What are we looking for?
A healthy, stable dividend yield.
The screen
Two weeks ago CI Financial Corp. slashed its dividend nearly in half. Just prior to the cut, CI would have looked very attractive to an income-oriented investor with a 6.1-per-cent yield. After the cut was announced, investors drove the stock down 4.2 per cent on the day. Each of the Big Five banks' research teams quickly lowered its one-year target price for CI. For income-oriented investors who may have been burned by CI’s dividend cut, we will look for another company with a high and sustainable dividend yield (in other words, a dividend that won’t slashed). Our starting universe will be any company trading in the United States or Canada with a SmartEstimate forecast yield of at least 5 per cent over the next 12 months (NTM), and we will screen this universe to find the companies whose investors can be more confident in relying on a consistent dividend.
First, we consider earnings quality. “Creative accounting” can be employed to make reported earnings appear rosier than reality. These practices are not sustainable though. We use the Thomson Reuters StarMine Earnings Quality model, which considers accruals, cash flow, operating efficiency and exclusions to screen for the companies whose reported earnings are more likely to continue into the future. (“Exclusions” are expenses a company doesn’t include in its reported earnings because it designates them as “special” or “non-core to operations.”) We require a score of at least 60, or at or above the 60th percentile relative to its North America peers.
We next consider three creditworthiness ratios: NTM net profit margin (minimum 10 per cent required), a cash-to-total-debt ratio of minimum 20 times and credit structural leverage. Credit structural leverage is the ratio of the default point to the market value of the firm’s assets. A smaller number means a firm is further away from a point where they would be forced to default on their obligations. We require a leverage figure no higher than 0.05 – that is, the market value of assets is at least 20 times the default point.
Finally, we use the Thomson Reuters StarMine text-mining algorithm for a more qualitative indication of likelihood of default. The text-mining algorithm searches through news articles, conference call transcripts, stock exchange filings and broker research and identifies phrases that in the past have been associated with defaults. To eliminate companies for whom this model is very bearish, we require a score of at least 30 (30th percentile in North America).
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What we found
The screen yields four companies, two each from Canada and the United States. In Canada, Gluskin Sheff + Associates Inc.’s forecast yield, interestingly, is exactly what CI’s yield was before the cut. While other traditional asset managers such as CI have struggled with net outflows, Gluskin Sheff recently released positive net flows for the most recent quarter.
In the United States, BP Midstream Partners LP (oil and gas transportation) released earnings two weeks ago and posted earnings per share that were 12-per-cent higher than Street expectations. Since November, insider ownership has increased from near zero to more than 7 per cent, meaning investors can now invest alongside company insiders who have significant “skin in the game." Short interest has also dropped from above 3 per cent in June to around 2 per cent.
Investors are advised to do further research before investing in any of the securities shown here.
Hugh Smith, CFA, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.