What are we looking for?
Canadian equities that have underperformed relative to the S&P/TSX composite index this year, yet offer better multiples than the index average.
The screen
With the help of a rebound in oil and precious metals prices, the S&P/TSX has seen a remarkable turnaround this year, coming off a 9-per-cent decline by late January to return 2.5 per cent on a year-to-date basis. The materials sector has received the largest share of gains as the S&P/TSX materials index is currently up 19 per cent this year. Returns have varied widely across sectors and stocks, so we look for companies that have underperformed the index this year and are priced at more attractive multiples than their benchmark – possibly providing additional upside potential. Our criteria are as follows:
- A return of less than 2.5 per cent year-to-date;
- Trading at forward price-to-earnings (P/E) and current price-to-book (P/B) multiples lower than the main index; the S&P/TSX’s forward P/E and current P/B are 14.5 and 1.7 respectively;
- Pay a dividend of greater than 3.2 per cent, while the five-year average dividend payout ratio (percentage of company’s earnings excluding extraordinary items paid out as dividends) does not exceed 75 per cent.
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What did we find?
While our screen yields eight companies across a wide range of market caps, the results are dominated by the financial sector with the exception of Dorel Industries, which designs, manufactures and distributes children's furniture and sports products and accessories, in addition to home furnishings, on a global level. Although the five-year average dividend payout falls within our criteria, note that the payout ratio has exceeded 100 per cent on a trailing-12-month basis, a consequence of earnings per share declining against a set dividend per share over the last three years. Dorel Industries Inc. joins Manulife Financial Corp. and Power Financial Corp. as companies trading at a discount greater than 10 per cent to the average analyst target.
This commentary does not provide individualized advice or recommendations for any specific subscriber or portfolio. Investors should conduct further research before investing.
Khaled Eniba works in the financial and risk unit of Thomson Reuters and specializes in banking and research.