How bad a year was it? It was a year when a beleaguered conglomerate's board of directors could abandon its CEO, walk away from a subsidiary it bought two years before for $6.4 billion in stock, leave banks on the hook for $1.25 billion (U.S.) in loans-and still finish No. 2 in our annual Top 1000 ranking (page 80) of Canada's largest corporations by profit. That company, of course, is BCE Inc., one of the perennial leaders in our ranking.
The fact that many of the leaders still earned hefty profits, although less than the year before, says a lot about their ability to roll with the punches amid global economic turmoil. That and their ability to keep squeezing steady income out of stolid, reliable Canadian consumers.
At the top of The Top 1000 is a familiar assortment of banks, life insurers, utilities, grocers and oil-and-gas companies, stalwarts since our first ranking in 1984. At the bottom are No. 1000-ranked Nortel Networks Corp. and other casualties of the tech bust of 2000 and 2001-more proof that Canada is still a country where dull works, while bold risk-takers are often punished, and punished severely.
Consider the Big Five banks. In 2001, they each earned more than $1 billion in profits. In 2002, just three cracked that barrier. Only the Royal Bank of Canada, No. 1 on our ranking for the second year in a row, boosted its profit, to a record $2.8 billion. Strong retail operations were a big factor. Royal also avoided massive telecommunications and power loan losses that plagued its competitors.
The Toronto-Dominion Bank was hit the hardest, dropping from No. 6 to No. 961 in our ranking. TD posted a $76-million loss in 2002, the first in its 48-year history, down from a $1.4-billion profit in 2001. Back then, TD was riding high after its takeover of Canada Trust the year before. At the same time, however, TD was the most aggressive lender among the Big Five to the likes of Teleglobe Inc. (a former BCE subsidiary), Adelphia Communications Corp. and Enron Corp. TD took huge write-downs on bad loans last year, as well as hefty charges related to its U.S. brokerage operations. As scheduled previously, Charles Baillie retired as TD's CEO in December. "It wasn't an ideal time," he said. No kidding.
If you wanted both action and profits last year, life insurance was the place to be. Manulife Financial Corp., Sun Life Financial Services of Canada Inc. and Great-West Lifeco Inc. all boosted their profits and moved up in our rankings, in large part because they've acquired rivals in recent years. The banks are still not allowed to merge with one another or sell life insurance through their branches, but it's only a matter of time before Ottawa loosens those restrictions. So the insurers are bulking up.
Manulife CEO Dominic D'Alessandro has been the most aggressive. Last fall, he geared up for a run at the Canadian Imperial Bank of Commerce, but that was quietly squelched by Finance Minister John Manley. In December, he launched a $6.4-billion hostile takeover bid for Canada Life, losing out when the company accepted a friendly $7.3-billion bid from Great-West in May.
There was lots of action and cash flowing in the oil-and-gas sector as well, though individual company results were mixed. Petro-Canada and Husky Energy Inc. racked up solid profit increases, while EnCana Corp. and Imperial Oil Ltd. posted slight declines. Shell Canada Ltd.'s profit dropped 44%, largely due to lower refining margins and heavy spending on the Athabasca Oil Sands Project.
The oil patch had the uncertainty over Iraq to thank for pushing oil prices up from near $20 (U.S.) per barrel at the start of 2002 to more than $35 (U.S.) in February of this year. As a result, EnCana posted a whopping $1.25-billion profit for the first quarter of 2003, a record for the Canadian energy industry. "I hope you sense the sense of excitement we have about how our company is doing," president and CEO Gwyn Morgan said to analysts. How long they can keep it up is another question. Plus, all that cash is a burden. Analysts predict a flurry of acquisitions of oil patch properties and companies this year. Or companies may buy back shares or pay special dividends to investors who are hungry for cash.
Their appetite has been fuelled by the hottest investment class in Canada over the past two years: income trusts, which own businesses and pay out operating profits to investors under preferred tax rules. Our ranking of the Top 50 income trusts (page 135) shows that many have paid out distributions of around 10%, far better than GICs and other interest-paying instruments.
How long can those fat payouts continue? Critics argue that trusts are the next big bubble in waiting. They point to some that have hit the wall and suspended distributions. But, so far, those suspensions have been rare. Besides, the concept of taking cash flow away from management and shooting it straight out to trust unitholders fits in with the disgruntled investor spirit of the times.
