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When Report on Business magazine set out to sketch the first full picture of Canada’s 1,000 largest publicly traded companies back in 1984, the biggest banks occupied five of the nine most profitable slots below top-ranked phone heavyweight Bell Canada Enterprises. Three energy companies also made the top 10, along with now-defunct global booze giant Seagram, which came in third. Dozens of companies have joined the Top 1000 list in the ensuing three decades. But many former stars have followed Seagram out the door, as Canada’s universe of public companies has narrowed, thanks to the waves of foreign and domestic takeovers, mergers, buyouts, bailouts and bankruptcies that have gutted entire sectors.
Yet the leading players today look awfully familiar. The same lords of finance occupy five of the first six places on our latest profit scorecard, headed by the traditional pacesetter, Royal Bank of Canada, which reclaimed top spot after slipping to third a year earlier. In a year when the economy lost traction and total corporate profits slid sharply, bank earnings continued climbing, most by double digits.
It definitely pays, in other words, to belong to a cozy oligopoly whose regulated domestic market is largely kept safe from foreign predators. You could say the same for the folks running the modern iteration of BCE, whose protected turf and broadening media and mobile interests helped it climb to eighth from 13th a year earlier. The rest of the top 10 consists of venerable Imperial Oil (another holdover from the class of ’84), Suncor Energy, Canadian National Railway (a Crown corporation in 1984) and Potash Corp. of Saskatchewan (provincially owned back in the day).
The country’s 1,000 largest publicly listed companies notched total earnings of just under $93.3 billion in 2012, down nearly 12% from the previous year, as deep declines in resources more than offset strong gains from banks and insurers. It was the weakest performance since 2009, when profits plunged to $55.7 billion in the wake of the global financial meltdown and the worst economic slump since the Great Depression.
The finance-resource duopoly at the top of the earnings pyramid accounted for a combined 58.3% of the total. But at a time when commodity producers ran into stiff global headwinds and some hefty losses, the financials expanded their share of a smaller profit pie to 45.1%. Much of this was gobbled up by the six biggest banks, which stuffed their coffers with 31.4% of the 1000’s profits.
A couple of decades from now, our profit picture could look dramatically different, as communications and financial players spawned in the digital era, and developers of renewable energy, medical and other technologies, push their way up the ranks. Banks may even become smaller and less profitable, as Internet-based competitors take a growing bite out of their most profitable businesses. Heck, if a gossip website can raise $200,000 through crowdfunding in a matter of days to get its hands on a certain cellphone video, and a person apparently can buy a Porsche with virtual currency, who needs the expensive middleman? And the likes of BCE, Rogers (18th on the latest list), Telus (28th) and Shaw (37th) may well turn out to be right to fear the invasion of the channel-snatchers: Netflix, Apple and Microsoft, which plainly intend to lay siege to the Canadians’ profit-churning business models. It’s also not inconceivable that the traditional energy market that has enriched so many Canadian operators and investors could be turned upside down by then. “I would be surprised if you didn’t have the emergence of alternative power across the globe,” says Arthur Heinmaa, managing partner of Toron Investment Management in Toronto, who pays close attention to developing global trends as part of his focus on managing risk. “You’re already seeing it in solar. You’re getting [cost] decreases of 20% to 30% a year.”
Financial institutions may also feel the heat, as the business of packaging products and services like mutual funds and mortgages becomes increasingly commoditized, and clients find more innovative and cheaper ways of raising or parking capital and handling payments. “You always have to be careful of any business model that involves wholesaling,” Heinmaa says. “I may be shot down with a thunderbolt for saying this, but I suspect the whole finance side is going to be much smaller. Developments like crowdsourcing [of funds] are just in their infancy.”
