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What are we looking for?

Canadian companies that prioritize cash flow.

The screen

A company’s ability to generate growth is one of the most important items to consider when evaluating a potential long-term investment. While there are numerous things investors can look to as a measure of future growth, one of the sources worth considering is a company’s cash flow. Recall that cash flow measures the amount of cash generated from a company’s business activities. This cash can be used to invest in new projects to help expand the business, as well as other things such as paying down any residual debt or increasing dividends to shareholders.

Today’s strategy searches for Canadian stocks that have excess cash available for use. The strategy’s universe is CPMS’s database of Canadian stocks, which today holds 698 names. The strategy ranks stocks based on:

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  • Annual cash flow momentum (measures the rate of change of annual cash flow per share; high values are best);
  • Five-year cash flow growth rate (an annualized number; high values are best);
  • Cash flow per share for the latest four quarters (high values are best).

In order to qualify for purchase, stocks were required to have values greater than zero for annual cash flow momentum, five-year cash flow growth rate and latest four quarters of cash flow per share. They were also required to have a five-year beta of less than one. (Beta is a measure of a company’s sensitivity relative to changes in the benchmark – here we use the S&P/TSX Composite Index.)

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 February, 1999, to March, 2019. During this process, a maximum of 15 stocks were purchased. Stocks were sold if their annual cash flow momentum, five-year cash flow growth rate or cash flow per share for the latest four quarters fell below zero. 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 17.4 per cent while the S&P/TSX Composite Total Return Index returned 7.4 per cent across the same period.

Stocks that qualify for purchase into the strategy today are listed in the accompanying table. As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Canadian companies that prioritize cash flow

RankCompanyTickerMarket Cap ($Mil)Recent Price ($)Div. Yield (%)12M Price Chg (%)Annual CF Momentum (%)5Yr CF Growth Rate (%)Trailing 4Qs CF/Shr ($)5Yr Beta
1VersaBankVB-T 158.6 7.510.86.5149.563.31.500.8
2Torex Gold ResourcesTXG-T 1,143.7 13.440.01.890.935.92.860.4
3NA Construction GroupNOA-T 442.6 16.320.5125.179.031.43.840.7
4StorageVault CanadaSVI-T 968.0 2.720.412.416.559.00.080.9
5Parkland Fuel Corp.PKI-T 5,859.6 40.123.034.6124.318.04.330.3
6GoGold Resources Inc.GGD-T 54.1 0.320.0-26.78.454.00.020.4
7Northland Power Inc.NPI-T 4,291.9 23.955.03.515.436.26.210.8
8Brookfield Asset ManagementBAM-A-T 60,435.4 63.231.424.226.129.58.771.0
9Alimentation Couche-TardATD-B-T 46,162.4 81.800.647.441.725.17.09-0.3
10Element Fleet ManagementEFN-T 3,483.7 8.032.265.69.937.92.240.8
11Constellation SoftwareCSU-T 25,354.6 1,196.450.430.420.023.739.800.7
12Boyd Group Income FundBYD-UN-T 2,966.0 149.280.437.318.025.37.440.4
13Wesdome Gold Mines Ltd.WDO-T 615.2 4.530.0139.759.021.50.300.3
14Innergex Renewable EnergyINE-T 1,893.4 14.234.95.19.032.21.700.7
15Waste Connections IncWCN-T 30,949.0 117.380.726.59.524.06.790.3

Emily Halverson-Duncan, CFA, is a director, CPMS sales at Morningstar Research Inc.

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