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number cruncher

What are we looking for?

The big banks recently reported – and results were mixed. Toronto-Dominion Bank seemed to have the strongest report compared with the Street’s expectations, while Bank of Nova Scotia appeared to be at the opposite end of the spectrum, with the weakest. Given the interest rate hikes so far this year, often a tailwind for financial firms, my team member Allan Meyer and I thought we would take a closer look at Canadian financials using our investment philosophy focused on safety and value. The sector usually looks attractive under this lens because it generally has attractive valuations and dividends, as well as reliable business models.

The screen

We started our search by filtering for Canadian-listed names with a minimum market capitalization of $5-billion. Market cap is a safety factor, generally larger companies are more liquid and stable. We sorted on this metric by largest to smallest. Dividend yield is the annualized dividend divided by the recent share price; it’s also a safety factor. Then we looked at debt-to-equity as our final safety ratio. It is the total debt outstanding divided by shareholders’ equity. A smaller number is preferred.

Price-to-earnings is the recent 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 past quarter. A positive number implies earnings are growing. Over the longer term this should lead to share price appreciation and dividend hikes. The opposite is true for a negative number. Return on equity reflects profitability – a higher number is better. It is the net income divided by shareholders’ equity.

We’ve also included the average and median numbers to allow for better comparability and the 52-week total return as a performance measure.

What we found

Canada’s financial sector: How safety, value metrics are holding up

CompanyTickerMkt. Cap. ($ Bil.)Div. Yld. (%)Debt to Eqty. (%)P/EEarns. Mom. (%)ROE (%)52W Ttl. Rtn. (%)Recent Price ($)
Royal Bank of CanadaRY-T177.34.1319.010.7-3.916.8-2.1125.07
Toronto-Dominion BankTD-T156.74.1317.89.81.616.08.386.13
Bank of Nova ScotiaBNS-T89.55.5256.
Bank of MontrealBMO-T85.84.3286.49.00.716.95.1127.77
Manulife Financial Corp.MFC-T44.15.720.77.0-1.612.2-2.023.13
Sun Life Financial Inc.SLF-T34.54.751.99.30.314.0-6.058.85
Intact Financial Corp.IFC-T33.92.137.415.2-1.015.413.5193.12
National Bank of CanadaNA-T30.04.1208.79.1-0.119.3-6.389.29
Great-West Lifeco Inc.GWO-T29.
Power Corp. of CanadaPOW-T20.95.780.28.7-14.610.0-15.634.03
Fairfax Financial HoldingsFFH-T16.51.954.37.9-15.118.318.4652.33
IGM Financial Inc.IGM-T8.56.2114.09.6-2.915.1-17.335.74
iA Financial Corp. IncIAG-T7.53.822.
TMX Group Ltd.X-T7.32.529.617.6-0.310.4-2.2132.06
Element Fleet Mgt. Corp.EFN-T6.51.9239.714.610.512.719.016.32

Source: Refinitiv Eikon & Wickham Investment Counsel Inc.

The aforementioned Bank of Nova Scotia generally scores well for safety and value. IGM Financial Inc. is the highest yielding while Manulife Financial Corp. is the least expensive and carries the lowest debt. National Bank of Canada is the most profitable and Element Fleet Management Corp. has the best earnings momentum.

The sector continues to boast solid dividends (average yield is more than 4 per cent), attractive valuations and profitability metrics, all of which bodes well for safety and value. The banks do tend to carry higher debt loads but this is normal as the nature of their business allows them to facilitate this.

iShares S&P/TSX Capped Financials Index ETF (XFN) is an alternative for investors who like the sector but prefer to diversify away individual security. BMO Equal Weight Banks Index ETF (ZEB) is an option for those who want to hold the big banks only.

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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