Canadian banks are amazing; they have outperformed the Canadian stock market for the past 5, 10, 15, probably 25 years. Unfortunately, they were not created equal. That’s a myth. Then, which Canadian Bank is the best?

Since the 2008 financial crisis, each member of the big six (Royal Bank, TD Bank, ScotiaBank, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank), took a different direction.

They all benefitted from the oligopoly environment in Canada to fund new growth vectors. 14 years later, if you pick the wrong bank, you will be leaving a lot of money on the table.

Let’s take a look at our Canadian Bank Ranking from position 6 to 1.

But first, let’s review their latest quarterly earnings:

#6 ScotiaBank (BNS.TO)

BNS is the most international bank in the Canadian banking industry. It has significantly expanded its business outside of Canada with 40% of its assets outside the Canadian border. This hasn’t always been an advantage as BNS ran into its share of problems with South American economic struggles. The bank reduced its international footprint and has limited it to 30 countries currently, from 54 in 2013. Expected GDP growth for these countries is quite attractive (higher than Canada and the U.S.), but this comes with much uncertainty and volatility. BNS is now a dominant player in Chile with its most recent acquisition of BBVA Chile in 2018. The bank has a strong track record of acquiring and integrating businesses. The most recent quarterly results show an economic recovery across the Pacific Alliance, a lower provision for credit losses, growth in wealth management, but lower income in capital markets.

Pros:

• Best diversified, most international: For over a decade, BNS focused on growing outside Canada (especially in Central America and in South America). Obviously, their Gross domestic product (GDP) growth rate is better than US and Canada. Their perspective moving forward is also better (they should grow at a 3%-4% rate while it will be hard to reach over 1%-2% in Canada and the US).

Cons:

• International exposure brings uncertainties: Before the pandemic, BNS had a great story, but they never capitalized on it, and they never outperformed other banks. Why? It’s complicated to do business in Central America! It took several years and several missed attempts for Canadian banks to enter the US. They made bad acquisitions and failed several times. Look at South America and Central America, you realize it’s a lot more complicated than making loans in the US. It’s even worse with the pandemic as countries with lower resources and weaker healthcare systems will face more problems than in North America.
• Worst performing stock from the top 6 over the past 10 years. With all the difficulties I just mentionned, I’m not expecting them to reverse that trend in the upcoming months and the upcoming years.

#5 Canadian Imperial Bank – CIBC (CM.TO)

While CIBC lags behind the other banks on the stock market (along with ScotiaBank), it gives investors the opportunity to pick up a generous yield without significant risk. We like that they want to grow their wealth management division, but the integration of Private Bank will represent a crucial step. If an investor is looking for additional income, CM is probably one of the best picks on the Canadian stock market; it just can’t be expected to outperform the banking industry over the long run. CIBC is trading at a low PE ratio versus its peers since it has lower growth expectations. On the bright side, the dividend is not at risk, and an investor will enjoy consistent increases. CIBC will likely be a good fit for a retirement portfolio since it offers the stability of a top 5 Canadian bank with a decent yield and the security of future dividend growth. We must add that the bank has done very well in 2021 and its recent results pushed CM’s price to its highest price level in history. Let’s put it this way: it’s hard to perform poorly when you invest in a Canadian bank!

Pros:

• High yield with a relatively low payout ratio: When you do the math, a low stock price brings a higher yield. A low PE ratio also brings a high yield and so the stock price is low…
• Mortgage loans: The mortgage side is doing well as housing market in Canada is doing well. But when your biggest growth vector is mortgages right now, I don’t think it will result in outperforming the other banks.
• Private banking and wealth management: Smart move, but a little late. CIBC is a small player in this ground compared to the others.

Cons:

• Lack of growth vectors: With interest rates super low, interest margin will be squeezed. CIBC’s only way out is to do more loans. That could be a very difficult path in the next years considering the consequences of the pandemic on the economy.

