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Quality Dividend Growth

Canadian Equity without the Banks

07/24/2019
Jeff Weniger, CFA, Director, Asset Allocation


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

 Figure 1_Big Six 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

Figure 2_Determining the Ranks of the Big Six in DGRCs 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%.

 

Notable Components

 

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.

 

Fundamentals

 

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

 Figure 3_DGRC Fundamentals

 

Unless otherwise stated, data source is WisdomTree’s 5/31/19 rebalancing screen, implemented in DGRC in mid-June 2019.


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WisdomTree Asset Management Canada, Inc.

161 Bay Street, 27th Floor

Toronto, ON. M5J 2S1

canadafeedback@wisdomtree.com

866-893-TREE (8733)

 

By registering, I certify that I have read, understood and agree to be bound by the WisdomTree Terms of Use. I understand that my personal information will be treated in accordance with the WisdomTree Privacy Policy available here.