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

Should you buy Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) for a 4.6% yield today or wait for it to dip some more?

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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%.

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

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