Few changes in most stable stocks

That’s what this survey (see table at right) is all about: identifying the most stable, long-term market performers to create a short list of conservative candidates for investment.

So, what is “price stability” – or its antonym, volatility? Robert A. Haugen, finance professor at the University of California and a recent researcher in investment analysis, uses this definition of volatility: the standard deviation of monthly return (including dividends, as well as capital gains).

Decades ago, however, a less complex method of measuring volatility was developed by Arnold Bernhard, a pioneering investment researcher who was trying to isolate the characteristics of a high-quality investment. Price stability, he found, was statistically most significant, even more than earnings growth,

It is Bernhard’s original price stability ratio that is used in the accompanying table – all this formula requires is 11 years of annual price ranges and basic arithmetic. Bernhard, who founded Value Line Investment Survey in New York in 1931, had published his findings in 1959.

Both Haugen’s and Bernhard’s methods differ fundamentally from beta in two respects: they measure price movements and total returns for more than a year and they are independent of other price measurements. (“Beta” is related to a market index or benchmark.)

The accompanying table lists the 26 stocks with the best price stability out of a group of 171 leading Canadian companies, most of them large-cap and dividend-payers. There are few changes compared with the stability leaders presented in Investment Executive’s (IE) previous price stability survey, which was published in the June 2011 issue. That’s to be expected of a stable group of stocks.

The 26 stocks in IE’s current list have provided an average total return of 37% for the five years from yearend 2006 to yearend 2011. Total return is price appreciation (or loss) plus dividends paid. In comparison, the S&P/TSX composite total return index has gained by 6.7% over the same period.

The list in the table is laden with utilities, banks and consumer staples companies – all businesses with fairly steady demand for their services and products.

Among the least stable stocks among the 171 companies over the same period, total returns tend to be negative.

For example, First Quantum Minerals Ltd., with a price stability ratio of 0.737, had produced a five-year loss of 64.7%. In the middle of the list, Sun Life Financial Inc., with a stability ratio of 0.432, had produced a five-year loss of 46.7%.

In contrast, Pembina Pipeline Corp., a former income trust, had produced a 134.2% total return in the past five years through a combination of price gains (to $26.45 a share from $15.83) and dividends paid ($7.41, excluding return of capital and capital gains). The dividend has increased each year.

Enbridge Inc., the natural gas pipeline operator, produced a 108.3% total return, thanks to a similar combination – a rise in stock price and increased dividends each year.

BMTC Group Inc., a holding company for retail chains selling furniture, appliances and electronics in Quebec, has produced a 124% total return, thanks to a near doubling of its stock price.

Large extra dividends have produced a 50.9% return for publisher McGraw-Hill Ryerson Ltd. In the five-year span, it has paid $17.50 in extra dividends, by far offsetting a 49¢ drop in the stock price. The company had paid a $7 extra dividend in May.

Accumulated dividends have overcome stock-price drops for some firms. Bank of Nova Scotia has produced a 16% total return despite a price drop. The stock price was down by $1.27, whereas dividends paid were $9.63.IE

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