What are we looking for?
My associate Allan Meyer and I take a closer look at Canadian financial stocks using our investment philosophy focused on safety and value.
The screen
We started our search by filtering for TSX-listed equities in the financial sector with a minimum market capitalization of $5-billion. Market cap is a safety factor; generally larger companies have more stable and diverse revenue streams and earnings profiles. The list is sorted on this metric, from largest to smallest.
Dividend yield is the annualized dividend divided by the recent share price. Dividends generally reflect safety and stability, and of course we like to get paid while we wait for capital appreciation.
Then we looked at debt-to-equity as a safety factor. It is the total debt outstanding divided by shareholders' equity. A smaller number indicates lower leverage or debt levels.
Price-to-earnings (P/E) is the share price divided by the projected earnings per share. It is a valuation metric – the lower the number, the better the value.
Earnings momentum is the change in annualized earnings over the last quarter. A positive number implies earnings are growing while the opposite is true for a negative number. Positive earnings momentum over the long term should translate to share price gains and perhaps even dividend hikes.
Price-to-book (P/B) compares the recent share price with the book or equity value per share. This is a value measure, a lower number is preferred.
Return on equity (ROE) reflects profitability, a higher number is better. It is calculated by dividing net income by shareholders' equity.
What did we find?
Power Corp. of Canada looks to be a value play with some earnings growth while Canadian Imperial Bank of Commerce posted the highest ROE of banks on the list and also ranks well from a dividend, leverage and value standpoint among its banking peers. It should be mentioned that because of the nature of their business, banks are generally able to carry and service higher levels of debt. Fairfax Financial came in with some solid metrics, but it should be noted that it is the only name on the listed with a negative ROE.
IShares S&P/TSX Capped Financials Index ETF is an alternative for investors who like the sector, but prefer to diversify away from an individual security.
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.