Canadian Dividend Investors
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Minimize Financial Risk
Successful investing is about managing risk, not avoiding it.
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Benjamin Graham
The financial risk associated with owning common shares cannot be eliminated, but it can and should be minimized to the extent possible. The adjacent table presents some guidelines for reducing the financial risk associated with owning shares of financially stable public companies, based on information presented in the Value Line Investment Survey reports.
Benjamin Graham was an American economist, financial analyst and professor at the Columbia Business School in New York, NY. He understood that every investment carries some level of financial risk. For example, when a Treasury Bill matures, the purchasing power of the principal amount you receive may be lower than when you bought it, because the rate of interest paid by the Bill was less than the rate of inflation.
In general, I suggest that you only consider owning companies that have a market value (the current share price times the number of outstanding common shares) of more than 1 billion dollars. This requirement will ensure that the shares can be readily bought and sold on the stock market. Smaller companies are listed on the markets; however their shares may be thinly traded, which can cause their share prices to fluctuate significantly from day to day or even hour to hour. In particular, if the shares are in high demand, it may be difficult to acquire them at a reasonable price or, if large numbers of shares are being are offered for sale, it may be difficult or impossible to sell your shares at a reasonable price.
I suggest that you only consider buying shares of companies that have been financially stable and have earned a profit every year for the most recent 10 years or more. It is acceptable, if earnings fall or turn negative in one or two years over the course of several decades, provided there is a consistent trend of increasing annual earnings and the company's financial success is expected to continue. The annual earnings for Sun Life Financial have been highlighted on the following portion of the Value Line report for the company. As indicated, the company's annual earnings have grown consistently and steadily from 2012 to 2023, and this trend is expected to continue for at least the next few years.
Value Line assigns a Safety Rank to all of the 1700 companies in their coverage universe. The ranking system ranges from 1 (the highest safety rank) to 5 (the lowest) relative to the other 1700 companies in the Value Line universe. The number of companies included in each Safety Rank are not necessarily equal. The Safety Rank is derived from each company's Financial Strength Rating and the Stock's Price Stability rating and is shown in the upper left corner of foregoing image, as indicated by the red arrow. In this case, the Value Line analyst has assigned Sun Life a Safety Rank of 2. Safety Rankings of 1 or 2 are considered suitable for conservative investors.
The Financial Strength Rating and Stock's Price Stability rating for each company appear in the lower right corner of the Value Line report, as indicated by the red arrow on the following image. The Financial Strength Rating is a qualitive assessment of each company's financial condition, relative to the other 1700 companies in the Value Line universe. The Financial Strength Rating assigned to each company has 9 rankings, ranging from A++ (the highest financial strength rating) to C (the lowest). In this example, Value Line has assigned Sun Life a financial strength rating of B++.
The Stock's Price Stability is a statistical measure of the weekly changes in a stock's market price, for each week in the most recent five years and is reported on a scale of 100 (the most stable market prices) to 5 (the most volatile prices). In the case of Sun Life Financial, the Stock Price Stability has a value of 95, indicating that the market price has been reasonably stable.
1. Attributed to Benjamin Graham. Source unknown.