score well across the board. Canadian Western is the only bank to make our list. Whitecap Resources could be a name for those who believe in an energy rebound while Labrador Iron Ore and Western Forest Products are commodity plays.
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.