But it’s Canada’s communications heavyweights that face the biggest threats from what analysts call “disruptive” innovation. “When you look at Netflix or Hulu [which streams video] or indeed even the new Xbox, there are a lot of technologies that could potentially displace the ubiquitous set-top box,” Heinmaa points out. “And then, they [the telcos and cable companies] just become providers of data into the house. Once you have the data, you can choose how you want to allocate it. Each year, they’re losing land lines. Now, a number of people are pulling the plug on TV. It wouldn’t be hard to imagine an environment where that starts to accelerate.”
Other prognosticators doubt Canada’s corporate hierarchy is facing a radical transformation, or any transformation at all, for that matter. “Outside of a change in foreign ownership policies regarding our resources or regulated industries, I suspect the answer is not a lot [of change],” says Andrew McCreath, president of Forge First Asset Management in Toronto. “We haven’t had a single government that is willing to identify and implement any industrial policy that facilitates a movement away from Canada being a hewer of wood and a drawer of water.”
And for now, there is no doubt that the lions of the old economy are still roaring, even as anemic growth, faltering world commodity prices, a slowdown in China and a deepening slump in Europe take a steep toll.
Analysts underestimated the ability of companies in a wide range of industries to shrug off the radioactive effects of the worldwide mess that began in 2008. But a sputtering global economy finally caught up to a large swath of Corporate Canada last year. Nearly 46% of the companies on our list posted losses, and many others booked reduced profit—dramatically reduced in some key parts of the resource world. The picture was a bit brighter when expanded to cover all private as well as public companies, including those in foreign hands. Their combined profit fell 8% before taxes. “The fact profits declined is not a shock,” says Douglas Porter, chief economist with BMO Capital Markets. “It’s the magnitude of the decline that’s a bit surprising.”
The results highlight a wide divide last year between companies whose strength lies in the domestic economy and the resource producers and other exporters whose fortunes are tied to a revival of global growth. The outlook for this year is slightly better, with oil prices and natural gas prices up from their profit-crushing lows of 2012. But as Porter observes, “the big macro themes are not that dramatically different. The big picture is that since the spring of 2011, commodity prices have gone sideways or down. The broader Canadian commodity price index is still tracking below the levels of a year ago. So I wouldn’t anticipate a big bounce this year.”
Of the 543 resource-related companies on our list, 344 finished the year bathed in red ink. One-third of those embattled loss-makers deal in precious metals for a living.
But perhaps the biggest surprise is that the raft of global and domestic problems hasn’t exacted an even bigger toll. “Corporate profits in general have done fairly well, despite a recovery [in Canada] that hasn’t been that dramatically strong,” says Avery Shenfeld, chief economist with CIBC World Markets. “That’s been true in the U.S. as well. But without a big run-up in commodity prices to help out this year, it’s going to be tough to eke out much in terms of a year-over-year gain.”
Solving the profit puzzle for many companies has involved slashing debt and operating costs, boosting productivity and keeping the cash flowing to the bottom line, even when revenues are stalling or sliding. An overly strong loonie hasn’t helped, although the hit to export earnings has been partly offset by the lower cost of imported technology and machinery. Still, the buffer effect on earnings from a lower Canadian dollar, usually seen whenever commodity prices fall, just hasn’t been there this time around. “The surprise has really been that Canada has not suffered as much as you would have thought from the high Canadian dollar,” Heinmaa says. But the bigger puzzle—one raised last year by then Bank of Canada governor Mark Carney in his attack on “dead money”—is why those companies that have managed to reap impressive profits have been hoarding cash, rather than investing more in future growth. Could it be that executives still vividly recall what happened in 2008 when capital markets and access to short-term funding seized up? Heinmaa thinks so. “It isn’t an issue of [lack of] confidence in the government. It’s a degree of self-insurance.”