#4 Bank of Montreal – BMO (BMO.TO)

BMO decided to take the stock market path to ensure its growth. It was the first Canadian bank with its own ETF on the market. Competition is fierce but being among the first Canadian issuers surely helped to build momentum in a growing market. Over the years, BMO concentrated on developing its expertise in capital markets, wealth management, and the U.S. market. BMO also made innovative moves such as the introduction of its own ETFs and a robo-advisor. Growth will happen in these markets for banks in the coming years. BMO is well-positioned to surf this tailwind. Keep in mind BMO’s results are often more hectic compared to its peers due to its capital market business segment. The bank has been the less generous in terms of dividend growth between 2010 and 2020. However, it came back strong with the most generous dividend increase in 2021 (more on that in the dividend growth potential section).

Pros:

• Focus on capital markets and wealth management: They were the first in the country to have their own ETF suites. They saw where the market is going, and they took advantage of it. They were also among the first Canadian banks to make a move towards private banking with the acquisition of Harris Bank in Chicago. They’re well established in wealth management and in capital market and I like that.
• Well established in the States.

Cons:

• Revenue and earnings are more volatile: Because of that focus, their revenue and earnings are more volatile or riskier. Their dividend growth perspective versus the other five is lower.

#3 TD Bank (TD.TO)

Over the years, the bank has been increasing its retail focus, driven by lower-risk businesses with stable, consistent earnings. The bank enjoys number one or two market share for most key products in the Canadian retail segment. TD keeps things clean and simple as the bulk of its income comes from personal and commercial banking. It has substantial exposure in major cities like Toronto, Vancouver, Edmonton, and Calgary, combined with a strong presence in the US. With about a third of its business coming from the U.S., TD is the most “American” bank you’ll find in Canada, with roughly 1/3 of its business coming from south of the border. If you are looking for an investment in a straightforward bank, TD should be your pick as increasing retail focus, large market share in Canadian banking, and U.S. expansion are key growth enablers for TD Bank.

Pros:

• Revenues (a third) coming from the US: They really caught up that game from their southern neighbors; they know how they want to deal; they have a great exposure over there.
• Largest amount of assets in Canada.
• Doing things simple but doing them the right way: They have been doing very well for the past 10 years.
• Strong wealth management: Their segment from Ameritrade did very well, and now they’re selling to Charles Schwab.

Cons:

• High exposure to mortgages: Hot markets such as Vancouver and Toronto could cool down a lot at one point in time. If we get into a housing bubble, then it’s going to be harder for TD.

#2 Royal Bank – RBC (RY.TO)

Royal Bank counts on many growth vectors: its insurance, wealth management, and capital markets divisions. These sectors combined now represent over 50% of its revenue. These are also the same segments that helped Royal Bank to stay the course during the pandemic. The company has made significant efforts in diversifying its activities outside of Canada and has a highly diversified revenue stream to offset interest rate headwinds. Canadian banks are protected by federal regulations, but this also limits their growth. Having some operations outside of the country helps RY to reduce risk and improve its growth potential. The bank posted impressive results for the latest quarters driven by strong volume growth and market share gains which offset the impact of low interest rates. As interest rates are expected to rise in 2022 and 2023, RY is in good position. Royal Bank exhibits a perfect balance between revenue growth.

Pros:

• Battling with TD to be the largest bank in terms of assets: They’re well established across all of Canada.
• Rouhly 50% of their revenue are coming from classic banking activities: Which means only 50% is subject to the interest rate squeeze.
• The other half is about wealth management, capital market, and insurance: They have been able to do lots of cross-selling across those segments, they are maximizing their presence in the wealth management, and they had a huge deal with BlackRock for ETFs.
• Outperformed the average bank in Canada in terms of market: Recently, they have also shown their strenght in terms of earnings.
• Strong dividend growth policy in place: Don’t expect any dividend increase for the rest of 2020 from any banks. I’m pretty sure Royal Bank (and other Canadian banks too) will wait a little, see how things go, see how their loan book is being affected, and then they may resume in 2021 or 2022. Still, the dividend is safe.

