What are we looking for?
Companies distributing a large portion of their earnings as dividends
The are many reasons why investors could be looking for dividends. From a capital allocation point of view, dividends protect investors from poor management decisions, such as prioritizing growth at any cost or engaging in buybacks at unattractive valuations. Both actions destroy shareholder value over the long term.
From a tax perspective, compared with buybacks, eligible dividends distributed by public companies are more tax-efficient for lower tax brackets than capital gains, making dividend-payers potentially a sensible decision for some individuals with liquidity needs, like retirees.
Investors are encouraged to consult a tax specialist to understand how different types of income may affect their tax obligations and social benefits.
The screen
We screened for Canadian companies with a market capitalization greater than $1-billion with:
- Stockpointer (SP) score greater than 65. The score mainly considers risk-adjusted return on capital, earnings per share growth and free cash flow per share. The score varies between zero and 100. The higher the value, the better the company.
- Dividend yield greater than 4 per cent.
- Positive two-year annualized net operating profit after taxes (NOPAT) growth.
For informational purposes, we have also included payout, price-to-earnings ratio, and one-year price return.
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What we found
First National Financial Corp. FN-T is one of Canada’s largest non-bank mortgage lenders. First National offers a dividend yield of 6.4 per cent with a moderate payout of 55.9 per cent. The company has shown impressive growth in its two-year annualized NOPAT at 16.8 per cent while keeping a relatively low P/E ratio of 8.3. First National reported its earnings on May 1 and the stock fell 7 per cent, partly owing to lower guidance and lower residential mortgage origination. The company attributes its latest results to an increased competition in the mortgage broker distribution channel from two large lenders.
Evertz Technologies Ltd. ET-T is a Canadian manufacturer of broadcast and film equipment, specializing in video and audio infrastructure for the television and film industry. Evertz offers a dividend yield of 5.3 per cent with a relatively high payout of 79.3 per cent. Over the past year, Evertz’s stock price increased by 17.5 per cent, the third highest of our screen. The company will release its earnings mid-June.
Suncor Energy Inc. SU-T is Canadian integrated energy company focused on oil sands development and petroleum refining. Suncor boasts a dividend yield of 4.2 per cent, with a relatively low payout ratio of 34.4 per cent, indicating a stable dividend with room for growth. The company has demonstrated solid two-year annualized NOPAT growth at 28.7 per cent. Suncor has an appealing P/E ratio of 8.2, which ranks third-lowest on our screen. Its earnings report is scheduled for release May 7 after market close.
Investors are advised to do further research before investing in any of the companies listed in the accompanying table.
For more details about these stocks, subscribe to the Inovestor for Advisors platform for free.
Anthony Ménard, CFA, is vice-president of data management at Inovestor.
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