Empirical research by professors Eugene Fama from the University of Chicago and Kenneth French from Dartmouth's Tuck Business School, has concluded that value stocks have a tendency to outperform growth stocks over long periods of time. In fact, between 1927 and 2011, small cap stocks outperformed large-cap stocks and value stocks outperformed growth stocks. Last year alone, based on the Fama-French research portfolios, small-cap value stocks beat small-cap growth stocks by whole 15 percentage points, whereas large-cap value stocks outperformed their large-cap growth peers by 8.7 percentage points. Value tilts in portfolios have proven to increase returns over time. (Still, investors should be aware that past performances are not guarantees of future results).
There are several value stocks among Canadian equities listed on the U.S. stock exchanges. Some of them boast upside potential for the long-run, which makes them good starting points in research of stock candidates with the capacity to produce market-beating results. The list below features the main characteristics of five large-cap value plays in the universe of Canadian dividend stocks with positive trailing and forecasted long-term EPS growth, return on equity of at least 15%, and trailing and forward P/Es below 15.0x. All the stocks featured below have attractive price-to-book ratios, either based on comparison with the ratios of their respective industries or the stocks' historical averages.
Agrium (AGU) is a producer, wholesaler, and retailer of agricultural nutrients and industrial products in the Americas. Agrium is also the only publically-traded company that crosses the entire agricultural value chain. The company's product lines include seeds, fertilizers (nitrogen, phosphate, and potash), and a slew of herbicides, insecticides, and fungicides. Agrium achieved record-breaking revenues in each of the past two years, with 2012 sales rising 8% from the year earlier to $16.7 billion. Last year, its EBITDA of $2.7 billion increased 2% year-over-year. The company's shares, which are up 19.4% over the past year, are trading at only 10.8x trailing earnings, versus 15.5x for its respective industry. Moreover, the company's price-to-book of 2.2 is at a 33.3% discount to the ratio for its respective industry. Given the robust growth in world's population and per capita incomes in emerging world, the demand for crop yield enhancers and seeds will increase substantially in the long run. This bodes well for Agrium. Analysts forecast Agrium's long-term EPS CAGR at 6.3%. Its low dividend yield and payout ratio suggest its dividend could grow further in the future. It should be noted that activist hedge fund investor JANA Partners, with a 7% stake in Agrium, is pushing for a spin-off of the company's retail business, reportedly with a goal to unlock value and growth potential.
Bank of Nova Scotia (BNS), Canada's third largest bank by asset size, is another value play. The bank is trading at 11.5x trailing earnings, slightly above its respective industry, but below the bank's five-year average trailing multiple of 12.5x. The bank's forward P/E is an even lower 10.8x. Moreover, its price-to-book of 2.0 is below its long-term average ratio of 2.2. The bank recently posted estimates-beating EPS for its fiscal first quarter, with a gain of 4% over the year-earlier quarter. Canadian banking, driven by acquisitions, organic growth, and lower loan loss provisions boosted the bank's performance. Moreover, given the bank's large exposure to Latin America and a growing presence in Asia, BNS's growth was also bolstered by the bank's international operations. Global banking and markets realized especially strong earnings growth. However, BNS reported ROE of 16.6% in the previous quarter, which remains high but still down from 19.8% in the same quarter the year earlier.
Imperial Oil (IMO), an integrated energy company and one of Canada's largest corporations, is also a value play. The company has paid dividends for 130 consecutive years, with the dividend increasing 50% since 2006. The company is growth oriented, committed to double its upstream production by 2020. For this reason, it is investing over $40 billion this decade to achieve the goal. The company beat analyst expectations for its fourth-quarter earnings by 27%. IMO's refining operations have been pushing up EPS, which is likely to continue in the near term. For 2012 as a whole, the company's sales increased 12% from 2011, to reach the second-highest level on record. In terms of valuation, IMO is trading at 9.9x trailing earnings, below its industry's trailing multiple of 11.6x. Its price-to-book of 2.3 is about on par with its industry's ratio, but below its five-year average ratio of 3.1. Analysts forecast the company's EPS CAGR at a meager 3.6% for the next five years. However, the company's recent acquisition of a 50% participating interest in the Celtic Exploration acquisition by ExxonMobil Canada for $1.6 billion will boost IMO's unconventional oil and gas assets in Montney and Duvernay shales. The stock is down about 8% over the past year.
Magna International (MGA), one of the world's largest auto parts manufacturers, supplier of all wheel drive systems, and vehicle assembler, also looks like a value play. The company is valued at 9.6x trailing earnings versus 13.1x for its respective industry. Its forward P/E is only 8.6x, with a PEG of 0.8. MGA has a price-to-book of 1.4, which is 40% higher than the company's long-term average, but still slightly more than half the industry ratio of 2.6. The company is also growing robustly. In the previous quarter, the MGA's reported EPS beat analyst expectations, increasing 12.9% from the year-earlier quarter. The 10.8% revenue growth supported the bottom-line growth. Full-year 2012 EPS increased 45% from 2011. The company's 2012 sales, which grew 7% from 2011, totaled $30.84 billion. They are expected to grow by as much as 8.3% this year, mainly driven by vehicle production growth in North America. Analysts have a rosy outlook of MGA's long-term EPS growth, forecasting EPS CAGR of 12.1% for the next five years. It is worth noting that the company has negligible leverage, with long-term debt to equity of mere 1%.
Shaw Communications (SJR) provides cable TV, high-speed Internet, home phone, telecommunication, and satellite services. The company serves 2.2 million video, 1.9 million Internet, and 1.4 million Digital Phone subscribers. Shaw pays a high dividend yield of 4.1% and makes monthly dividend payments. The stock, which has rallied nearly 18% over the past year, could be considered a value play, as it is currently trading at 14.6x trailing earnings, below its five-year average multiple of 15.6x and its respective industry's multiple of 15.8x. The company has also been growth at a solid clip, as its consolidated fiscal 2012 revenues increased 5% last year and EBITDA rose 4%. Shaw has achieved a consolidated revenue and EBITDA five-year CAGR of 10% and 9%, respectively. Analysts are not particularly bullish about Shaw's long-term EPS prospects, forecasting the company's EPS CAGR at 6.4%.
The aforementioned stocks boast value characteristics that should be further analyzed. Some boast significant long-term growth potential, especially Agrium. Others could be considered potential dividend growth plays, given their low payout ratios and forecasted EPS growth. This particularly relates to Agrium and Magna International.