Safe stocks everyone is talking about

Canadian banks are often touted as safe investments, but which is the best?

By MSN Money Partner Jun 13, 2012 10:52AM

By Sheldon Liber


Given the market volatility and global economic uncertainty, investors have been scrambling for safe places to hide. While many think those places are Treasurys and certificates of deposit, those have little chance of even keeping up with inflation and will be even bigger losers if rates go up. Investors are therefore also looking for safe stocks.


It seems most agree that Canadian Banks are such a place. According to Bloomberg, Canadians dominate the World's 10 Strongest Banks, with three of the top six from Canada. Bloomberg reviewed the 78 largest global institutions.

The three Canadian banks that made the grade were Canadian Imperial Bank of Commerce (CM) at No. 3, Toronto-Dominion Bank (TD) at No. 4, and Royal Bank of Canada (RY) at No. 6. The Bank of Nova Scotia (BNS) and Bank of Montreal (BMO) ranked at No. 17 and No. 22, respectively.


One factor setting Canadian banks apart from most others is that government requirements are much more stringent about capital reserves and limits on what banks can invest. You would think this would not be such a novel approach, especially given recent history, yet it has been relatively unique.

By examining traditional metrics, I placed the banks in order of best to simply good. None of them were bad.

Price-to-earnings (P/E)
BMO: 9.42
CM: 9.46
BNS: 11.51
TD: 11.89
RY: 16.49

Price-to-sales (P/S)
BMO: 2.46
CM: 2.52
RY: 2.74
TD: 3.44
BNS: 3.59

Price-to-cash-flow (P/CF)
CM: 9.2
BMO: 9.4
BNS: 11.6
TD: 11.8
RY: 15.3

Price-to-earnings-to-growth (PEG)
CM: 0.89
BMO: 1.19
TD: 1.08
RY: 1.28
BNS: 1.29

Among these first four data points there is a clear pattern that seems to support Bloomberg's ranking of Canadian Imperial Bank of Commerce as the top Canadian bank. The lower ranked Bank of Montreal makes a good showing so far as well.


I do not know if it has any relevance, but CM is the smallest of the banks capitalized around $28 billion, followed by BNS at $34 billion, and moving up significantly from there.


If you are a bargain hunter, the P/E, P/S and P/CF ratios of these companies are not very compelling. Only the very low PEG ratio stands out to this value investor as noteworthy. The growth might easily be attributable to the safety factor.

By expanding my review to a few more important items I find more investor friendly news.

Dividend yield
BMO: 5.1%
CM: 5.1%
RY: 4.5%
BNS: 4.2%
TD: 3.7%

Return on equity (ROE)
CM: 19.41%
BNS: 15.57%
RY: 15.17%
BMO: 15.13%
TD: 13.97%

Price-to-book (P/B)
BMO: 1.45
TD: 1.75
BNS: 1.97
RY: 2.01
CM: 2.02

All of the banks make payouts that far exceed most other banks, and again Canadian Imperial and Bank of Montreal lead the pack.


It is also  a good sign that bank management has been able to produce double-digit returns on equity in our current difficult environment with CM being the stand out.


Lastly, I have displayed the price-to-book for each bank and the ratios are lower than the market but none of them compare to the current levels of U.S. Banks, although Toronto-Dominion Bank does have a large presence in the U.S.

In doing some spot-checking among of large U.S. banks, Wells Fargo (WFC) comes the closest to rivaling the Canadian banks. However, it does fall short in totality. For example, it only pays a 2.6% yield, has an ROE around 14.8, and a P/S of 3.29.

My conclusion reflects that of Bloomberg's and I was able to satisfy myself as to the positive attributes of these Canadian banks. In so doing, Canadian Imperial Bank of Commerce was the leader.


In full disclosure, I used my findings to invest in Canadian Imperial Bank of Commerce recently. I eat my own cooking. Bon appetit.

Sheldon D. Liber is the CEO/CIO of Chasing Value Asset Management, a financial author and a private investor. You can follow him on Twitter: @chasingvalue

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