Cons:

• Royal Bank could also get hurt by a bearish housing market: This is a rather small downside considering RY’s strenght and ability to face headwinds.

#1 National Bank (NA.TO)

NA has targeted capital markets and wealth management to support its growth. Private Banking 1859 has become a serious player in that arena. The bank even opened private banking branches in Western Canada to capture additional growth. Since NA is heavily concentrated in Quebec, it concluded deals to do credit for investing and insurance firms under the Power Corp. (POW). The stock has outperformed the Big 5 for the past decade as it has shown strong results. National Bank has been more flexible and proactive in many growth areas such as capital markets and wealth management. Recently, NA is seeking additional growth vectors by investing in emerging markets such as Cambodia (ABA bank) and in the U.S. through Credigy. Can it have more success than BNS on international grounds? It looks like they may have found the magical formula to do so!

Pros:

• One of the fastest growing wealth management businesses in the country: They have a very strong brand recognition there. Since they were doing a lot of loans in Western Canada, they actually opened private banking branches there too. Not regular branches where everybody can go, but selling points where private consultants and private bankers could be there for their clients.
• Strong in capital markets: They’re very active on the market. This creates more volatility, as it is the case with BMO, but overall, they’ve been doing well, and they’re making more money.
• International branch and US segment: In the international, they focused on Cambodia. They completed the purchase of ABA Bank over there. They’re trying to create growth outside of Canada, but they’ve selected emerging markets in Asia instead of South America.
• Heavily based in Quebec: In the past, it was a reason to lie a little behind, but over the past 10 years, Quebec has proven its resiliency. They’re not dependent on energy to grow their economy; they have a Canadian economy similar to Ontario. They’re doing well. In the pandemic, Quebec has been hit with a lot of cases, but its economy seems to be on the way to recover faster than the other banks.

Cons:

• International branch and US segment: We’re going to see how it goes. It’s not my favorite part of their business model but I like the fact that they try to diversify.

Final Thoughts

Canadian banks could be compared to the salt you use in your hearty fall soup. Some salt in it is making it tasty and great. Add too much salt and it is totally ruined. Act with the same caution for Canadian banks. Pick one or two, but don’t add too much in your portfolio!

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The world needs energy to function and the best energy companies are rewarding shareholders handsomely this year. The oil & gas industry has been fascinating investors for several decades. I guess this is due to the thrill coming from the next exploration results or an oil boom pushing stocks to record levels.

Where to find the best Oil & Gas Energy Stocks?

First, one must understand the differences across sub-sectors and activity types. The oil & gas industry is usually divided into three activities:

Upstream: This term represents all activities related to exploration and production. This is usually the phase where the commodity price is the most important. Companies will establish their financial projections based on a specific price (or cost) per barrel. Then, they will decide to explore (drill wells) or not depending on the likelihood of profitable operations.

Midstream: Midstream activities include the processing, storing, and transporting of oil & gas and their byproducts. This is where you will find pipeline-related businesses. The transportation and storage activities are usually more stable as they usually operate on long-term contracts with producers.

Downstream: this is the final step of the process including refining (to produce gasoline for example) and marketing the product (selling it to the end-customer). Don’t just think about gasoline, but all the other modified products such as liquefied natural gas, heating oil, synthetic rubber, plastics, lubricants, antifreeze, fertilizers, and pesticides

Sub-Sector (Industry)

Energy Stocks Greatest strengths

Oil & gas stocks will raise passions and attract many investors during bull markets (especially after the boom in 2021). As the economy grows, demand for such products increases accordingly. Commodity prices go up, profits are skyrocketing, and dividends are generous. The problem is that it rarely stays that way.

