Bank of Nova Scotia: Rare Opportunity for Strong 6.4% Yield (NYSE: BNS)

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Investment thesis

In March 2020, in the midst of the stock market crash, I took a close look at the value and dividend characteristics of the Big Five Canadian banks. At the time, the 5 largest banks in Canada: the Royal Bank of Canada (RY), the Toronto-Dominion Bank (TD), the Bank of Nova Scotia (BNS), the Bank of Montreal (BMO) and the Canadian Imperial Bank of Commerce (CM) were all trading at significant discounts from their historical valuations. The combination of weak stock prices and the continuity of dividend payments had resulted in dividend yields 68% higher on average than the 5-year averages in March 2020. Five months later, that average yield bonus has closed at about 30%, or about half of the performance bonus. from March 2020. Although the sector has recovered somewhat, the Bank of Nova Scotia has lagged behind its peers in the recovery. For investors focused on long-term dividend growth, Scotiabank’s current level offers great value and attractive returns.

Value in a large sector

For dividend-focused investors with a long-term time horizon, Canadian banks tick many boxes. These companies have stable business models in a protected industry with strong dividend growth records. With the recent market turbulence caused by the global pandemic, bank stock prices have reached some of their most attractive levels since the global financial crisis. I love the Canadian banking industry in general, and it’s hard to go too far wrong with one of the Big Five. In particular, RY, TD and BNS are some of my main long-term holdings. Interested in both dividend growth and value, I recently added to Bank of Nova Scotia and Toronto-Dominion Bank due to their compelling current valuations and attractive dividend yields. In terms of value and dividend profile, the Bank of Nova Scotia currently stands out in this group.

Company Profile

The Bank of Nova Scotia has a market capitalization of C $ 68 billion and assets of over $ 1.2 T. Scotiabank – As a brand, the company has 97,000 employees and serves more than 25 million customers in the Americas. Using the proceeds from the bank’s Canadian high-margin operations, Scotiabank has established a significant presence in Latin America, with a focus on the Pacific Alliance countries of Mexico, Peru, Colombia and Chile. Over the past few years, the bank has focused on growing its wealth management business through major acquisitions with the goal of diversifying away from its retail banking business in Canada. Scotiabank trades on the Toronto Stock Exchange and the New York Stock Exchange under the symbol “BNS”. For a more in-depth look at BNS’s operations and growth positioning, please see my analysis here.

Source: Scotiabank Investor Presentation

Convincing dividend yield

Scotiabank currently produces over 6.4%; an incredible 44% premium over the bank’s historic 4.49% dividend yield. Company performance in 2020 is at its highest level since 2008-2009 when performance exceeded 8%. For investors looking for an attractive dividend income name, Scotiabank is at its most attractive level in a decade.

Source of the table: author; Data source: Morningstar

In addition to the current high yield, Scotiabank also has an incredible history of dividend growth stretching back 137 years. In the last decade since the global financial crisis, Scotiabank has offered dividend investors a 6% CAGR. These steady semi-annual dividend increases have rewarded investors quarter after quarter with reliable growing income streams.

Source of the table: author; Data source: Morningstar

Comparatively attractive

Over the past 5 months, Canadian bank stocks have rallied steadily. With the rise in stock prices, dividend yields have moderated from their spectacular premium of March 2020. The compression of this premium over the past 5 months has been steady but inconsistent. Scotia’s performance held up better than TD, CM and BMO in March. However, its recovery has been slower than any of the other four major Canadian banks.

Source of the table: author; Data source: Morningstar

The cut in the Scotiabank dividend bonus from March to August was 21%, compared to an average of 36% for the group. This slow recovery offers investors the opportunity to take advantage of this comparatively high dividend yield by adding positions.

Source of the table: author; Data source: Morningstar

Dividend security

Since 2009, Scotiabank has experienced an average annual EPS growth of 8%. With EPS growth outpacing dividend growth, the company has been able to maintain a reasonable payout ratio which has averaged 49.5% over the past 5 years. With a current payout ratio of around 59%, Scotia’s payout ratio is almost 19% above the company average. While above the company’s target dividend payout range of 40-50%, the current payout is in line with the average premium that other major Canadian banks currently offer.

Source of the table: author; Data source: Morningstar

The Office of the Superintendent of Financial Institutions Canada, or OSFI, lists all of Canada’s five major banks as National Systemically Important Banks, or D-SIBs. OSFI has asked banks to refrain from share buyback programs or increase dividends amid the COVID-19 pandemic, but allowed them to maintain dividend payouts going forward. According to OSFI’s April 2020 statement:

The domestic stability buffer is countercyclical by design because it requires the constitution of reserves in the right times, so that when the risks materialize, banks can do more than just absorb the losses; they are also able to continue to support the economy by lending, providing services to clients and paying dividends.

Regulators, analysts and investors generally understand that Canadian banks are seen as examples of stability during economic turmoil. According to analyst Meny Grauman of Cormark Securities,

“There is a bonus for investors earned because of this enormous amount of time, safety and security of the dividend. You prefer to keep that intact and go and raise your own funds on less than preferable terms ”.

Scotiabank and its peers have a vested interest in maintaining current dividend payouts, even if doing so increases payout ratios in the short term.

Scotiabank has paid a dividend continuously since 1883 and has increased the dividend in 43 of the past 45 years. This dividend is supported by a large and diversified activity which presents a high level of recurring income. It should be noted that the Bank of Nova Scotia maintained its dividend during the global financial crisis ten years ago and resumed dividend growth in 2011 during the recovery. This dividend, like those of other major Canadian banks, is very secure. Scotiabank is unlikely to increase its dividend this year, or maybe even in 2021; however, I am very confident that the Scotia dividend is secure at current levels.

Key points for investors

In addition to the comparative attractiveness of the Canadian banking industry, Scotiabank’s current 6.4% return is attractive on a historical basis. The current yield will not last, so investors interested in long-term dividend growth can take advantage of the current low prices to increase their positions. I recently doubled my credit at Scotiabank with the intention of holding DRIP shares for the next several decades.

Disclosure: I am / we are long BNS, TD, RY. I wrote this article myself and it expresses my own opinions. I am not receiving any compensation for this (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.



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