TSX 60 Reprieve Despite a tumble in market value, Algonquin Power and Utilities Corp.
lives on the S&P/TSX 60 Index of Canada’s biggest companies. If it leaves, however, don’t expect Fairfax Financial Holdings Ltd.
to be its replacement, according to a Globe and Mail analysis of the indexes.
Analyst Jean-Michel Gauthier at Scotia Capital Inc. had expected Algonquin might get axed by S&P Dow Jones Indices in its quarterly rebalancing of major Canadian stock indexes. He had said Fairfax might be the replacement.
When S&P Dow Jones Indices made its announcement late Friday, however, no changes were made. Mr. Gauthier noted Monday in a new research note that investors seemed to have expected the swap and since it didn’t happen, “a short-term relief rally” in Algonquin is possible. He didn’t address why he thought S&P Dow Jones Indices – which doesn’t comment on its index choices – made its decision.
Algonquin rose 2.3 per cent and Fairfax fell just under 2 per cent in Monday’s trading.
Four stocks added to Canada’s main equity index; Algonquin Power stays in TSX 60
With the growth of index funds and other passive investing strategies, whether a stock is part of a major index can have a meaningful effect on share prices. Fund managers who track an index need to hold shares in the underlying companies.
What’s working in Algonquin’s favour in remaining in the S&P/TSX 60 – and is a serious headwind to Fairfax – is the precarious industry balance of Canada’s major stock indexes.
S&P Dow Jones Indices maintains the S&P/TSX Composite Index, the broadest measure of the Canadian market with about 220 to 250 members, depending on the quarter. The S&P/TSX 60, it says in its methodology document, “represents Canadian large cap securities with a view to reflecting the sector balance of the S&P/TSX Composite.”
The index maker uses “float” – the value of shares that aren’t held by insiders and that therefore trade frequently and are easily available to the public – to judge whether a company should be included in its indexes. The index provider does not release its proprietary float calculations.
However, there are publicly available float data from a number of sources, including S&P Global Market Intelligence, an affiliated company to S&P Dow Jones Indices.
Algonquin’s market value peaked in April, 2022; the company is now worth less than 40 per cent of that high. The Oakville, Ont.-based company said in August it is selling its renewable energy business for $2.28-billion of cash plus up to $220-million of future payments, based on profits. Proceeds, Algonquin said, will be used to pay off debt.
Algonquin’s public float is about $4.7-billion, according to S&P Global Market Intelligence, making it the smallest company in the S&P/TSX 60. The average float is around $50-billion and the median float is around $32-billion.
There are four other companies with a public float below $10-billion, according to S&P Global Market Intelligence: CAE Inc. ($8.9-billion); Canadian Tire Corp. Ltd. ($7.8-billion); Canadian Apartment Properties REIT ($7.5-billion) and Saputo ($6.9-billion).
There are 18 members of the S&P/TSX Composite that have floats above $10-billion. The largest is Great-West Lifeco Inc. at more than $45-billion. But its controlling shareholder, Power Corp. of Canada, is already in the S&P/TSX 60, likely precluding its inclusion.
Fairfax is next, at a float of $37.8-billion – more than $20-billion greater than the next companies, TFI International Inc. and GFL Environmental Inc.
Fairfax, however, is running headlong into S&P Dow Jones Indices’ stated goal of “crafting S&P/TSX 60 with a view to reflecting the sector balance of the S&P/TSX Composite.”
Based on the floats in the S&P Global Market Intelligence database – again, not necessarily the floats calculated by S&P Dow Jones Indices – the financial-services industry is already overrepresented in the S&P/TSX 60. The S&P Global Market Intelligence weights suggest financials are about 36 per cent of the S&P/TSX 60, compared with less than 33 per cent of the S&P/TSX Composite.
Removing Algonquin for Fairfax would send the financial-industry weighting at least a percentage point in the wrong direction, The Globe estimates. Utilities, Algonquin’s industry group, is underweighted in the S&P/TSX 60.
Communication services, consumer staples, information technology and consumer discretionary are all overweighted to an even greater degree than financial services, The Globe finds. Industrials, materials and real estate are underweighted.
The only industry whose S&P/TSX 60 weighting closely resembles its S&P/TSX Composite weighting is energy.
What’s best for the balance when making changes? In the future, adding both TFI International Inc. and GFL Environmental Inc. and removing Algonquin and another small company will likely bring industrials closer – but not all the way to – its S&P/TSX Composite representation.
In Friday’s announcement, S&P Dow Jones Indices did add four stocks to the S&P/TSX Composite Index. S&P said it will add construction company Aecon Group Inc. (
); energy-services companies Enerflex Ltd. (
) and TerraVest Industries Inc. (
) and Ngex Minerals Ltd. (
), a Vancouver-based miner of precious metals in South America.