Large stocks of Canadian banks are the main holdings of many North American investor portfolios. The reason is simple. For a long time, banks have provided secure dividends backed by steadily growing earnings.
Examining the big bank’s performance over the last few periods reveals the best banks to hold for the long term. Here are the earnings growth, dividend growth and total returns of the six major Canadian banks, including Royal Bank of Canada (TSX: RY) (NYSE: RY) Banque Toronto-Dominion (TSX: TD) (NYSE: TD), Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, and National bank of Canada (TSX: NA). They are ranked from largest market capitalization to smallest.
|Bank||EPS for fiscal year 2011-2019||EPS for fiscal year 2011-2020||EPS for fiscal year 2015-2020||RDG for fiscal year 2011-2020||Total returns for fiscal year 2011-2020|
|N / A||7,75%||6,29%||5,21%||8,60%||9,90%|
* FY – Exercise
* EPS – Earnings per share
* DGR – Dividend growth rate
Shares of RBC, TD and National Bank beat the banking average across the board. RBC stocks became the ultimate winner for a total return of 10.8% FY 2011 through FY 2020, followed by National Bank stocks and TD stocks.
However, National Bank recorded the strongest growth in earnings per share between fiscal 2015 and 2020, which is driving future dividend growth. Importantly, National Bank’s payout ratio for fiscal 2020 was around 47%. It’s quite an achievement in an economic year disrupted by the pandemic to have a payout ratio like this.
Typically, the payout rates of major Canadian banks do not stray very far from the 50% range. National Bank’s payout ratio was low last year because its EPS only declined by about 5%, while the EPS of its larger peers fell 12-25%.
One of the reasons National Bank is growing at an above average rate could be because of its smaller size. Its market capitalization is less than half the size of the smallest of the big five banks, CIBC.
The main actions of Canadian banks for 2021 and beyond
Investors are encouraged to choose their primary Canadian bank stocks from among RBC, TD and National Bank, taking into account our discovery above. Banks have their differences.
RBC is made up of a diversified company in the areas of personal and commercial banking (45% of profits in FY2020), capital markets (24% of profits), wealth management (19%), insurance (7%) and investor and treasury services (5%). In fiscal 2020, 59% of its revenue came from Canada, 25% from the United States and 16% from international. If you are looking for the most stable bank, RBC should be your first choice.
TD is the fifth largest bank in North America in terms of total assets. It focuses on retail banking services in Canada and the United States and on a leading wholesale banking business. Its growth is directly affected by the health of the Canadian and American economies.
In fiscal 2020, TD’s earnings mix was 58% retail in Canada, 18% retail in the US, 14% wholesale and 10% TD Ameritrade (from the acquisition of Schwab in October 2020).
National Bank turns out to be the most Canadian bank in that about 80% of its income comes from Canada. In Canada, it is concentrated in Quebec, which generates about 55% of its revenues. Thus, its profit growth will depend on the health of the Canadian economy as well as its ability to gain market share in the country.
The insane take away
Dividends from the big six Canadian banks look secure. However, they could freeze their dividends until the pandemic situation is resolved. When there is an economic contraction, like what happened last year, bank stocks saw big declines, which was a great time to top up your core bank holdings.
Here are some other top stocks that you should think of as core stocks …
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Fool contributor Kay Ng owns shares of the Royal Bank of Canada, the Bank of Nova Scotia and the Toronto-Dominion Bank. The Motley Fool recommends BANK OF NOVA SCOTIA.