3 Canadian Bank Stocks Ideal For Income Investors

3 Canadian Bank Stocks Ideal For Income Investors

The following is a guest post from Bob Ciura from the Sure Dividend website. Recently he emailed me asking if they could do a guest post on the site. I’m a huge fan of their website, so I gladly said yes.

3 Canadian Bank Stocks Ideal For Income Investors

At Sure Dividend, we widely recommend high-quality dividend stocks. We believe that strong businesses with high dividend payouts, competitive advantages, and future growth potential can be phenomenal long-term investments. It is even better if these stocks can be purchased at a discount to their intrinsic value.

When investors think of buying bank stocks, the U.S. giants like JP Morgan Chase (JPM) or Bank of America (BAC) probably come to mind. However, investors should also be considering Canadian banks right now, which are trading at significantly lower valuations than their U.S. counterparts.

For example, The Toronto-Dominion Bank (TD), Bank of Montreal (BMO), and Bank of Nova Scotia (BNS) are three of our top-ranked blue chip stocks right now. We believe these three Canadian banks are all undervalued, with strong business models and high dividend yields.

Blue Chip Canadian Bank #1: The Toronto-Dominion Bank

Toronto-Dominion Bank generates more than C$40 billion in revenue each year. It operates three main segments: Canadian Retail, U.S. Retail, and Wholesale Banking. Retail services include personal banking, credit cards, and auto loans. Wholesale banking includes investment banking and capital markets services. The company has over 2,300 retail locations in North America.

One of the best qualities of TD is its long track record of steady growth. TD’s earnings-per-share history was very stable with a 6.5% growth rate from 2010 to 2019. Results have been negatively impacted to begin 2020 due to the coronavirus (adjusted earnings dropped 50% in the most recent quarter, due to a C$3.22 billion provision for credit losses) but the long-term outlook is positive.

TD has a leading position in the Canadian credit card business which serves as a key competitive advantage and one that will drive future growth. The dividend is well covered, and TD raised its dividend by 6.8% in the first fiscal quarter of the current fiscal year, which proves that the company is shareholder-friendly.

TD currently pays a quarterly dividend of C$0.79, which equates to US$2.32 per share on an annual basis. This means the stock has a high dividend yield of 5.2%. The stock is also undervalued. Based on 2020 expected EPS of approximately US$5.32, TD stock trades for a 2020 price-to-earnings ratio of 8.3, which is below our fair value estimate of 11.5.

Blue Chip Canadian Bank #2: Bank of Montreal

Bank of Montreal was Canada’s first bank, with its founding in 1817. Today, it has about 1,500 branches in North America and the company generates annual revenue of approximately C$25 billion. It generates about 60% of its earnings from Canada and about 32% from the U.S.

Like many of its rivals in the banking industry, BMO has seen its financial results worsen due to the coronavirus. Net income declined 54% in the most recent quarter, while adjusted net income fell 53% year-over-year. Not surprisingly, the company absorbed total provision for credit losses of C$1.12 billion, up C$942M from the same quarter last year.

However, other financial metrics have held up fairly well so far this year. Revenue declined just 3.4% in the most recent quarter as the company noted growth in the P&C businesses. Separately, BMO recorded a Common Equity Tier 1 ratio was 11.0% as of April 30th, compared with 11.4% at the end of the previous quarter, due to loan growth.

BMO pays a quarterly dividend of C$1.06 per share, or US$3.12 per share annualized. This provides a dividend yield of 5.7%. BMO is an impressive dividend payer—the company boasts the longest-running dividend payout history of any Canadian company (191 years). Over the past 15 years, BMO has increased its dividend at a 6% compound annual rate. The stock has a low valuation, trading for a 2020 price-to-earnings ratio of just 11.0 based on our internal expectation of US$4.96 in full-year EPS.

With a low valuation, a high dividend yield of nearly 6%, and an extremely impressive history of steady dividends, BMO is an undervalued dividend stock.

Blue Chip Canadian Bank #3: Bank of Nova Scotia

Bank of Nova Scotia (or Scotiabank) is the third-largest financial institution in Canada. Scotiabank reports in 5 segments – Canadian Banking, International Banking, Global Wealth Management, Global Banking & Markets, and Other.

The company has been negatively impacted by the coronavirus to start the year. But BNS has also reported growth in a few of its most important metrics. In the 2020 second quarter, revenue increased 2% thanks to 5% growth in net interest income. Loans and deposits each increased 4% for the core Canadian Banking segment for the quarter. Net income declined 41%, due to C$1.85 billion in provision for credit losses, which more than doubled from the year-ago period.

Adjusted diluted earnings-per-share dropped 39% to C$1.04. It’s important to note that, much like the other big Canadian banks, BNS’s big drop in earnings is largely due to prudent loan loss provisioning in light of the COVID-19 impact.

Despite the weakness reported by all major banks to start 2020, we believe the industry will return to long-term growth once the coronavirus crisis ends. We view the coronavirus as a short-term issue, which gives long-term investors the opportunity to purchase these stocks at a discount.

BNS stock trades for a price-to-earnings ratio slightly below 11. This is a fairly low valuation multiple for a profitable company with a strong dividend. BNS currently yields more than 6%, a very attractive payout in a low interest rate environment.

Final Thoughts

The S&P 500 Index has recovered significantly off its 52-weeks lows, but there are still plenty of undervalued dividend stocks to buy. Investors looking for stocks trading at reasonable valuations with high dividend yields, should take a closer look at Canadian banks.

In particular, the three stocks presented here represent compelling investment opportunities due to their low valuation multiples and high dividend yields. BMO, TD, and BNS each have high dividend yields that are well above both the S&P 500 Index average, and the average yield among the big U.S. banks. As a result, we view all 3 Canadian banks attractively for value and income investors.

As you know I’m a fan of Canadian Bank Stocks and encourage others to hold some of them in their portfolio. I currently hold and am long BNS, TD, BMO & National Bank in our dividend portfolio.

I hope you enjoyed Bob’s post.


8 Responses

  1. German says:

    These banks will fund my retirement one day 🙂

  2. DG Capital says:

    I have all six big banks in my portfolio, these are my forever holdings! Looking forward to the days when they increase start increasing their divis again

  3. Very nice banks i habe only scotiabank in my portfolio , but the next comes sure.

    • Rob says:

      hey world

      welcome! gotta love the Canadian banks. Scotia is a big holding of ours. slowly but surely right?
      keep it up

  4. tony says:

    what are the tax liabilities on dividends for US buyers

    • Rob says:

      hey Tony

      welcome. Im not a expert on us taxes but I would think there would be a 15% withholding tax on dividends depending on the account you how the canadian security’s in.

      Certain banks are on both the Canadian exchnages and the Us exchange. Ie Td bank so you could buy td on the nyse and the tax circumstances would be the same as other us stocks.

      hope that helps

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