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The Best Financial Stocks In Canada Right Now

In this series, we reviewed all of the TSX and TSX Venture’s stock and came up with what we think the best candidates are. Here are the Best Financial Sector Stocks In Canada, as well as the methodology that got us there. 

(Updated Jan 31, 2023) A financial sector stock is a stock that represents a company in the financial industry. Financial industries include banks, insurance companies, and more.

There are several reasons why investors may choose to invest in financial sector stocks. First of all, the financial industry is typically less volatile than other industries, meaning that there is less risk associated with these types of stocks. Second, companies in the financial sector tend to pay out higher dividends than companies in other sectors, making them an attractive investment for income-seeking investors. Finally, the financial sector is often one of the first industries to recover following an economic downturn, making these stocks a good choice for long-term investors who are looking to ride out market cycles.

Risk And Safety Of Regulation

All major financial institutions need to pass the regulatory capitalization ratio requirements put in place by the government of Canada. This framework should protect Financial institutions against major downturns. It is of our opinion that this oligopolistic group will outperform over the long run.

Investing in any stock comes with risk, and financial sector stocks are no different. One of the biggest risks associated with these types of investments is the potential for regulatory changes. For example, if a new government administration comes into power and implements stricter regulations on the financial industry, this could have a negative impact on the profitability of companies in this sector. Additionally, interest rate changes can also affect the financial sector. Higher rates also tend to benefit banks but hurt insurance companies. As such, it is important for investors to do their research and understand the potential risks before investing in any stock, including those in the financial sector.

Methodology For Ranking The Top Financial Stocks In Canada

We’ve first made sure that the company has a Return on Equity higher than 12%. For a financial institution, this is a low bar given how highly leveraged the balance sheets usually are. Little Return on Assets are truly required to pass that test. We’ve also made sure that the companies on the list had consistent long term revenue growth. Positive earnings were necessary for the past 4 years. 

It is also possible that entry #2 on the list becomes an acquisition target for a larger bank because it has smaller market caps, at $50B.

We’ve then sorted the top Canadian financial sector companies by free cash-flow yield – the best metric to differentiate a good from a bad investment, all else being equal – highest to lowest:

  1. MFC, with a ideal PE ratio of 7, 39% free cash-flow yield (!) and 5% dividend yield, Manulife Financial Corporation seems to be the lowest risk of all in this high earnings yield group, still trading below 1x book value;
  2. CM, with a PE ratio of 9, 39% free cash-flow yield and 5.7% dividend yield, CIBC is also a very interesting name on that list. That said, they have recently issued shares to fix their capitalization ratio requirements and are now trading at 1.1x book value;
  3. POW, with a PE ratio 12, 30% free cash-flow yield and a 5.4% dividend yield, Power Corporation of Canada keeps 3rd position even though their share price increased by 11% since we last covered it;
  4. TD, with a PE ratio 10, 22% free cash-flow yield and a 4.2% dividend yield, The Toronto-Dominion Bank makes the 4th and penultimate place;
  5. RY, with a PE ratio 12, 15% free cash-flow yield and a solid 3.9% dividend, Royal Bank makes the last entry for the list of the best financial stocks in Canada right now.

Other financial stock contenders drop sharply from there.

READ NEXT: Best Stocks In Canada


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