Canadian stock markets may be a very small segment of global stock markets in terms of market capitalization (3-4%), but they are home to some of the best companies across sectors such as financial, energy, mining and minerals. These companies have proven track records in terms of profitability and growth, good management and strong balance sheets.
The Toronto Stock Exchange (TSX) is the most popular stock exchange in Canada. The TSX Composite Index, or just TSX, has 251 constituents with a market cap of C$1,917.163 billion. The TSX has many variants or subsets like the TSX 60, which represents the 60 leading companies across the leading sectors in Canada.
Smaller and lesser-known companies are listed on the Toronto Stock Exchange Venture (TSXV). TSVX is an index with 400 constituents and has a market cap of C$18.111 billion. There is also the Montreal Exchange, which is a derivative exchange, and the NEX, a forum for companies which have fallen below the ongoing listing standards of TSXV. (Market cap as of July 30, 2014.)
Companies with Proven Track Records
Suncor Energy, an integrated energy company, made history in 1967 by pioneering commercial crude oil production from Canada’s Athabasca oil sands. Since then, the company has grown to become Canada’s largest energy company and generates strong returns for its shareholders. The company, which has significant growth prospects and high-quality assets, focuses on operational excellence and financial strength and is a competent global player.
The company’s capital allocation is done with certain guiding principles in mind: ensure sustainable and reliable operations, make investments in profitable growth and deliver value to shareholders. In Q2 2014, Suncor delivered value to shareholders through $338 million in dividends and $271 million in share repurchases. The company expects a compounded annual growth rate potential of 10-12% in oil sands and 7-8% overall until 2020.
Operations of the Royal Bank of Canada and its subsidiaries are carried out under the master brand name of RBC. It is the largest bank in Canada and the 12th-largest bank globally based on market capitalization (as of May 20, 2014). It operates in 44 countries with a client base of more than 16 million worldwide. The bank generates 63% of its revenue from Canada, with 18% from the U.S. and the remaining 19% internationally.
The bank’s business is well diversified with a broad suite of products and financial services to cater to individual and business clients. The business is spread across Personal & Commercial Banking (54%), Capital Markets (23%), Wealth Management (11%), Insurance (7%) and Investor & Treasury Services (5%) (excludes corporate support). The bank reported revenue of $8.5 billion and $8.3 billion during Q1 and Q2 2014, respectively. The Royal Bank of Canada is regarded as one of the most dependable dividend payers and has given out dividends each year since 1870 to its shareholders.
Potash Corporation of Saskatchewan (PotashCorp) is a world leader in fertilizers by capacity, producing the three primary crop nutrients: Potash (K), Nitrogen (N) and Phosphate (P). PotashCorp is an international enterprise and has operations and business interests in seven countries. Potash drives the company’s growth and is the company's main focus. The company has five large, low-cost potash mines in Saskatchewan and one in Brunswick. To enhance its global footprint, PotashCorp has invested in South America, the Middle East and Asia in potash-related businesses. The company has the industry’s most diversified product line with large, low-cost reserves of phosphate.
PotashCorp reported earnings of $472 million (56 cents per share) in Q2 2014, bringing the earnings for H1 2014 to $812 million (95 cents per share). The company’s strength lies in the fact that barriers to entering the industry are high due to visibly limited deposits of potash and high development costs. The company’s outlook is positive with a supportive earnings environment.
This world-class transportation leader offers rail connection to three coasts with approximately 20,600 route-miles of track in North America. It is the only transcontinental network in North America and the largest rail network in Canada. The company offers integrated transportation services – rail, intermodal, trucking, freight forwarding, warehousing and distribution, giving employment to 24,000 railroaders in Canada and the United States.
The company’s strengths are in multiple areas - its stable financial position with reasonable debt levels, revenue growth, and good cash flows from operations and growth in earnings per share (EPS). The company posted a net income of C$2,612 million, or C$3.09 per diluted share in 2013 with revenue of C$10,575 million. The revenue for Q2 2014 was at C$3,116 million. Among companies from the railroad sector, Canadian National Railway has the lowest debt-to-equity ratio. With its strong balance sheets and widespread coverage advantages, the company is well positioned to stay ahead of its competitors for a long time.
Barrick Gold is engaged in production and sale of gold as well as related operations such as mines and advanced exploration and development. The company is currently operating on five continents and has a market capitalization of C$21,763 million. Revenue growth, lowest cost (all-in sustaining cost basis) among peers and good cash flow from operations are the company’s strengths. Barrick was able to meet its guidance for gold production for the 11th straight year in 2013.
The company is geographically very well diversified with operations being conducted in a wide range of locations. Barrick’s mineral reserves (as on Dec. 31, 2013) were 1,014.1 million ounces of gold, 888 million ounces of silver contained within gold reserves and 14 billion pounds of copper. The company's revenue is linked to the demand and prices for gold. The trend in gold prices ahead will either bring opportunities or pose challenges for Barrick Gold.
The prominent Canadian companies on the Toronto Stock Exchange (TSX) are listed on the New York Stock Exchange (NYSE) as well. Investors can look to invest through the stock exchange, which offers them more choice, less hassle and tax benefits since the taxation rules vary across countries. For investors new to Canadian stocks, the best option can be to look at the TSX 60 constituents, as that will introduce them to the prominent names across the leading sectors in Canada.
Disclosure: At the time of writing, the author did not own shares of any company mentioned in this article.