The Bank of Nova Scotia Hikes its Dividend Yet Again

This big five bank continues to reward investors while remaining attractively valued.

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The Motley Fool

Strong results for the Canadian banking sector have continued into the first quarter of 2014. Bank of Nova Scotia (TSX:BNS)(NTSE:BNS) is now the fourth of the big 5 to increase its dividend on the back of some impressive fiscal first quarter 2014 (calendar fourth quarter 2013) results.

Fiscal first quarter 2014 results were impressive
Like its big 5 peers, Bank of Nova Scotia reported some impressive results for the fiscal first quarter 2014. Net income spiked 6.5% in comparison to the same period in the previous year, as well as being up 2% in comparison to the previous quarter to $1.7 billion.

The key driver of this strong performance was the solid performance of the bank’s Canadian personal and commercial banking business, which saw first quarter net income jump 7% year-over-year to $575 million. This was on the back of stronger deposit and credit growth, emphasizing there are still considerable growth prospects for the top 5 banks in the Canadian market.

Those prospects are being driven by stronger than expected economic growth, higher demand for credit and a housing market, which despite claims of being overheated by some pundits, continues to perform strongly.

However, international banking, a key driver of the Bank of Nova Scotia’s long-term growth strategy, reported a 2.2% fall in net income. The focus of this business is its operations in Colombia and Peru, and softer local currencies coupled with higher inflation were the key drivers of this fall in net income. For the year to date, the Colombian peso alone is down by 6% against the U.S. dollar and 2.4% against the Canadian dollar.

Higher than expected inflation in those countries impacted profitability, driving operational costs higher. But the underlying businesses in Peru and Colombia — forecast by the IMF to be two of the fastest growing economies in Latin America — continue to perform strongly and will remain key drivers of the bank’s future growth.

A steadily growing dividend continues to reward loyal investors
As a result of these strong results, Bank of Nova Scotia’s board approved yet another dividend hike of $0.02 per share to $0.64 per quarter, giving the bank a forecast 2014 annual dividend of $2.54 per share. This gives the stock a particularly tasty dividend yield of 4.1%.

It also makes it the fourth of the big 5 to increase its dividend. The dividend yield compares favorably to its peers, being higher than Toronto Dominion’s (TSX:TD)(NYSE:TD) 3.8%, The Bank of Montreal’s (TSX:BMO)(NYSE:BMO) 4% and Royal Bank of Canada’s (TSX:RY)(NYSE:RY) 4%.

This increase is also the second in the last year, giving the bank’s dividend a five-year compound annual growth rate of 5%. This is more than triple Canada’s annual average inflation rate over the same period and highlights the bank’s commitment to rewarding loyal investors through a steadily growing dividend — all of which makes it a compelling investment for income-hungry investors.

The stock is attractively priced
Even after hiking the dividend, Bank of Nova Scotia remains attractively priced with a trailing 12-month price-to-earnings ratio of 12 and a price-to-book ratio of 1.9. These ratios also compare favorably to its big 5 peers, as you can see from the table.

BNS Val Metrics 040314

On the basis of its price-to-book ratio — a key measure of a bank’s value — the Bank of Nova Scotia is attractively priced in comparison to its peers.

Foolish bottom line
Bank of Nova Scotia continues to perform strongly and reward patient and loyal investors through a steadily growing dividend. Not only does it have the second highest dividend yield of its peers, but it also remains attractively priced in comparison.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith does not own shares of any companies mentioned.

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