National Bank of Canada (TSX:NA), the sixth-largest bank in Canada, has watched its stock rally over 10% in the last month, and I think it will head significantly higher from here for three main 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 buying the stock today.
1. Its strong earnings results could support a continued rally
On February 23, National Bank of Canada released better-than-expected first-quarter earnings results, and its stock has responded by rising over 7% in the weeks since. Here’s a quick breakdown of 10 of the most notable statistics from the report compared with the same period a year ago.
- Adjusted net income increased 4.1% to $427 million
- Adjusted earnings per share increased 2.6% to $1.17, surpassing analysts’ expectations of $1.14
- Adjusted revenue on a taxable equivalent basis increased 4.9% to $1.53 billion, surpassing analysts’ expectations of $1.47 billion
- Net interest income increased 4.1% to $763 million
- Non-interest income increased 5.6% to $767 million
- Total assets increased 2.3% to $219.3 billion
- Total deposits increased 9.9% to $131.06 billion
- Total loans and acceptances increased 10.4% to $118.51 billion
- Total equity increased 8.8% to $11.41 billion
- Book value per share increased 5.5% to $27.77
2. It trades at less than nine times forward earnings
At today’s levels, National Bank’s stock trades at just 8.8 times fiscal 2016’s estimated earnings per share of $4.65 and only 8.5 times fiscal 2017’s estimated earnings per share of $4.85, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 10 and the industry average multiple of 13.1.
With the multiples above and its estimated 7.1% long-term earnings growth rate in mind, I think National Bank’s stock could consistently trade at a fair multiple of at least 10, which would place its shares upwards of $48 by the conclusion of fiscal 2017, representing upside of more than 16% from today’s levels.
3. It has the highest yield of Canada’s six largest banks
National Bank pays a quarterly dividend of $0.54 per share, or $2.16 per share annually, which gives its stock a yield of about 5.3%, and this is higher than Royal Bank of Canada’s 4.4% yield, Toronto-Dominion Bank’s 4% yield, Bank of Nova Scotia’s 4.7% yield, Bank of Montreal’s 4.3% yield, and Canadian Imperial Bank of Commerce’s 4.9% yield.
Investors must also make two important notes.
First, National Bank has raised its annual dividend payment for five consecutive years, and its recent increases, including its 4% hike in May 2015 and its 3.9% hike in December 2015, 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 adjusted net income, so I think its consistent growth will allow its streak of annual dividend increases to continue for the next several years.
Does National Bank of Canada belong in your portfolio?
National Bank of Canada 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.