MENU

48 hours only!

Join Pro Canada for roughly just HALF the entry price you saw yesterday…

A Top Canadian Bank Dips: Is it Time to Buy?

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) has dipped almost 5% this week. Investors looking for a solid, growing income might want to take another look at the bank, which has paid a dividend for more than 100 years and is one of Canada’s top banks. After all, a lower price implies a higher dividend yield to start.

The business

Bank of Nova Scotia primarily operates in Canada, but it also has sizeable operations in Mexico, Peru, Chile, and Colombia, where GDP growth is expected to be higher.

Specifically, about 58% of its income comes from Canada and roughly 17% collectively comes from Mexico, Peru, Chile, and Colombia. The bank also earns about 6% of income from the United States and approximately 19% collectively from Asia, Europe, and other countries.

First-quarter results

In the first quarter, Bank of Nova Scotia grew its revenue by 9% year over year. And it reported net income of $1.8 billion, diluted earnings per share (EPS) of $1.43, and return on equity of 13.8%. Additionally, its capital position remained strong at 10.1%.

Net income and EPS were both higher year over year, but on a quarter-over-quarter basis, they declined 2% and 1%, respectively. This is partly due to increases in expenses of 12% year over year, of which 7% was due to the impact of foreign exchanges.

In November, Bank of Nova Scotia finished acquiring JPMorgan Chase’s Canadian credit card portfolio, which contributed $15 million of net income in the first quarter.

Dividend

Bank of Nova Scotia has hiked its dividend for 48 of the last 50 years. It froze its dividend in 2009 and 2010 to be prudent during the financial crisis. This year the bank has raised its quarterly dividend per share by $0.02 to $0.72.

The bank tends to raise its dividend twice a year. In fact, the bank has increased its dividend per share by two cents every six months since the second half of 2013, so it’s actually slowing its dividend growth.

In 2013 it hiked its dividend by 8.8%. In 2014 it hiked it by 6.5%. In 2015 its dividend growth was 6.1%. If the bank hikes its dividend by two cents again this year, that’d be growth of 5.7% for the year.

That said, Bank of Nova Scotia pays one of the most solid dividends in Canada. Its payout ratio is only 50%, which aligns with the other big Canadian banks.

Conclusion: Is it a buy?

At $62.61 per share, Bank of Nova Scotia trades at about 10.8 times its earnings, so it’s about 15% off from its long-term normal multiple, which indicates a fair value of about $72.50 per share.

So, the bank is reasonably priced today, and investors can buy it for a 4.6% yield if they’re looking for a solid income that’s expected to grow faster than inflation. However, the bank would be a stronger buy between the $53 and $57 level for a yield range of 5-5.4%.

Urgent update: Motley Fool issues rare "double down" stock alert

Not to alarm you but you recently missed an important and rare event. Stock Advisor Canada issued a "double down"... and history suggests it pays to listen. Because 10 of the most lucrative "double downs" in one of the Motley Fool's premier services skyrocketed an average of 434%! So, simply click here to discover why Motley Fool "double downs" have some investors rocking with excitement. Five years from now, you'll wish you'd grabbed this stock. Click here to learn more.

Fool contributor Kay Ng owns shares of Bank of Nova Scotia (USA).

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.