What are we looking for?
Canadian energy companies with positive economic profits, according to "economic value-added" (EVA) analysis. These are companies able to generate a positive return from their invested capital after borrowing costs are considered.
The screen
We have screened the S&P/TSX energy index companies with one main criterion – the economic performance index (EPI). The EPI is essentially a ratio (the rate at which the company creates EVA), calculated as the return on capital divided by cost of capital.
We then added selected metrics to better assess to overall performance of these stocks:
- The EPI must be 1.0 or more. A ratio of 1.0 or above indicates a company is able to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- Change in EPI (trailing 12 months). A positive result indicates a strengthening economic performance;
- Free-cash-flow-to-invested-capital ratio. Free cash flows indicate the amount of cash the company generates, which could be used to stimulate growth, pay and/or increase dividends, reduce debt, etc. Considering the harsh year energy companies just went through, a positive result here is excellent;
- The one-year dividend growth rate, current dividend yield and price performance are 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 also allows investors to create personalized filters and build custom portfolios.
What did we find?
Unsurprisingly, the number of Canadian energy companies generating positive economic profits is very low (10), and most of them are close to negative territory.
Nonetheless, it is still interesting to know these organizations have been able to keep their heads above water since energy prices started to decline in June, 2014. Out of that list, Pason Systems Inc., ShawCor Ltd., Enbridge Income Fund Holdings Inc. and Parkland Fuel Corp. stand out. All four of them still generate positive economic profits (EVA), positive free cash-flows and did not lower their dividends in the past year. For investors who want some exposure to the energy sector, sticking with companies that are still offering positive economic profits could be a good strategy. Since June 26, 2014, this 10-stock group would have lost 22.4 per cent, while the S&P/TSX energy index plunged 45 per cent, excluding dividends in both calculations.
Investors should contact a professional or do their own research before investing in any of the stocks shown here.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.