Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is Canada’s third-largest bank, and I think its stock is a strong buy for three primary reasons. Let’s take a closer look at these reasons to see if you agree and if you should be a long-term buyer today.
1. Its strong earnings results could support a rally
Earnings play a major role in a stock’s performance in the quarter in which they are released, and on May 31 Bank of Nova Scotia released very strong results for its three- and six-month periods ended on April 30, 2016. Here’s a quick breakdown of 12 of the most notable statistics from the first half of fiscal 2016 compared with the first half of fiscal 2015:
- Adjusted net income increased 4.3% to $3.68 billion
- Adjusted earnings per share increased 4.3% to $2.89
- Total revenue on a taxable equivalent basis increased 9.6% to $13.16 billion
- Net interest income increased 10.5% to $7.04 billion
- Non-interest income increased 8.6% to $6.12 billion
- Total assets increased 6.9% to $894.96 billion
- Deposits increased 5.9% to $609.31 billion
- Loans increased 7.1% to $466.85 billion
- Common shareholders’ equity increased 4.8% to $48.95 billion
- Assets under administration increased 1.7% to $453.47 billion
- Assets under management increased 1.5% to $179.41 billion
- Book value per common share increased 5.4% to $40.70
2. Its stock trades at inexpensive forward valuations
Bank of Nova Scotia’s strong earnings results could help kick-start a rally, and the fact that its stock is undervalued could help make a short-term rally progress into a long-term rally.
Its stock trades at just 11.1 times fiscal 2016’s estimated earnings per share of $5.85 and only 10.5 times fiscal 2017’s estimated earnings per share of $6.19, both of which are inexpensive compared with its trailing 12-month price-to-earnings multiple of 11.7, its five-year average multiple of 11.5, and the industry average multiple of 13.5.
It also trades at a mere 1.6 times its book value per share of $40.70, which is a major discount compared to its five-year average market-to-book value of 1.84.
3. It has one of the best dividends in the banking industry
Dividends amplify shareholder returns, especially when they are reinvested, and Bank of Nova Scotia has a great one. It pays a quarterly dividend $0.72 per share, or $2.88 per share annually, which gives its stock a high and safe yield of about 4.4%.
Investors must also make two notes about its dividend.
First, the company’s three dividend 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 in which it has raised its annual dividend payment.
Second, it has a target dividend-payout range of 40-50% of its net earnings, so I think its consistent growth, including its aforementioned 4.3% year-over-year increase to an adjusted $2.89 per share in the first half of 2016, will allow its streak of annual dividend increases to continue for many years to come.
Should Bank of Nova Scotia be added to your portfolio?
I think Bank of Nova Scotia is a strong buy, so if you agree, take a closer look and consider buying shares today.
