Rebecca Teltscher

Valeant Pharmaceuticals has been referred to as an “unstoppable force” by many investors impressed with its recent returns. However, when analyzing the now largest company on the TSX, many concerns come to mind. Valeant is over five times more expensive on a price to earnings or price to book value basis. One may question whether the growth through acquisition story is one that can be maintained indefinitely. The other observation worth mentioning is that Valeant Pharmaceuticals does not pay a dividend. This limits its downside protection should something negative happen and also doesn’t compensate investors with a steady income stream that can be compounded over time.

Please refer to the table below comparing Valeant Pharmaceuticals with two well known Canadian companies. The largest Canadian Bank, Royal Bank of Canada, and the largest Canadian Telecommunications company,  BCE inc.

Royal Bank of Canada
BCE Inc
Valeant Pharmaceuticals
Market Cap ($Billions)
106.24
44.42
113.93
Price to Earnings
11.35
18.68
106.26
Price to Book
2.02
2.97
16.6
Dividend Yield
4.18%
4.93%
0.00%
No of Employees
78,000
57,234
16,800
Weight in S&P TSX index
6.06%
2.56%
6.17%

 

Another interesting thing to note is the impact Valeant Pharmaceuticals has had on the Canadian stock market. Now representing over 6% of the Canadian market, Valeant’s return has positively skewed the overall market return over the past two years. This year alone, the Canadian market would have performed much worse if you exclude Valeant Pharmaceutical’s contribution. As of July 31, 2015, the S&P/TSX delivered relatively flat performance at 0.59% year to date. If you exclude Valeant from the index, the market would have returned -2.28%. That represents almost a 3% contribution to the entire composite.

 

Performance Impact of Valeant Phamaceuticals on S&P TSX
Valeant Impact
Market Return
Market Return
without Valeant
2014
0.80%
10.46%
9.67%
YTD 2015*
2.87%
0.59%
-2.28%
* as of July 31, 2015
** Source: Thomson Reuters

 

While Leon Frazer does not own Valeant Pharmaceuticals, it is easy to see how one stock can influence returns of an entire index. It if for this reason we advise investors to use caution when using a benchmark to judge a portfolios success.

 

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