The energy sector can generate great returns in your portfolio, but you will be required to follow this sector closely (and hopefully know what you are doing). If you can pick stocks during oil busts (as was the case back in March-April 2020), you will show double-digit (sometimes triple digit) returns. Since we do not employ a “buy and sell quickly” strategy, we rarely like energy stocks at DSR. They generally make unreliable dividend growers.

Finally, the energy sector is a great hedge against inflation. Along with other commodities, energy companies can easily pass price increases to their customers as it’s linked to supply vs. demand.

Energy Stocks Greatest Weaknesses

The energy sector is quite volatile and cyclical. This is not the best place to pick dividend growers. Many companies will attract investors with their high yield and generous promises, but they will eventually fail their shareholders. I’ve heard the best and the worst stories coming out of this sector. Therefore, it is crucial to do your homework prior to investing in the Energy sector.

The main problem with this sector is it is capital intensive and profits often depend on commodity prices. Companies have little to no control over the prices they receive for their oil or natural gas. Therefore, they spend billions on projects and hope the end price will remain profitable for several years.

Vertically integrated companies (upstream, midstream, and downstream) tend to maintain their dividend payments no matter what, but it is still a risky business. For example, BP (BP) had to cut its dividend after a major oil spill. Royal Dutch Shell (RDS.A or RDS.B) and Suncor (SU.TO / SU) also cut their distributions following the oil debacle in 2020.

As technology evolves, our demand for energy stagnates while our production capacity improves. In other words, don’t expect natural gas prices to rise anytime soon. All factors are combined to keep them at a low level.

How to get the best of it

The energy sector is the most cyclical of all. If you are courageous enough to ride the roller coaster, you can grab shares at highly depreciated prices every few years. If you would rather stay focused on a dividend growth investing strategy as we do here at DSR, you must be incredibly picky before investing a penny in this sector.

I prefer pipelines (midstream industry) as the most interesting opportunity in the energy sector. Pipelines are capital intensive and exposed to regulators and potential oil spills, but they also act as toll roads. The world needs energy and pipelines are the ones providing it.

This sector is more suitable for a growth investor. If you are retired and looking to enjoy a peaceful retirement, you may want to ignore this sector completely.

Target sector weight: Since this sector doesn’t offer the best dividend growers in town, I’d say that a 5% exposure should be enough (unless you like roller coasters!).

Best Energy Stocks to buy in September 2022

As a part of the hype around energy, stocks has faded, there are some great opportunities in this sector.

Canadian Natural Resources (CNQ.TO)

In a world where the West Texas Intermediate (WTI) trades at $75+ per barrel, CNQ would be a terrific investment (here is your cue since the WTI is trading way over $70 lately!). It is sitting on a large asset of non-exploited oilsands and reaches its breakeven point at a WTI of $35. What cools our enthusiasm is the strange direction oil has taken along with the fact that oilsands are not exactly environmentally friendly. Many countries are looking at producing greener energy and electric cars. This could slow CNQ’s ambitions. However, CNQ is very well positioned to surf any oil booms. The stock price has more than doubled in value since the fall of 2020. It has previously invested very heavily, and it is now generating higher free cash flow because of past capital spending. CNQ exhibited resiliency in 2020, and this merits a star in their book. This is also why it’s part of our Canadian Rockstars List!

Dividend Growth Perspective

On top of an impressive dividend growth streak of over 20 years, CNQ has recently shifted gears with highly generous dividend increases (another 28% in 2022!).  CNQ has proven the resiliency of its business model and confirmed its ability to be a strong dividend grower. This is truly impressive. Now that the oil market has strengthened, CNQ should be able to generate healthy cash flows for years to come.

