What are we looking for?
Canada’s big banks are in the midst of quarterly financial reporting. Toronto-Dominion Bank TD-T and Royal Bank of Canada RY-T shared their results last week, and the remaining banks are doing so this week. Results have varied, but in general seem to be slightly weak.
Given the continued interest-rate hikes so far this year coupled with potential economic softening, my team member Allan Meyer and I thought we would take a closer look at Canadian financial stocks using our investment philosophy focused on safety and value. The sector is a market darling in Canada and usually looks attractive under the scope of safety and value, given its generally appealing valuations and dividends, as well as its reliable business models.
The screen
We started our search by filtering for Canadian-listed names in the financial sector with a minimum market capitalization of $5-billion. Market cap is a safety factor – large companies tend to be more liquid and stable than small ones. We sorted on this metric from largest to smallest.
Dividend yield is the annualized dividend divided by the recent share price. Allan and I love to get paid while we wait for capital appreciation and dividends are also a safety factor.
Debt/equity is our final safety ratio. It is the total debt outstanding divided by shareholders’ equity. A smaller number is safer.
Price/earnings is the recent share price divided by the projected earnings per share. It is a valuation metric, and a lower number is preferred.
Earnings momentum is the change in annualized earnings over the most recent quarter. A positive number implies earnings are growing, which could lead to share price appreciation and dividend hikes over the long term (and vice versa for a negative).
Return on equity reflects profitability, and a higher number is better. It is the net income divided by shareholders’ equity. We’ve also included the average and median numbers to allow for better comparability, and the 52-week total return as a performance measure.
What we found
Fairfax Financial Holdings Ltd. FFH-T boasts the best profitability and value, and scores well for safety and value. Its total return reflects that.
In general, most of the life insurers also score well. Power Corp. of Canada POW-T blows away the group in earnings momentum, while iA Financial Corp. Inc. IAG-T has the least debt.
Bank of Nova Scotia BNS-T is the highest yielding bank and looks to be the most attractive one. Banks tend to carry higher debt loads than other companies, and this is normal owing to the nature of their business. However, their earnings momentum is waning as of late.
As highlighted in our introduction, financials tend to deliver solid dividends, attractive valuations and profitability metrics, which all bodes well for safety and value.
Exchange-traded funds are for investors who like the sector, but prefer to diversify away from individual securities. The iShares S&P/TSX Capped Financials Index ETF (XFN) holds stocks in the whole sector. The BMO Equal Weight Banks Index ETF (ZEB) holds the big banks only.
Investors should contact an investment professional or conduct further research before buying any of the securities listed here.
Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.
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