What are we looking for?
S&P 500 companies offering robust and rising economic performance. We are looking for a positive and rising EVA (economic value-added) figure, which represents the economic profit created in excess of the cost of capital. To calculate EVA, we simply subtract the cost of capital from the return on capital, and multiply the result by the total invested capital.
The screen
We screened the S&P 500 using the following criteria:
- Market cap of $5-billion or greater;
- All companies must pay a dividend;
- An economic performance index, or EPI (return on capital divided by cost of capital) above 1.5. An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- A return on capital of 15 per cent or greater;
- A positive change in the return on capital over the last 12 months;
- A positive EVA per share;
- An increasing EVA per share over 12 and 24 months;
- Positive free-cash-flow-to-capital. This ratio gives a sense of how well the company uses the invested capital to generate free cash flows, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. A positive figure is good; 5 per cent and above is excellent;
- The debt-to-equity ratio is displayed for informational purposes.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value-added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.
What did we find?
Only 16 companies fit our criteria. Altria Group, a so-called "sin stock" because of its operations in the tobacco and wine industries, comes first with the highest EPI of the group. The company also generates the highest return on capital and offers the highest dividend yield at 3.57 per cent. Nike and Starbucks both offer a healthy balance of high economic performance, growth and low leverage. In addition, Starbucks generates a substantial free-cash-flow-to-capital ratio, which means the company could be in a good position to continue to aggressively increase its dividend, buy back shares, or fuel a portion of its growth using internal cash. Southwest Airlines and Marriott have the highest return on capital increase over the last 12 months (up 5 per cent), and Marriott is also, by far, the company that generates the most free cash flow for each dollar of invested capital.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.