Investors are searching for top quality stocks to add to their retirement portfolios.
Let’s take a look at Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) to see if it deserves to be in your TFSA or RRSP right now.
International strength
Investors often skip Bank of Nova Scotia when searching for a financial stock to add to their TFSA or RRSP holdings, but that might be a mistake.
Why?
The company has invested heavily in building a strong international business, and the effort is producing impressive results.
Most of the growth has focused on Latin America, with Mexico, Colombia, Chile, and Peru being the main markets. These four countries form the core of the Pacific Alliance, which is a trade bloc set up to promote the free movement of goods and capital among the member states.
As the middle class grows, demand for credit cards, loans, and investment products increases, and Bank of Nova Scotia is positioned well to benefit. In addition, the company’s presence in each of the four countries means it can provide important cash-management services to businesses that are expanding into the other markets.
The international banking group generated $614 million, or 29% of the profits, in fiscal Q3 2017. Net income rose 16% compared to the same period in 2016, supported by an 11% jump in loans and a 13% increase in deposits.
Domestic strength
Bank of Nova Scotia’s Canadian operations are also performing well. The Canadian banking group generated $1.045 billion in net income in fiscal Q3, which was up 12% compared to the same period last year, or 8% better when you strip out real estate gains.
Business loans rose 11% and retail savings deposits increased 10% on a year-over-year basis.
Other activities
Investment banking and capital markets activities pitched in an additional $441 million in earnings for the quarter, representing a 5% increase over the same period last year.
Dividend growth
Bank of Nova Scotia has a strong track record of raising its dividend with a 10-year compound average growth rate of 7%. Management is targeting earnings-per-share growth of 5-10% over the medium term, so investors should see steady dividend increases continue.
The current quarterly payout of $0.79 per share provides a yield of 4%.
Risks
Some investors are concerned that rising interest rates could trigger a crash in the housing market and hit the banks. A total meltdown would have an impact, but most analysts expect a gradual pullback.
Bank of Nova Scotia is well capitalized, and its mortgage portfolio is more than capable of riding out a housing downturn. Insured mortgages represent 52% of the loans, and the loan-to-value ratio on the rest is 50%. This means house prices would have to fall significantly before the bank takes a material hit.
Should you buy?
The stock isn’t as cheap as it was early last year, but Bank of Nova Scotia still looks attractive for buy-and-hold investors who are looking for top-quality companies to add to their TFSA or RRSP portfolios.
