royal bank

Bank of Nova Scotia is our top pick among Canada’s five main banks, but the other four also have bright prospects. Most are using their strong balance sheets to make profitable acquisitions at bargain prices. That should let them keep raising their dividends. ROYAL BANK OF CANADA $56 (Toronto symbol RY; Conservative Growth Portfolio, Finance sector; Shares outstanding: 1.4 billion; Market cap: $78.4 billion; Price-to-sales ratio: 2.2; Dividend yield: 4.1%; TSINetwork Rating: Above Average; www.rbc.com) is Canada’s largest bank, with $815.0 billion of assets. The U.S. Commodity Futures Trading Commission (CFTC) recently accused Royal of using a complex series of trades to cut its tax bill in Canada. Specifically, the CFTC says that divisions of the bank bought Canadian and U.S. dividend-paying stocks (plus futures contracts on these stocks) and quickly sold them to other divisions. These transactions would let Royal earn tax credits on the dividends it received from these holdings....

PLEASE NOTE: Our next Hotline will go out on Friday, April 13, 2012. MOLSON COORS CANADA INC., Toronto symbols TPX.A $45.24 and TPX.B $41.10, is buying StarBev L.P., which owns nine breweries in central and eastern Europe. StarBev brews over 20 local beers, as well as major international brands, such as Stella Artois, Beck’s and Lowenbrau, under license. Molson Coors aims to close the deal by June 30, 2012....

Canadian Western Bank, $29.75, symbol CWB on Toronto (Shares outstanding: 75.7 million; Market cap: $2.3 billion; www.cwbank.com), offers business and personal banking services across the four western provinces. It’s the biggest Canadian bank headquartered in western Canada, and the country’s eighth-largest. The bank’s wholly owned subsidiaries include National Leasing Group Inc., Canadian Western Trust Company, Valiant Trust Company, Canadian Direct Insurance Inc., Adroit Investment Management Ltd. and Canadian Western Financial Ltd. In its fiscal first quarter ended January 31, 2012, Canadian Western Bank’s earnings rose 9.6%, to $41.5 million from $37.9 million a year earlier. Earnings per share fell 1.8%, to $0.55 from $0.56, on more shares outstanding. Net interest income rose 6.5%, to $104.9 million from $98.5 million. Other income fell 6.7%, to $18.8 million from $20.1 million....

ROYAL BANK OF CANADA $56 (www.rbc.com) has completed the sale of its struggling U.S. retail-banking business, which consists of 424 branches in six southeastern states. That will free up cash that the bank can invest in its more profitable banking operations in Canada and the Caribbean....

PENGROWTH ENERGY CORP., $9.78, Toronto symbol PGF, is buying rival oil producer NAL Energy Corp. (Toronto symbol NAE) in an all-stock transaction. Under the terms of the deal, NAL investors will receive 0.86 of a Pengrowth common share for each share they hold. That will give them 26% of the combined company. The plan needs shareholder and other approvals, but Pengrowth and NAL aim to complete the merger by May 31, 2012. Adding NAL’s properties in Alberta and B.C. (54% natural gas and 46% oil) will increase Pengrowth’s projected 2012 production to between 86,000 and 89,000 barrels of oil equivalent a day, from its earlier range of 74,500 to 76,500 barrels....

TECK RESOURCES LTD. $36 (www.teck.com) plans to sell $1 billion U.S. of new long-term bonds. It will use the cash to redeem $1.05 billion U.S. of its existing debt. The company will record a one-time, non-cash charge of $340 million U.S. in connection with the early redemption. However, this move will cut Teck’s annual interest costs by $55 million U.S.; in 2011, Teck earned $2.5 billion (Canadian), or $4.18 a share. Buy. ROYAL BANK OF CANADA $56 (www.rbc.com) has completed the sale of its struggling U.S. retail-banking business, which consists of 424 branches in six southeastern states. That will free up cash that the bank can invest in its more profitable banking operations in Canada and the Caribbean. Royal also raised its quarterly dividend by 5.6%, to $0.57 a share from $0.54. The new annual rate of $2.28 yields 4.1%. Buy. TORONTO-DOMINION BANK $80 (www.tdbank.com) is looking for new ways to cut its costs, as low interest rates have shrunk the revenue the bank earns from loans. However, its credit losses continue to fall as more borrowers repay their loans on time. That let TD raise its quarterly dividend by 5.9%, to $0.72 a share from $0.68. The new annual rate of $2.88 yields 3.6%. Buy.

ISHARES MSCI CANADA INDEX FUND $28.36 (New York symbol EWC; buy or sell through brokers; ca.ishares.com) is like a market cap-based index fund, but its managers try to improve its performance by tinkering with the index fund formula. They do this through their Morgan Stanley Capital International Canada Index. The fund has an MER of 0.52%.

The index’s top holdings are Royal Bank, 6.1%; TD Bank, 5.6%; Bank of Nova Scotia, 4.5%; Suncor Energy, 4.4%; Barrick Gold, 4.0%; Canadian Natural Resources, 3.5%; Potash Corp., 3.3%; Goldcorp, 3.2%; Bank of Montreal, 3.0%; CN Railway, 2.8%; and CIBC, 2.5%.

If you want to own a Canadian index fund, you should buy the iShares S&P/TSX 60 Index Fund. You’ll pay about a third of the management fees.

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ISHARES DOW JONES CANADA SELECT DIVIDEND INDEX FUND $21.01 (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) holds 30 of the highest-yielding Canadian stocks. Its selections are based on dividend growth, yield and payout ratio. The weight of any one stock is limited to 10% of its assets. The fund’s MER is 0.50%. It yields 3.9%.

The fund’s top holdings are CIBC, 6.6%; National Bank, 5.9%; Bonterra Energy, 5.8%; Bank of Montreal, 5.3%; TD Bank, 5.3%; AG Growth International, 4.7%; Royal Bank of Canada, 4.3%; Telus, 4.1%; and Bank of Nova Scotia, 4.1%.

The fund holds 54.3% of its assets in financial stocks. Utilities are next, at 20.5%. The top Canadian finance stocks have sound prospects. However, if you invest in this ETF, be sure to adjust the rest of your portfolio so it won’t be overly concentrated in the financial sector.

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ISHARES S&P/TSX 60 INDEX FUND $17.91 (Toronto symbol XIU; buy or sell through brokers; ca.ishares.com) is a good, low-fee way to buy the top stocks on the TSX. The units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Expenses are just 0.17% of assets.

Most of the stocks in the index are high-quality companies. However, as it must ensure that all sectors are represented, the fund holds a few we wouldn’t include.

The index’s top holdings are Royal Bank, 6.9%; TD Bank, 6.4%; Bank of Nova Scotia, 5.2%; Suncor Energy, 5.0%; Barrick Gold, 4.5%; Canadian Natural Resources, 4.0%; Potash Corp., 3.7%; Goldcorp, 3.6%; Bank of Montreal, 3.4%; CN Railway, 3.1%; BCE Inc., 2.9%; CIBC, 2.8%; Enbridge, 2.7%; TransCanada Corp., 2.7%; Cenovus Energy, 2.5%; and Manulife Financial, 1.9%.

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Canada’s big five banks have avoided the problems with subprime mortgages and European sovereign debt that have crippled many of the world’s largest financial firms. The big banks are now using their strong balance sheets to make acquisitions, often at bargain prices, and to upgrade their holdings....