Enbridge (ENB.TO)

ENB’s customers enter 20-25-year transportation take or pay contracts. This means that ENB profits regardless of what is happening with commodity prices. ENB is also well positioned to benefit from the Canadian Oil Sands as its Mainline covers 70% of Canada’s pipeline network. As production grows, the need for ENB’s pipelines remains strong. Following the merger with Spectra, about a third of its business model will come from natural gas transportation. Enbridge has a handful of projects on the table or in development. It must deal with regulators, notably for their Line 3 and Line 5 projects. Both projects are slowly but surely developing. The cancellation of the Keystone XL pipeline (TC Energy) secures more business for ENB for its liquid pipelines. ENB now has a “greener” focus with its investments in renewable energy.

Dividend Growth Perspective

The company has been paying dividends for the past 65 years and has 27 consecutive years with an increase. Further dividend growth shouldn’t be as generous as compared to the past 3 years (10%/year). Management aims at distributing 65% of its distributable cash flow, leaving enough room for CAPEX. Look to their latest quarterly presentation for their payout ratio calculation. Management expects distributable cash flow growth of 5-7% annually. Therefore, you can expect a similar dividend growth rate. We have used more conservative numbers in our DDM calculation that are more in line with the 2021 and 2020 dividend increases of 3%. Here’s more about Enbridge’s dividend safety:

Topaz Energy Corp (TPZ.TO)

The company arrived on the market at the perfect moment (2021). Topaz was established through its key counterparty, Tourmaline Oil Corp (TOU.TO), from whom Topaz acquired its formative royalty and energy infrastructure assets in November 2019. Bolstered from this opportunity, Topaz now focuses on growth by acquisition to diversify its business model away from Tourmaline. In 2022, Liquid-rich natural gas royalties (paid by Tourmaline) should represent 50% of Topaz’s revenue. It will also count on conventional liquids royalties (~25%) and revenue coming from its infrastructure (25%). On top of acquisitions, we expect Topaz to exhibit strong organic growth as there are more projects being developed on their land. We appreciate the midstream business infrastructure projects representing 78% of revenues as they are based on take-or-pay contracts. This secures a portion of cash flow and brings more stability to a highly cyclical sector.

Dividend Growth Perspective

Topaz is a new company paying a new dividend and that makes it hard to predict what will happen next. The company has already increased its dividend several times, going from $0.21/share in 2021 to $0.26/share in early 2022, for a 24% total increase in less than 12 months. Free cash flow per share continues to increase by double-digits as Topaz surfs a strong oil & gas market. For 2022, management is confident that it will be able to increase its dividend by 8% while keeping its payout ratio within its target range of 60% to 90%.

TC Energy (TRP.TO)

TRP is making use of large amounts of capital to fuel its growth over the coming years. Its acquisition of the Columbia pipeline and its extension toward Mexico are just two examples of what is to come. The company recently funded $4.5B for its Southeast Gateway Pipeline project to compliment TRP’s existing natural gas footprint in Mexico. It enjoys long-term contracts (of an average of 14 years), which provide great cash flow stability over time. The pipepeline’s growth potential remains in its natural gas pipeline expansion. TRP is a good candidate for long-term investment. As is the case with Enbridge, an investor must make sure to track TRP’s rising debt level. The company has kept its focus on rewarding shareholders with generous dividend increases, and that focus should continue. Unfortunately, management revised its dividend growth policy at the end of 2021; it’s still generous, but it’s not what it used to be!

Dividend Growth Perspective

TRP has successfully increased its dividend annually since 2001. TRP exhibits a 5-year CAGR of 9% but management reviewed its intention to boost its payout by 3-5% CAGR going forward. This news disappointed the market toward the end of 2021. We haven’t changed our DDM calculations as we were already forecasting a 4% dividend growth rate before the announcement. The company’s growth is fueled by its massive investment program. At the current yield, this is a good candidate for a retirement portfolio.

Find Better Stocks on the Canadian market…

There are great stocks to buy in the Energy sector, but there is more on the Canadian market! Moose Markets presents you with the Canadian Dividend Rock Stars list: a selection of Canadian companies showing both income and growth. The Canadian Rock Stars List is a selection of the safest dividend stocks in Canada. Download the list for free here:

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