Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), the third-largest bank in Canada, has watched its stock widely outperform the overall market in 2016, rallying more than 11% as the S&P/TSX Composite Index has risen just 3%, and I think the rally is just getting started for three primary reasons. Let’s take a closer look at these reasons to determine if you agree and if you should take it one step further by establishing a position today.

1. Its strong Q1 earnings could support a continued rally

On the morning of March 1, Bank of Nova Scotia released better-than-expected first-quarter earnings results, and its stock has responded accordingly by rising over 13% in the trading sessions since. Here’s a summary of 10 of the most notable statistics from the report compared with the same period in fiscal 2015:

  1. Net income increased 5.1% to $1.81 billion
  2. Earnings per share increased 5.9% to $1.43, surpassing analysts’ expectations of $1.42
  3. Total revenue on a taxable equivalent basis increased 9.4% to $6.51 billion, surpassing analysts’ expectations of $6.27 billion
  4. Total assets increased 7.9% to $919.6 billion
  5. Customer loans and acceptances increased 7.9% to $630.9 billion
  6. Deposits increased 7.8% to $486.9 billion
  7. Common shareholders’ equity increased 8.5% to $50.9 billion
  8. Assets under administration increased 2.7% to $452.6 billion
  9. Assets under management increased 3% to $179 billion
  10. Book value per share increased 9.2% to $42.32

2. It’s undervalued

At today’s levels, Bank of Nova Scotia’s stock trades at just 10.6 times fiscal 2016’s estimated earnings per share of $5.87 and only 10 times fiscal 2017’s estimated earnings per share of $6.23, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 11.7 and the industry average multiple of 13.1.

With the multiples above and its estimated 7.5% long-term earnings growth rate in mind, I think Bank of Nova Scotia’s stock could consistently command a fair multiple of about 12, which would place its shares upwards of $74 by the conclusion of fiscal 2017, representing upside of more than 18% from today’s levels.

3. It has a high and safe dividend with room for growth

Bank of Nova Scotia pays a quarterly dividend of $0.72 per share, or $2.88 per share annually, which gives its stock a high and safe yield of about 4.6%.

It is also important to make two notes.

First, Bank of Nova Scotia has raised its annual dividend payment for five consecutive years, and its recent increases, including its 2.9% hike on March 1, has it on pace for 2016 to mark the sixth consecutive year with an increase.

Second, the company has a target dividend-payout range of 40-50% of its net income, so I think its consistent growth will allow its streak of annual increases to continue going forward.

Does Bank of Nova Scotia belong in your portfolio?

Bank of Nova Scotia represents one of the best long-term investment opportunities in the market today, so all Foolish investors should strongly consider making it a core holding.

This should be the TOP stock on every investor's buy list...

Exports of liquefied natural gas could be one of the best growth opportunities out there for long-term investors. And, we think we've identified the Canadian company to invest in. It's a global company with operations across nearly 20 countries and 70 locations. We like it so much, we've named it as 1 Top Stock for 2016 and Beyond. To find out why, click here now to learn how to access your FREE copy today!


Let’s not beat around the bush – energy companies performed miserably in 2015. Yet, even though the carnage was widespread, not all energy-related businesses were equally affected.

We've identified an energy company we think offers one of the best growth opportunities around. While this company is largely tied to the production of natural gas, it doesn't actually produce the gas. Instead, it provides the equipment required to get natural gas from the ground to the end user. With diversified operations around the globe, we think it's a rare find in the industry.

We like it so much, we’ve named it as 1 Top Stock for 2016 and Beyond. To find out why, simply enter your email address below to claim your FREE copy of this brand new report, "1 Top Stock for 2016 and Beyond"!

Fool contributor Joseph Solitro has no position in any stocks mentioned.