Bank of Nova Scotia’s Q2 Results Beat Expectations: Should You Buy Now?

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) beat second-quarter estimates on May 31, but its stock has reacted by making a slight move lower. Should you buy on the dip?

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Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), Canada’s third-largest bank in terms of total assets, announced better-than-expected second-quarter earnings results before the market opened on May 31, but its stock has reacted by making a slight move lower. Let’s break down the results and the fundamentals of its stock to determine if this weakness represents a long-term buying opportunity or if it could continue lower from here.

Breaking down the earnings beat

Here’s a summary of Bank of Nova Scotia’s second-quarter earnings results compared with what analysts had expected and its results in the same period a year ago.

Metric Q2 2016 Actual Q2 2016 Expected Q2 2015 Actual
Earnings Per Diluted Share $1.46 $1.42 $1.42
Total Revenue (TEB) $6.65 billion $6.44 billion $6.05 billion

Source: Financial Times 

Bank of Nova Scotia’s earnings per diluted share increased 2.8% and its total revenue on a taxable equivalent basis (TEB) increased 9.8% compared with the second quarter of fiscal 2015.

Its slight earnings-per-share growth can be attributed to its adjusted net income increasing 3.6% to $1.86 billion, driven by 17.9% growth to $977 million in its Canadian Banking segment and 15.2% growth to $561 million in its International Banking segment.

Its very strong revenue growth can be attributed to its net interest income (TEB) increasing 10% to $3.52 billion, driven by 15.2% growth to $1.59 billion in its International Banking segment, and its non-interest income (TEB) increasing 9.6% to $3.13 billion, driven by its total banking revenues increasing 11.4% to $1.03 billion.

Here’s a quick breakdown of eight other notable statistics from the report compared with the year-ago period:

  1. Total assets increased 6.9% to $894.96 billion
  2. Deposits increased 5.9% to $609.31 billion
  3. Loans increased 7.1% to $466.85 billion
  4. Common shareholders’ equity increased 4.8% to $48.95 billion
  5. Assets under administration increased 1.7% to $453.47 billion
  6. Assets under management increased 1.5% to $179.41 billion
  7. Book value per common share increased 5.4% to $40.70
  8. Productivity ratio on a taxable equivalent basis improved 410 basis points to 57.4%

Bank of Nova Scotia also announced that it would be maintaining its quarterly dividend of $0.72 per share, and the next payment will come on July 5 to shareholders of record at the close of business on July 27.

What should you do with Bank of Nova Scotia stock today?

It was a solid quarter overall for Bank of Nova Scotia, and its results exceeded expectations, so I think the market should have reacted by sending its stock higher. With this being said, I think the decline in its stock represents a great buying opportunity for the long term for two reasons in particular.

First, it’s a value play. Bank of Nova Scotia’s stock trades at just 11.1 times fiscal 2016’s estimated earnings per share of $5.81 and only 10.5 times fiscal 2017’s estimated earnings per share of $6.17, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 11.5 and the industry average multiple of 13.7. It also trades at a mere 1.59 times its book value per share of $40.70, which is a discount compared with its five-year average market-to-book value of 1.85.

Second, it’s a dividend play. Bank of Nova Scotia pays an annual dividend of $2.88 per share, which gives its stock a very high and very safe yield of about 4.5%. It’s also very important to note that it has raised its annual dividend payment for five consecutive years, and its three hikes since the start of 2015, including its 2.9% hike in March, have it on pace for 2016 to mark the sixth consecutive year with an increase.

With all of the information provided above in mind, I think Bank of Nova Scotia is a strong buy. All Foolish investors who do not have exposure to the banking industry should strongly consider initiating positions today.

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.

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