Tuesday, 3 May 2011

Which Canadian Stocks with Growing Dividends? - The Low Yielders

Last week we looked at Canadian stocks that have consistently increased their dividends for several years and whose dividend yield of 3% or more exceeds the TSX Composite average. This week, we turn to the other batch of dividend growers, 20 in all, whose yield is below that of the TSX.

Is the lower yield a good or a bad sign? If these companies have been progressively increasing their dividends, how might it be that their dividend still does not come up to the broad market average? Several possibilities exist: the stock price has more than kept pace with the dividend rises so that the yield formula of Div/Stock Price produces a smaller number; the dividend started at such a low payout level or the amount of increase has been so small that the yield still has not risen much. A scan of our comparison tables below reveals that both explanations apply to different companies and in most cases that looks like good news. (Note that our tables this week have more columns and are based primarily on the superb recently beefed-up My Watchlist customizable tool available free on GlobeInvestor.)

Dividend Past Performance, Safety and Further Growth Potential
(click on image to enlarge)

  • Great Dividend Performance: Dividend growth rates, whether measured over the past year or five years, has been outstanding. The 5-year compounded annual growth of the bottom performer, Atco Ltd (ACO.X), at 6.8% is very satisfactory while that of the top performer, Tim Hortons (THI), at 35.3% is phenomenal. The high-yielders of last week showed much more modest growth rates as a group.
  • Strong Dividend Growth Potential: Dividend payouts as a ratio of earnings is low (under 30%) for almost every company indicating considerable leeway to give further increases despite very healthy - the lowest is 6.8% per year - compounded dividend increases over the last five years. This is in sharp contrast to last week's high-yielders which almost all have high payout ratios.
  • Strong Dividend Safety: Interest coverage is high enough at every company, except at Finning (symbol: FTT), that there appears little danger of an actual dividend cut in the short term and in the longer term, debt levels as seen in the various debt ratios, seems low enough to protect dividends of almost all the companies.
Stock Price Attractiveness - Are there potential good buys?

  • Many of the stocks exhibit attractive green indicators amongst the series of different value metrics, but five of them look to be good across the board with no negatives and lots of positives - rising sales and profits, healthy return on equity, low current stock price compared to past or analyst forecast future earnings, low stock price compared to sales, cash flow and book value, even analyst ratings:
  • Tim Hortons (THI)
  • Home Capital Group (HCG)
  • SNC-Lavalin Group (SNC)
  • Empire Company (EMP.A)
  • Atco Ltd (ACO.X)
The overall conclusion is that a good number of the low-yield dividend growing stocks appear to have good potential for further dividend rises and probably stock price gains too. Numbers are not the final answer, however, and the investor is still wise to look into each company's prospects through reading annual reports, news articles and whatever commentary can be found. It is not what has happened in the past, as reflected in the above numbers, but what will happen in the future, that matters.

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

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