Canadian Equity without the Banks
Regular readers of this blog know how I feel about the Canadian stock market’s overemphasis on the big banks. But does anyone ever ask why core equity indexes have to include them in such size? The WisdomTree Canada Quality Dividend Growth Index doesn't play that game (figure 1).
The WisdomTree Canada Quality Dividend Growth Index has zero exposure to the whole lot (Figure 1).
Figure 1: “Big Six” (Big Five Plus National Bank) Weights
The Strict Screen
Since many WisdomTree Canada Quality Dividend Growth Index ETF (DGRC) owners are using it as their core holding, here are the forensics on how our 495-stock universe gets to the final 50 companies.
First, all companies without a dividend are eliminated, bringing our list to 292 candidates. Canada’s six largest banks were still alive after that screen.
Then, DGRC’s index keeps only the companies whose earnings exceed their dividends. All of the Big Six made it past this screen too.
Next, they are all ranked by return on equity (ROE), return on assets (ROA), and, if the Street has a consensus earnings figure, the growth of those future earnings.
RBC, a 0% Example
RBC pays a dividend and has higher earnings than that dividend, so it made it past the first two screens.. But it is eliminated on the ROE/ROA/earnings growth metrics (figure 2). It has a score of just 57.5 (second column to the right). On the far right, that score ranks 74th out of the narrowed field of 100. RBC is thus tossed out of the top 50.
At the most recent run, the Big Six ranked from 67th to 80th in this final screen.
Figure 2: Determining the Ranks of the Big Six in DGRC’s Index
Weighting RBC if It Was In
RBC paid dividends of $4.16 billion over the past year. Suppose, for arithmetic ease, that all 50 companies combined paid $41.6 billion. Paying one-tenth of the total, our dividend-weighted Index would want to give RBC a 10% allocation. However, we cap the big companies at 5% weights.
Other Axed Notables
DGRC also currently has no allocation to Suncor, Enbridge, TC Energy (the renamed TransCanada), Manulife, Brookfield and Nutrien. Also notable: the MSCI Canada Index has 1.7% in the nascent cannabis sector, but DGRC has 0%.
DGRC’s Index is overweight industrials like Magna and the two big railways. Rogers and Telus are also in it, but BCE is not. Other big holdings include Thomson Reuters (data), Saputo (dairy), Intact Financial, Canadian Tire and CI Financial.
Though it has “dividend” in its name, DGRC is not a “hunt for yield” ETF (figure 4). Instead, it falls in the core of the Value-Core-Growth spectrum.
Its 2.64% dividend yield is lower than that of MSCI Canada (3.03%), but it has a yawning gap over the cap-weighted index on buyback, which stems from the ROE differentials. Add the dividend and the buyback yield and we end up with a notable difference on shareholder yield.
And we constructed this without the plumped dividends of the Big Six.
Figure 3: DGRC Fundamentals
Unless otherwise stated, data source is WisdomTree’s 5/31/19 rebalancing screen, implemented in DGRC in mid-June 2019.