Canadian Dividend Investors
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Maximize Profitability
Focus on return on equity, not earnings per share.
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Assuming you have minimized the financial risk associated with owning a company's common shares, you should then consider companies that have a record of being highly profitable. The return on equity (ROE) is a convenient measure of a company's profitability and is defined as the net (after tax) income divided by the shareholders equity. When you buy the common shares of a company, you are actually buying a proportionate share of the company's equity, based on the number of shares you buy. Therefore, the higher the return on equity, the greater the profitability of your investment.
The historic returns on equity have been highlighted on the following image, which was copied from the Value Line report for Sun Life Financial, dated May 3, 2024. As shown, the ROE ranges from a low value of 9.7% in 2020 to a maximum of 14.4% in 2021, with most of the values being between 10% and 11%. You must use your own judgement in choosing a representative value for each company, since simply using an average value of ROE for the most recent 5 or 10 years can be misleading.
The following table summarizes the representative ROE values for the companies in my current portfolio, as judged from the historic values for ROE reported by Value Line for each of the respective companies.
I suggest owning Canadian companies that have a minimum ROE of 10%, the higher the better. As indicated on the foregoing table, the ROE values for Telus and Enbridge do not meet this criterion, primarily because both companies have been expanding their pipeline distribution systems and therefore their capital expenses are high. It is expected that once this work is completed in the next few years, their capital expenses will fall and their revenue, earnings and profitability will rise.
It is worth noting that Canadian companies are generally less profitable as compared to their international peers, most likely because the Canadian population is smaller and more widely dispersed as compared to the U.S., China or Europe.
1. Vick, T., 2001. How to Pick Stocks Like Warren Buffet. Profiting from the Bargain Hunting Strategies of the World's Greatest Value Investor. McGraw-Hill, New York, NY pp 135 to 145