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Canadian Blue-chip Industrial Forum
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How the Big Six stack up-G&MHow the Big Six stack upTuesday, July 7, 2015 RIZWAN SHAHNumber Cruncher What are we looking for? Following up on the results of the second quarter, we are now looking at the trend of economic profit for Canadian banks. The screen As a metric, economic profit (also known as "economic value-added," or EVA), is a measure of the wealth returned to shareholders over time, which is different from accounting profit. We selected the Big Six banks and looked at the following metrics: EVA intrinsic value is, in effect, our 12-month target price; price/intrinsic value indicates whether the stock trades at a discount or premium relative to its intrinsic value; return on capital, or ROC, is calculated by dividing the net operating profit after taxes by the invested capital; the "weighted average cost of capital" column considers both the cost of debt and the cost of equity - the lower the figure the better; economic performance index, or EPI, is the ratio of return on capital divided by cost of capital. A ratio higher than 1.0 reflects wealth creation for shareholders. (Note: We've also included threeyear EPI change); return on capital growth (five years); intrinsic value growth (yearly average change over five years); 12-month economic profit change; current dividend yield. More about StockPointer StockPointer is a fundamental analysis tool based on an economic value-added (EVA) 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 (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios. What did we find? Currently, banks are still creating value but the trend is negative, according to the three-year EPI change metric, with only TD as a positive outlier. Of the group, only TD shows a clear rising trend in economic profit. It also shows the strongest ratios in return-on-capital change (3.3 per cent) and intrinsic-value growth over five years (16.3 per cent). Its EVA change over 12 months (51.5 per cent) really stands out. We believe that TD's growth strategy in the United States over the past 10 years is gaining traction to create value for the shareholders. With the possibility of a Canadian recession on the horizon, such a strategy might mitigate the effects of a domestic downturn. Investors are advised to do additional research prior to investing in any of the companies mentioned. Rizwan Shah is account manager for StockPointer at Inovestor Inc. |
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