What are we looking for?
Now that the Big Six Canadian banks have reported their most recent quarterly earnings, let's take a deeper look into the numbers to see what has changed from an economic profit perspective. We are also comparing the Big Six's economic performance with smaller, alternative banks and lenders.
The screen
We created a spreadsheet to compare the Canadian banks and alternative lenders with a market cap above $800-million by looking at the following metrics:
- Return on capital;
- Change in return on capital over 12 and 24 months;
- Cost of capital, which represents the company’s average cost of borrowing;
- The economic performance index, or EPI (return on capital divided by cost of capital). An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- Change in EPI over 12 and 24 months;
- Dividend yield;
- Average annual dividend growth rate over five years;
- Dividend payout ratio.
The year-to-date price performance is displayed for information purposes.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (Economic Value Added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.
What did we find?
First National Financial Corp., Canada's largest non-bank lender, comes up as the company with the highest EPI of the group at 4.9. It is the only company that has been able to increase its return on invested capital over the past 12 months – up 18 per cent to a current return on capital of 40.8 per cent. First National pays monthly dividends at a current yield of 5.63 per cent, the highest of the group. The market definitely recognizes First National's stellar fundamental performance, looking at the 35.8 per cent YTD price performance.
Among the Big Six, Toronto-Dominion Bank is the only one that has not seen a decrease in its return on invested capital in either the past 12 or 24 months. It also offers the second-highest EPI (on par with Canadian Imperial Bank of Commerce), after Royal Bank of Canada.
Unfortunately, TD's above-average economic performance didn't translate into an above-average market return – the year-to-date price performance being the lowest of the group at 6.1 per cent. Its dividend yield of "only" 3.84 per cent is the lowest among the Big Six. This could explain why some dividend investors might have chosen to invest in other banks, thus keeping TD's stock momentum at lower levels.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.