Why Bank of Nova Scotia Is Down 2%

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is down 2% in early trading following its Q4 earnings release. Is it time to buy?

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Bank of Nova Scotia (TSX:BNS)(NYSE:BNS), Canada’s third-largest bank, announced its fourth-quarter earnings results this morning, and its stock has responded by falling 2% in early trading. Let’s break down the quarterly results and the fundamentals of its stock to determine if now is the time to buy.

The fourth-quarter results

Here’s a quick breakdown of 10 of the most notable financial statistics from Bank of Nova Scotia’s three-month period ended October 31, 2017, compared with the same period in 2016:

Metric Q4 2017 Q4 2016 Change
Net interest income $3,831 million $3,653 million 4.9%
Non-interest income $2,981 million $3,098 million (3.8%)
Total revenue $6,812 million $6,751 million 0.9%
Adjusted net income attributable to common shareholders $2,008 million $1,943 million 3.3%
Adjusted diluted earnings per share (EPS) $1.65 $1.58 4.4%
Total assets $915,273 million $896,266 million 2.1%
Deposits $625,367 million $611,877 million 2.2%
Loans $504,369 million $480,164 million 5.0%
Common equity $55,454 million $52,657 million 5.3%
Book value per common share $46.24 $43.59 6.1%

What should you do now?

It was a solid quarter overall for Bank of Nova Scotia, and it capped off a very strong fiscal year for the company, in which its revenue increased 3.1% to $27.16 billion and its adjusted EPS increased 8.1% to $6.54 compared with fiscal 2016, so I do not think the drop in its stock is warranted. Furthermore, I think the decline represents a very attractive entry point for long-term investors for two fundamental reasons.

First, it’s undervalued. Bank of Nova Scotia’s stock now trades at just 12.5 times fiscal 2017’s adjusted EPS of $6.54 and only 11.7 times fiscal 2018’s estimated EPS of $6.98, both of which are inexpensive given its current earnings-growth rate and its estimated 8.7% long-term earnings-growth rate; these multiples are also inexpensive given the strength and stability of its business model, and the limited competition it faces.

Second, it’s a dividend-growth star. Bank of Nova Scotia currently pays a quarterly dividend of $0.79 per share, representing $3.16 per share annually, which gives it a 3.9% yield. It’s also important to note that fiscal 2017 marked the seventh consecutive year in which it has raised its annual dividend payment, and that its 3.9% hike in August has it on pace for fiscal 2018 to mark the eighth consecutive year with an increase.

Bank of Nova Scotia’s stock is up about 6% since it reported its third-quarter earnings results on August 29, and I think it still represents a great long-term investment opportunity today, so take a closer look and consider adding it to your portfolio.

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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