Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) pulled back 2.79% after the company reported its Q1 2017 earnings results. The company’s earnings were in line with analyst expectations, but many thought the results were disappointing considering Bank of Nova Scotia’s peers in the Big Five reported estimate-crushing results. The stock of the company is now off its high by 6%, and I believe the recent pullback is an excellent opportunity for long-term investors looking to add some international spice to the core of their portfolios.
Good but not great Q1 2017 results
Bank of Nova Scotia’s International segment net income increased 18% to $576 million. The Canadian Banking segment net income grew 12% to $981 million, and the Investment Banking segment had a 28% increase to $469 million. Overall, those are good results, but they’re nothing incredible like what its peers recently delivered, so that’s why the stock is retreating. I don’t think the pullback is warranted, so value investors should definitely be looking to scoop up shares if the stock continues to dip further.
Could Trump’s policies hurt the Latin American segment?
The company has the largest exposure to foreign markets of the Big Five, and the management team is focused on growing its Latin American segment, which includes Mexico. There’s no question that President Trump wants to get a better deal from Mexico regarding the trade agreement, and many pundits believe that Mexico may not be an attractive area given the headwinds that may be generated by new policies put forth by the Trump Administration.
The Foreign Banking segment could be a huge long-term growth opportunity for Bank of Nova Scotia. The foreign markets are growing very fast, and the momentum is expected to continue over the next few years. The banks in foreign markets are extremely fragmented, so there’s a ton of room to run.
Bank of Nova Scotia’s international growth initiatives will definitely provide a huge boost to earnings over the long run. Sure, there’s a little more risk with foreign markets, especially as Mexico becomes less of an attractive space to invest. But foreign markets have the potential to offer growth over the next few years. Bank of Nova Scotia also has a top-notch risk-management team, so a bit more risk for a lot more reward is a great trade-off.
The stock currently yields a 3.84% dividend yield, and you can count on a large number of dividend increases over the next few years thanks to the cash flow coming from the fast-growing International segment and the solid Domestic Banking segment. Bank of Nova Scotia is a dividend-growth superstar, and I believe it’s one of the cheaper banks in the Big Five after the recent post-earnings dip.
Valuation
The stock currently trades at a 1.8 price-to-book multiple, which is in line with the company’s five-year historical average price-to-book multiple. The stock definitely isn’t a steal after the huge run it had last year, but it’s not that expensive when you compare the stock to its peers in the Big Five. Canadian banks are pricey at current levels, so Bank of Nova Scotia’s fair valuation should grab the attention of long-term income investors looking to load up on a dividend-growth king.
