Assessing dividends and valuations for the 10 biggest TSX stocks by market cap

For today’s column, we will look at valuations and dividends for the 10 largest stocks by market cap in the S&P/TSX Composite Index TXCX as well as examine that index by sector. I have been fortunate to generate this column biweekly for the past few years (thanks to the guidance of the editorial team) with this being my 100th column for Globe Investor.

What are we looking for?

The S&P/TSX Composite Index is up 14.6 per cent year-to-date and 23 per cent on a one-year basis. It is among the strongest-performing markets globally over the past 12 months. Some of the recent key ratios for the index are: Price-to-earnings (P/E) ratio, which is at 20.3, price-to-book (PB) at 2.2 and price-to-sales (PS) at 1.9. To compare with historic figures, the five-, 10- and 20-year average P/E ratios for that index are all close to 15. With that, let’s look at valuations and dividends for the 10 largest TSX stocks by market cap.

The screen

We used StockCalc’s screener to select the top 10 listed stocks by market capitalization on the TSX. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see if it is undervalued or overvalued compared with its price.

Overview of the techniques used:

• Discounted cash flow (DCF value) is a valuation technique in which cash-flow projections are discounted back to the present to calculate value-per-share;
• A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
• An adjusted book value (ABV) is calculated by multiplying book-value-per-share by its 10-year average price-to-book ratio.
• If we have analyst coverage, we look at the consensus target price.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can access StockCalc using the promo code “Globe30” which offers a 30-day free trial and special pricing for the second month.

About the index

The S&P/TSX Composite Index is weighted by float-adjusted market capitalization. According to data from S&P Dow Jones Indices, the top 10 stocks by market cap comprise 35.7 per cent of the index’s total weight. Large-cap names, especially major banks and energy firms, have an outsized influence on index performance. Financials are the largest sector by weighting in this index at 33 per cent, followed by energy at 16, with industrials and materials both at 13 per cent. Information technology (10), consumer staples (4), utilities (4), consumer discretionary (3), communication services (2), real estate (2) and health care (less than 1 per cent) make up the balance. The combined market capitalization of this index is about $4.5-trillion, with Royal Bank RY-T being the largest at $267-billion. For perspective, NVIDIA, Microsoft MSFT-Q and Apple AAPL-Q each have larger market capitalizations than this index.

What we found

Our overall valuations are showing these stocks generally within plus- or minus-10 per cent of current price. The average one-year return before dividends for this list is 31 per cent (with Shopify SHOP-T helping to generate that high average – the index with its 212 stocks is up 23 per cent over the past 12 months) and most stocks on this list are dividend payers. Let’s look at a few of these companies:

Canadian Pacific Kansas City CP-T is a major railway operating on track that spans most of Canada and into the midwestern and northeastern United States. Following CP’s merger with Kansas City Southern in April, 2023, CPKC operates new single-linehaul services from Canada and the Upper Midwest down through Texas, the Gulf of Mexico, and into Mexico. CPKC hauls shipments of grain, intermodal containers, energy products, chemicals, plastics, coal, fertilizer and potash, automotive products, and a diverse mix of other merchandise. Our various models are both above and below current price with our weighted average value in line.

We see both BAM-T and BN-T on this list. Brookfield Asset Management Ltd. BAM-T is an asset management company. It offers a range of investment products to pension plans, sovereign wealth funds, financial institutions and others. Brookfield Corp. BN-T is a holding company with seven operating segments: asset management, wealth solutions, renewable power and transition, infrastructure, private equity, real estate and corporate activities. It has a global geographic presence. Our weighted valuation for BAM-T is in line with current price and we have a slightly lower valuation than current price for BN-T, driven in part by our ABV calculation.

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from the models and Analyst target data if used.

Source: stockcalc.com.

Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis. Brian Donovan, CBV is the President of a Canadian FinTech based in Miramichi, NB.