The many companies saddled with heavy losses are more concerned with retrenchment than expansion. The biggest losers this time around include some of the starriest names in the Canadian galaxy: once-glittering tech darling Research In Motion, whose closely followed travails caused it to plunge all the way to 994th from 29th; natural gas power Encana, which had the dubious distinction of finishing dead last (lousy prices for your main product and a $2.79-billion U.S. loss will do that to you), after holding down 143rd place the year before; and debt-laden Barrick Gold (don’t mention Chile or gold short-sellers in their presence), which plummeted all the way to 995th from fourth the previous year. Fellow producer Kinross Gold managed the tricky feat of finishing 999th two years in a row. Yellow Media vacated the cellar, but not by much, finishing 997th. On a less gloomy note, it managed to eke out a profit in its most recent quarter, even as revenue declined.
Hanging around the crowded corporate intensive-care ward for any length of time can lead to unnecessarily dark and foreboding thoughts about the prognosis for Corporate Canada. Consider this: If one of this country’s leading skeptics is right about the earnings outlook this year and next, executives will soon be humming Happy Days Are Here Again.
That analyst would be David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates in Toronto, whose considerable reputation is based on a string of prescient bearish calls over the years, including the U.S. housing collapse of 2007 and the recent troubles in the Canadian home sector. Now, he wishes people like me would dispense with the permabear title that we routinely put in front of his name. His remarkably sunny—and contrarian—outlook for Canadian earnings may well accomplish that. “The rear-view mirror is helpful, but I’d still rather drive by looking through the front window,” Rosenberg says. “And considering how depressed the commodity sector is, I think there is only upside from here.”
Looking through his windshield at the accumulating data, Rosenberg has concluded that the world economy is not about to go to hell in a handbasket and corporate earnings will not be heading down or even sideways. In fact, he says, profits in the next year are “going to very likely surprise to the high side. After a prolonged period of disappointment, I wouldn’t be surprised to see analysts raising their numbers to double-digit profit growth here by next year.”
Rosenberg rhymes off a string of domestic and international building blocks that will form the foundation for these banner results. On the foreign front, he cites reduced recessionary pressures and an end to failed austerity in Europe; decent demand from China, which is slowing but scarcely headed toward a slump; renewed signs of life in resource-hungry Japan; improving labour and housing markets south of the border; and continuing moderate growth on a global scale.
“Commodities are behaving as though the world is going to enter a protracted slowdown,” Rosenberg says. “What I’m seeing is telling me global growth is likely to remain moderate, but with an improvement going forward.” What does that mean for Canadian commodity producers? “If basic materials and energy simply stabilized after their sharp declines, that alone would add 10% to aggregate Canadian profit growth in the coming year.”
Rosenberg is equally upbeat about domestic conditions, particularly if the Bank of Canada, under new management, drops its long-held bias toward tightening interest rates and instead declares its readiness to cut rates. This could help lower the value of the loonie and boost banks’ net interest margins by steepening the bond yield curve. Meanwhile, labour demand is on the rise, the Canadian housing market is stabilizing, household balance sheets are improving and banks are making access to credit less restrictive, boosting consumer confidence.
Starting about 18 months ago, worries began surfacing in the analytical crowd that both housing and credit would weaken markedly, posing a double-barrelled threat to bank earnings. “But if anything, it’s almost been a Goldilocks scenario for them, where we have still managed to have some growth, but not enough to drive up interest rates,” says Porter. “And inflation has remained very well-behaved. So it’s been quite a benign backdrop for the financial services sector.”
All of that can only mean another year in which bank chiefs will need physiotherapy for the sore arms they get from patting themselves on the back so much. And if the global economy manages to just stabilize, some of the suffering commodity players may be tempted to join them. But even Rosenberg and others who have donned rose-coloured glasses acknowledge there are plenty of dangers out there that could mar this idyllic landscape.
The Top 1000 rankings in ROB Magazine and this website only provide a limited snapshot of data for the top 1000 companies in Canada. The most comprehensive database of Canadian corporate financial information is available for purchase in spreadsheet format here. This year we have improved on what we have offered in previous years in two separate packages based on whether your needs are research or sales prospecting. Find in-depth financial and contact information, total compensation for every CEO on the Top 1000 and more.