What are we looking for?
Canadian financial stocks offering deep value in a richly valued market.
With U.S. and Canadian markets rallying strongly since Dec. 24, it is becoming more difficult to find stocks adhering to traditional value-investing characteristics. One Canadian market sector that has retained many attractive value-investing properties is financial services, with an average price-to-earnings ratio of just 13.9 – the lowest of any Canadian sector. It has been held back by dampened expectations for rate hikes by the Bank of Canada in 2019. As a result, many of the stocks in this sector also offer excellent value as well as attractive dividend and return-on-equity characteristics.
We will be using Trading Central Strategy Builder to search for Canadian financial services stocks with low valuation metrics, strong return on equity and high dividend yields.
We will start by screening for Canadian financial services stocks with a market capitalization of $5-billion or more. This will limit our search to approximately the top 20 per cent of financial services in the Canadian market. To find companies offering deep value in a market at or near its record highs, we will screen for P/E ratios of 15 or less and price-to-book ratios of two or less.
To focus on firms with a track record of using invested capital to generate returns for shareholders, we will filter for return-on-equity of 10 per cent or more. Finally, to find firms paying attractive dividends, we will limit our search to companies with a dividend yield of 3.5 per cent or more.
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What we found
Topping our list is Power Financial Corp., parent company of Great-West Lifeco Inc. and IGM Financial Inc. Power Financial has very attractive valuation levels with a P/E ratio of 10.1 and a P/B of just 1.1. Power Financial’s stock price is relatively flat over the past year but has done well in 2019, up more than 24 per cent.
Mortgage insurance provider Genworth MI Canada Inc. has the lowest P/B ratio on our list at just 0.9. Concerns of a bubble in the Canadian housing market have held back the price of this stock, which is up just 2.2 per cent year-to-date. The stock has a very attractive dividend yield of 4.9 per cent and has increased the dividend by an annual rate of 7.8 per cent over the past five years.
The largest company on our list is Toronto-Dominion Bank with a market cap exceeding $137-billion. Like most of the big Canadian banks, TD has underperformed the broader market in 2019, up 9.7 per cent year-to-date versus 15.4 per cent for the S&P/TSX Composite Index. TD has a low P/E ratio of 12.4 and a return on equity of 15.4 per cent.
The investment ideas presented below are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of customer success at Trading Central.