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Why Bank of Nova Scotia Is Down 2%

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.

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Fool contributor Joseph Solitro has no position in any stocks mentioned.

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