Executive pay is a big source of that aggravation. At annual shareholder meetings this spring, Magna International Inc. chairman Frank Stronach, who tops our list of the 50 top-paid executives (page 147) with $52.1 million in earnings last year, and Royal Group Technologies Ltd. CEO Vic De Zen, who is No. 9 with $10.6 million, both had to defend themselves. "I should get more," Stronach said, citing Magna's strong long-term growth. Indeed, Magna's revenues have doubled over the past five years. Of course, he and his family also control the company with multiple-voting shares. Royal Technologies' stock price has declined by more than two-thirds in a year. Yet De Zen, who set his own annual bonus, gave himself $5.6 million last year, up from $2.2 million the year before.
Despite all this, Ken Hugessen, senior executive compensation consultant at Mercer Human Resource Consulting, which compiled the Top 50 ranking, argues that excesses are being reined in. Median total compensation for the executives on this year's Top 50 dropped to $7.3 million from $9.2 million in each of the previous two years. He also notes that Nortel Networks and Ballard Power Systems Inc. each had five executives in the Top 50 two years ago. This year, there is just one-Nortel CEO Frank Dunn.
Shareholders are pressing for more control of executive pay by board committees of independent, outside directors. Many companies are also following the Big Five banks and replacing controversial stock options programs with grants of shares to executives based on the total shareholder return of the company relative to its competitors. To Hugessen, it's a classic pendulum swing. "There was quite a reaction to executive pay in the early 1990s," he says, "but then we got a new bull market." He adds it took a collapse for investors to realize that "there was no new paradigm. It was the same old paradigm."
For many companies, prospects seemed limitless even two years ago. Now, just hanging on is good enough. -***** 5 Top 1000 newcomers RANK 2002.. COMPANY
131 TSX Group Inc. 142 Heritage Oil Corp. 152 Ritchie Bros. Auctioneers Inc. 154 Rona Inc. 192 Novamerican Steel Inc.
5 that have left RANK 2001.. COMPANY
108 Rio Alto Exploration Ltd.
Taken over by Canadian Natural Resources Ltd.
312 Emco Ltd.
Taken private by U.S. investment firm Blackfriars Corp.
450 A.L.I. Technologies Inc.
Taken over by U.S. health-care and tech firm McKesson Corp.
795 Echo Bay Mines Ltd.
Merged with Kinross Gold Corp. and TVX Gold Inc.
997 Teleglobe Inc.
Entered bankruptcy protection in May, 2002
-******* Biggest moves up The Top 1000
RANK CHANGE IN PROFIT 2002 2001 COMPANY AND YEAR END ($ MILLION) 40 987 Rogers Communications(De02) 776 36 980 Fairfax Financial Holdings(De02) 762 56 977 Placer Dome(De02) (US)307 86 989 Moore Corp.(De02) (US)431 66 965 MDC Corp.(De02) 301 98 974 Quebecor Inc.(De02) 341 80 952 Torstar Corp.(De02) 212 47 917 Bell Nordiq Group(De02) 281 135 976 Geac Computer Corp.(Ap02) 308 147 984 Algoma Steel Inc.(De02)* 434
-****** Biggest moves down The Top 1000
RANK CHANGE IN PROFIT 2002 2001 COMPANY AND YEAR END ($ MILLION) 998 32 Inco Ltd.(De02) (US)-1,786 976 16 OInex Corp.(De02) -943 994 38 Bombardier Inc.(Ja03) -651 961 6 Toronto-Dominion Bank(Oc02) -1,459 986 33 Telus Corp.(De02) -683 963 26 Westcoast Energy(De02) -637 981 69 Corus Entertainment(Au02) -294 979 111 Tembec Inc.(Se02) -236 956 97 Fording Canadian Coal Trust(De02) -166 972 132 Norske Skog Canada(De02) -168
-****** Highest returns on common equity
ONE-YEAR RANK COMPANY AND YEAR END RETURN % 1 Geac Computer Corp.(Ap02) 592 2 Mega Bloks(De02) 393 3 Heritage Oil(De02) 128 4 Cedara Software(Ju02) 118 5 MDC Corp.(De02) 113
-****** Lowest returns on common equity
ONE-YEAR RANK COMPANY AND YEAR END RETURN % 1 Acetex Corp.(De02) -1,217 2 Perle Systems(Ma02) -560 3 MediSolution Ltd.(Ma02) -489 4 McWatters Mining(De02) -434 5 Basis 100 Inc.(De02) -208