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What are we looking for?

This week my associate Allan Meyer and I take a closer look at Canadian financials using our investment philosophy focused on safety and value.

The screen

We started our search by filtering for TSX-listed names 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 we love to get paid while we wait for capital appreciation.

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Then we looked at the debt-to-equity ratio as a safety factor. It is the debt outstanding divided by shareholders' equity. A smaller number indicates lower leverage or debt levels.

The price-to-earnings ratio 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 while the opposite is true for a negative number. Positive earnings momentum over the long term should translate to share price appreciation and perhaps dividend hikes.

Return on equity reflects profitability and a higher number is better. It is calculated by dividing net income 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

In general, the life insurers look attractive, but Manulife Financial Corp. has the lowest price-to-earnings ratio and scores well across the board for both safety and value.

The banks dominate the list in terms of size (market cap). They also tend to pay a good dividend and have attractive valuation and profitability ratios, but they tend to have high debt levels. It should be mentioned that, because of the nature of their business, banks are generally able to carry and service higher levels of debt.

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CI Financial Corp. posted the highest return on equity, and fairs well on most safety and value measures.

The iShares S&P/TSX Capped Financials Index exchange-traded fund (XFN) is an alternative for investors who like the sector but prefer to diversify away individual security risk.

Investors should contact an investment professional or conduct further research before buying any of the securities listed here.

Company Ticker Market Cap ($Bil) Recent Price ($) Div. yield (%) D/E (%) P/E Earns. Momentum (%) ROE (%) 52Wk Ttl Rtrn (%)
Royal Bank of Canada RY-T 137.7 95.06 4.1 247.0 10.6 3.1 18.0 -2.3
Toronto-Dominion Bank TD-T 131.0 71.45 3.8 180.0 10.3 2.5 16.4 0.0
Bank of Nova Scotia BNS-T 86.2 70.18 4.8 169.5 9.4 1.2 15.0 -12.6
Bank of Montreal BMO-T 62.6 97.69 3.9 244.3 10.1 3.9 14.3 2.4
Brookfield Asset Management Inc. BAMa-T 56.8 57.19 1.4 285.5 23.4 -3.2 10.6 8.7
CIBC CM-T 50.3 113.68 4.8 151.2 9.0 2.6 17.7 3.3
Manulife Financial Corp. MFC-T 43.0 21.68 4.6 31.9 7.6 8.9 13.6 -16.3
Thomson Reuters Corp. TRI-T 36.3 64.49 2.9 53.7 41.9 -33.0 5.2 18.2
Great-West Lifeco Inc. GWO-T 30.2 30.59 5.1 22.8 9.5 5.7 12.8 -9.6
Sun Life Financial Inc. SLF-T 29.3 48.53 4.1 46.3 9.7 3.3 13.9 -0.5
National Bank of Canada NA-T 20.2 60.04 4.1 299.7 9.4 2.4 18.1 -1.4
Power Financial Corp. PWF-T 20.0 28.02 6.2 78.8 8.0 -0.3 13.1 -17.2
Fairfax Financial Holdings Ltd. FFH-T 17.3 618.00 2.0 46.4 11.0 -18.3 15.7 -8.5
Intact Financial Corp. IFC-T 14.3 102.50 2.7 30.0 14.2 0.2 11.3 -2.7
Power Corp. of Canada POW-T 11.2 26.76 5.7 120.0 8.0 -5.6 10.2 -14.7
IGM Financial Inc. IGM-T 8.0 33.18 6.8 202.5 9.9 4.1 17.9 -22.3
Industrial Alliance Insurance IAG-T 5.3 47.94 3.5 19.4 8.2 2.1 12.0 -17.2
CI Financial Corp. CIX-T 5.0 19.92 3.6 58.8 8.3 3.0 34.9 -27.1
Median 29.8 58.6 4.1 99.4 9.6 2.5 14.1 -5.6
Average 42.5 89.3 4.1 127.1 12.1 -1.0 15.0 -6.7

Source: Eikon, Wickham Investment Counsel, Inc.

Sean Pugliese, CFA, is an investment portfolio manager at Wickham Investment Counsel, helping individuals, families and other investors.

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