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number cruncher

What are we looking for?

Canadian financials have had a strong start to the year, with the sector posting double-digit returns. Some market pundits suggest this may continue as investors tend to gravitate toward high-quality, less volatile, dividend-paying names with a strong earnings presence during uncertain times. As a result, my team member Allan Meyer and I thought we would take a look at opportunities in the sector using our investment philosophy focused on safety and value, and the financials often fit in well with it.

The screen

We started our search by filtering for Canadian-listed names in the financial sector with a minimum market cap of $7-billion. Market cap is a safety factor; generally, larger companies offer more liquidity and stability. We sorted on this metric by largest to smallest. Dividend yield is the annualized dividend divided by the share price. Dividends often reflect safe and steady business models – and of course, Allan and I love to get paid while we wait for capital appreciation. We limited the screen to dividend-payers as a result. Then we looked at debt/equity as our final safety metric. It is the total debt outstanding divided by shareholder equity. A smaller number is preferred. Price/earnings is the share price divided by the projected earnings per share. It is a valuation metric, and the lower the number, the better the value. Earnings momentum is the change in annualized earnings over the previous quarter. A positive number over the long term implies earnings are growing, and should lead to share price appreciation and dividend hikes over the long term. The opposite is true for a negative number. Return on equity is the net income divided by shareholder equity and is a profitability measure. We’ve also included the average and median numbers to allow for better comparability and the 52-week total return to track performance.

What we found

16 companies offering safety and value for investors  

CompanyTickerMkt. Cap. ($B)Div. Yld. (%)D/E (%)P/EEarns. Mom. (%)ROE (%)52wk Ttl Rtn (%)Recent Price ($)
Royal Bank of CanadaRY-T192.583.8300.411.50.616.1-1.3138.99
Toronto-Dominion BankTD-T170.444.1316.910.21.116.0-10.193.56
Bank of MontrealBMO-T91.914.2257.69.8-2.114.8-6.3135.47
Bank of Nova ScotiaBNS-T88.355.6273.58.9-0.515.5-16.574.16
Canadian Imperial Bank of CommerceCM-T56.345.5210.89.1-4.014.7-20.462.19
Manulife Financial CorpMFC-T48.865.120.78.0-2.911.60.626.20
Sun Life Financial IncSLF-T40.194.362.410.52.614.21.468.54
Intact Financial CorpIFC-T34.832.233.415.3-3.614.79.5198.72
National Bank of CanadaNA-T34.153.9264.410.4-1.318.41.9101.27
Great-West Lifeco IncGWO-T33.525.835.
Power Corporation of CanadaPOW-T21.865.680.29.1-12.68.8-10.635.70
Fairfax Financial Holdings LtdFFH-T21.641.654.37.6-24.413.633.8870.89
IGM Financial IncIGM-T10.025.4111.411.3-3.714.0-3.042.18
iA Financial Corporation IncIAG-T8.713.322.79.10.713.32.283.59
TMX Group LtdX-T7.702.627.818.8-0.410.33.8138.12
Element Fleet Management CorpEFN-T7.422.1239.716.19.513.550.318.90

Source: Refinitiv Eikon & Wickham Investment Counsel Inc.

Great-West Lifeco Inc. GWO-T pays the highest dividend and scores well for safety and value on most measures. Manulife Financial Corp. MFC-T carries the lowest debt ratio and also looks attractive. Fairfax Financial Holdings Ltd. FFH-T boasts the best value but has the worst earnings momentum, which may be the reason for the inexpensive valuation. Element Fleet Management Corp. has the strongest earnings momentum, but carries the most debt/equity for a nonbank financial. The banks tend to have high debt loads as it is part of the nature of their business. National Bank of Canada looks to be the most attractive bank on profitability. Toronto-Dominion and Bank of Nova Scotia are appealing if looking for other names, but there doesn’t appear to be a clear standout among the big banks.

The TSX Capped Financials ETF is for investors who like the sector, but prefer to diversify away individual securities.

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.

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