Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is riding some incredible momentum; it soared an incredible 41% last year. I believe the momentum can continue into 2017 thanks to very strong international earnings and an industry-leading domestic retail segment. The management team is also striving to improve its expense management in order to improve margins. The party is not over yet for this dividend-growth superstar.
The company saw some very impressive results last year, which I believe will continue into this year. Net income increased by 2% year over year to $7.37 million with diluted EPS increasing 2% year over year to $5.77. The rally that followed is completely appropriate and may still have more room to run.
The bank invested $275 million in a strategic effort to improve its customer experience and increase productivity. With an impressive 14.3% ROE, there’s no question that these investments will give a nice boost to the top and bottom line.
The international segment is where Bank of Nova Scotia distinguishes itself from its peers. The company has 14 million international customers compared to 8.5 million Canadian customers. This international focus allows the company to grow in emerging markets, which will offer more growth prospects over the long term thanks to the fragmented nature of international markets.
Bank of Nova Scotia has the ability to reach high-growth economies that its peers in the Big Five aren’t able to at the same magnitude. I believe the international focus will continue to be a huge strength going forward and could be the catalyst for more capital gains and bigger dividend hikes.
High growth and a high dividend in one company
Bank of Nova Scotia is able to offer the average investor a safe, bountiful dividend while being able to grow thanks to its strong international segment. The company has paid a dividend to investors since 1832 and will continue to do so for the next century. Going forward, we can expect the earnings momentum to continue, and two generous dividend raises can be expected each year for the next few years.
The stock currently trades at a 13.3 price-to-earnings multiple with a 1.8 price-to-book and a 3.6 price-to-sales multiple, all of which are within range of historical averages, so the stock looks to be fairly priced at current levels. The current dividend yield is at 3.88%, which is slightly lower than its historical average yield of 4%.
Based on these valuation metrics, the stock looks to be fairly valued. However, the company is riding huge tailwinds in 2017 thanks to its strong international banking segment. We can expect a lot of these multiples to decrease this year. Therefore, I believe the stock is actually undervalued and could enjoy huge upside this year.
If you’re looking for a dividend stock that offers terrific growth, then look no further than Bank of Nova Scotia. TD Securities has a 12-month price target of $87, which represents a 14% upside from current levels, not including the fantastic dividend.
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 Joey Frenette has no position in any stocks mentioned.