‘Twas the night before Halloween, when boxes of tiny chocolates crowd the house awaiting the wee witches and goblins who will soon be out and about.
While All Hallows Eve promises treats, the market has served up tricks to investors this fall. The S&P/TSX Composite Index fell by 15 per cent from its high in the spring of 2022 and the woeful decline doesn’t include inflation, which has been cutting down the size of holiday treats in recent times.
Norman Rothery: Portfolios for dividend and value investors
The stock market’s stumble prompted me to look for bargains and compare them to the ghosts of bear markets past. I start my search with the 300 largest common stocks trading on the Toronto Stock Exchange and then measure them up for their dividend and value appeal.
The Top 300 companies include 207 that pay dividends and offer an average dividend yield of 3.6 per cent. Similarly, the 241 stocks with positive earnings over the last four quarters have an average price-to-earnings ratio (P/E) of 10.8. There are 261 companies followed by industry analysts with positive expected earnings over the next four quarters and they have an average price-to-forward-earnings ratio (P/FE) of 10.2.
Turning to balance sheets, a full 290 of the 300 stocks have positive book values and trade at an average price-to-book-value ratio (P/B) of 1.3. (The raw data herein comes from Bloomberg, but the calculations are my own. The averages for the ratios are harmonic means while arithmetic means are used for yields.)
Value investors like to employ old rules of thumb to find bargains that harken back to money manager Benjamin Graham’s days. He suggested, in the 1973 edition of his book The Intelligent Investor, that defensive investors should look for stocks with P/Bs of less than 1.5 and P/Es of less than 15. The Canadian stock market is stuffed with opportunities that would interest Mr. Graham because 129 of the Top 300 stocks trade for less than 15 times earnings and 141 trade for less than 1.5 times book value.
Buying in bad times can be frightening but it helps to look at past bear markets for a sense of where we stand. That’s why I searched through dusty data from yesteryear to find the yields and ratios that prevailed near the bottom of past crashes. More specifically, I gleaned data from the COVID-19 crash at the end of March, 2020, the financial crisis at the end of February, 2009, and the bottom of the internet bust in September, 2002.
The accompanying table presents today’s ratios and yields for the largest Canadian banks along with similar data from near the market’s lows in 2020, 2009 and 2002. The table is sorted by current size (market capitalization) starting with Royal Bank down to the much smaller Laurentian Bank. Similar data is offered on all 300 large stocks in the online version of this article, and I own many of the stocks in both tables.
Canadian bank shares have been under pressure in recent times due to rising short-term interest rates and the accompanying fear of a collapse in the real estate market and economy more generally. Remarkably, five banks trade at book value multiples below those seen during the financial crisis in February, 2009, when the market was, arguably, in a more fearful state.
Mind you, most dividend yields aren’t quite as juicy as they were in 2009 when I bought shares of Bank of Montreal, which offered a yield near 10 per cent. I still hold a few of the bank’s shares today but it offers a comparably paltry, but still quite reasonable, 5.6 per cent yield. On the other hand, Bank of Nova Scotia pays 7.6 per cent these days, whereas it only sent 6.9 per cent to shareholders in early 2009.
It’s a rare day when large Canadian banks trade near book value with single-digit forward earnings multiples while paying generous yields. Holding them might prove to be a treat over the long term – provided all hell doesn’t break loose, which is a possibility that can’t entirely be ruled out.
The same can be said for a great swath of the Canadian stock market in which diversification can easily be had by buying a large basket of stocks trading for less than 15 times earnings. It’s something to consider when nibbling on Halloween leftovers this year.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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