Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), the third-largest bank in Canada in terms of total assets, has watched its stock widely underperform in the overall market in 2015, falling over 2.5% as the TSX Composite Index has gained over 5%, but it could be one of the top performing stocks from this point forward. Let’s take a look at three of the primary reasons why this could happen and why you should consider establishing a long-term position today.
1. A growing asset base driving earnings and revenues higher
Bank of Nova Scotia released solid first-quarter earnings results on March 3, but its stock has responded by falling over 2% in the weeks since. Here’s a summary of 12 of the most important statistics from the report compared to the same quarter a year ago:
- Net income increased 1% to $1.73 billion
- Earnings per share increased 1.5% to $1.36
- Revenues increased 4% to $5.96 billion
- Net interest income increased 5.5% to $3.17 billion
- Non-interest income increased 2.4% to $2.78 billion
- Core banking margin expanded six basis points to 2.41%
- Total assets increased 8.8% to $851.9 billion
- Total deposits increased 8.3% to $584.6 billion
- Total customer loans and acceptances increased 6% to $451.8 billion
- Total assets under management increased 13.4% to $173.8 billion
- Total common shareholders’ equity increased 10.6% to $46.9 billion
- Book value per share increased 11.1% to $38.75
2. The stock trades at inexpensive current and forward valuations
At today’s levels, Bank of Nova Scotia’s stock trades at just 10.9 times fiscal 2015’s estimated earnings per share of $5.89 and only 10.7 times fiscal 2016’s estimated earnings per share of $6.04, both of which are inexpensive compared to its five-year price-to-earnings multiple of 12.3.
In addition, the company’s stock trades at a mere 1.66 times its book value per share of $38.75, which is very inexpensive compared to its market-to-book value of 1.90 at the conclusion of fiscal 2014.
I think Bank of Nova Scotia’s stock could consistently command a fair multiple of at least 12, which would place its shares upwards of $70.50 by the conclusion of fiscal 2015 and around $72.50 by the conclusion of fiscal 2016, representing upside of approximately 6.5% and 12.6%, respectively, from current levels.
3. A 4.2% dividend yield
Bank of Nova Scotia pays a quarterly dividend of $0.68 per share, or $2.72 per share annually, which gives its stock a bountiful 4.2% yield at current levels. The company has also raised its annual dividend for five consecutive years, showing that it is strongly dedicated to maximizing shareholder returns, and I think this streak could continue for the next several years.
Should you invest in Bank of Nova Scotia today?
Bank of Nova Scotia represents a great long-term investment opportunity today because it has a growing asset base that has continued to drive its earnings and revenues higher, because its stock trades at inexpensive valuations, and because it has a very high 4.2% dividend yield. Foolish investors should take a closer look and strongly consider beginning to scale in to long-term positions today.
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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 Joseph Solitro has no position in any stocks mentioned.