What are we looking for?
Canadian banks with the highest economic performance and growth, trading at low multiples.
The screen
We have screened the Canadian banks (including mortgage-related companies) with only four main criteria, but also added different indicators to our results table to push the analysis a little further. We are looking for positive economic performance, profit and dividend growth, as well as attractive valuation multiples and dividend sustainability to identify long-term investment opportunities.
Our main screening criteria were:
- an economic performance index, or EPI (return on capital divided by cost of capital), above 1.0. An EPI ratio of 1.0 or more indicates a company’s capacity to create wealth for its shareholders (a higher EPI displays a greater rate of wealth creation);
- net operating-profit-after-taxes (NOPAT) change above minus-10 per cent over 12 and 24 months;
- all companies had to pay dividends;
- one-year and five-year annualized dividend growth of 5 per cent or greater;
The dividend yield, dividend payout and price-to-earnings ratio were added to the table for information purposes.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer also allows investors to create personalized filters and build custom portfolios.
What did we find?
Ten Canadian stocks fit our criteria. For those of you wondering, the only member of the Big Six missing is Bank of Montreal, because of a too-low five-year annualized dividend growth rate (4 per cent).
Equitable Group Inc. stands out from the group thanks to its outstanding NOPAT growth over both 12 and 24 months.
Even though the dividend yield is not high, at 1.66 per cent, the company offers aggressive dividend growth on the short and long term, with a very healthy payout of about 11 per cent, by far the lowest (best) of the group. After the recent price declines, the stock now trades at a low trailing P/E ratio of 6.5.
Within larger banks, Royal Bank of Canada and Toronto-Dominion Bank are the only two offering double-digit NOPAT growth over 24 months as well as an annualized dividend growth rate of 10 per cent or more over the last five years.
Jean-Didier Lapointe is a financial analyst for StockPointer at Inovestor Inc.