What are we looking for?
Amid earnings season, investors are eager to see how companies on their watch list and in their portfolios have performed during the latest quarter. Today, we will search for Canadian dividend-paying companies with growing returns on capital invested and rising profits.
The screen
We screened the Canadian stock universe by focusing on the following criteria:
- Market capitalization greater than $500-million;
- Three-month and 12-month growth in net operating profit (NOP). This is a measure of operating efficiency that excludes operating costs, focusing on the company’s core operations;
- Three-month and 12-month growth in the return on capital (ROC). This is a profitability ratio that measures the returns expected for both debt and equity investors;
- A current economic performance index (EPI) equal to or greater than one – this ratio is the return on capital to the cost of capital. It gives shareholders an idea of how much return the company is generating on each dollar spent. An EPI of one would indicate that return of capital is just enough to cover the costs of capital.
- Dividend yield greater than 2 per cent;
- Free-cash-flow-to-capital ratio. This metric gives us an idea of how efficiently the company converts its invested capital to free cash flow, which is the amount left after all capital expenditures have been accounted for. It is an important measure because it gives us the company’s financial capacity to pay dividends, reduce debt and pursue growth opportunities. We are always looking for a positive ratio.
For informational purposes, we have also included recent stock price and one-year return. Please note that some ratios shown may be as of the end of the 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 American depositary receipts).
What we found
An attractive finding is Wall Financial Corp., a real estate developer and manager based in British Columbia specializing in hotel and residential properties. The company, the only one on our list with a market cap of less than $1-billion, has had the greatest 12-month return-on-capital growth, which has pushed up the EPI to 2.4, among the highest on our list. Wall also has an extraordinarily high one-year NOP growth, largely owing to a condominium and rental market in B.C. that remains in bubble territory. Although home prices have slipped in recent months after regulatory changes, the company has benefited as housing demand remains strong. It is generating a high level of free-cash-flow-to-capital of 12.1 per cent, which, along with a dividend payout ratio of 66 per cent (not shown), supports its currently lofty yield of 11.6 per cent.
Rogers Communications Inc. is the largest company by market cap on our list. The telecom giant has had a good year in terms of profit growth, in line with the rest of our findings, however its stock price fell slightly over the past 12 months. Rogers is expected to report earnings on Wednesday.
Investors are advised to do further research before investing in any of the companies shown below.
Noor Hussain is an analyst and account executive for Inovestor Inc.
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Noor Hussain