What are we looking for?
Companies on the S&P 500 that generate high economic profit for the shareholders, above-average dividend growth rates and that are trading at interesting multiples.
The screen
We have screened the S&P 500 index with several different challenging criteria to make this filter as complete as possible.
We are looking for high economic and accounting performance, as well as attractive valuation multiples to identify long-term investment opportunities.
Our seven screen criteria are described below:
- return on capital is above 10 per cent;
- an economic performance index, or EPI (return on capital divided by cost of capital) is above 1.5. An EPI ratio of 1.0 or more indicates a company’s ability to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- all companies must pay a dividend;
- one-year dividend growth is 10 per cent or more;
- five-year average dividend growth rate above 10 per cent;
- price-to-earnings ratio is below 15.0;
- current price-to-earnings ratio is below its five-year average.
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?
Only 10 companies in the S&P 500 index fill our requirements.
All these companies offered an outstanding dividend growth rate to shareholders in the past five years.
They are also economically very profitable, since their return on capital is well above their cost of capital (borrowing cost).
With the recent drop in the markets, some of these solid names now yield more than 2 per cent (or in some cases more than 3 per cent) and they are also trading well below the S&P 500 average P/E (19.8) and their own five-year average P/Es.
Investors are advised to do their own research before investing.
Jean-Didier Lapointe is a financial analyst at Inovestor Inc.