Bank of Nova Scotia (TSX:BNS): Long-Term Value Generation and a 4.6% Dividend Yield

Bank of Nova Scotia (TSX:BNS) (NYSE:BNS) effectively asks shareholders to take on some short-term pain for long-term gain.

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Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) stock is down 8% year-to-date at a time when most of the other Canadian bank stocks have rallied slightly or at least pretty much held up.

This 8% drop follows a period of significant acquisitions for the bank to the tune of $7 billion, many of which will be completed in the second half of 2018 and have brought some execution risk to the stock as well as higher future growth.

It also follows the $1.7 billion equity raise, which has diluted current shareholders in the short-term.

But I would watch this stock with the longer-term picture in mind.

The most recent acquisitions of Canada’s MD Financial Management ($38 billion of assets under management) and Jarislowski Fraser Limited ($40 billion in assets under management), are high-quality acquisitions that will create a stronger bank in Canada with greater earnings power and significant synergies over the long term.

International acquisitions

And these Canadian acquisitions come after stepped up expansion efforts in South America, as the company completed an acquisition in Chile in 2017, an acquisition in Columbia in January 2018, and an acquisition in Peru in May 2018.

A very busy year indeed.

A year that has caused short-term stock weakness.

But the bank is building an empire.

At the very least, I think investors should keep this bank on their watch list with the intention of adding on weakness.


Because the bank has embarked on a very ambitious long-term growth plan — one with the potential to make it outperform the other Canadian banks by a significant margin.

It remains Canada’s most international bank, a bank that has big earnings power that will be increasingly visible once integration is complete and synergies come onstream.

In summary, Bank of Nova Scotia has recently increased its presence in the Canadian market and away from international markets as a way to better control the risk in the business.

In 2008, the Canadian banking segment represented 43% of total net income, in 2012, it represented 31% of total net income, and it now represents 49% of total net income.

So we can see that the bank has been balancing its risk versus reward potential by focusing on where it sees the best balance.

With 29% of net income coming from international banking, Bank of Nova Scotia remains of the most heavily involved in the more risky, higher growth, international markets.

Bank of Nova Scotia stock weakness has resulted in an increased dividend yield that now ranks at the top of the banks, at 4.6%, presenting investors with an opportunity for yield.

An opportunity for investors to buy into a high-quality dividend stock, and to buy in ahead of the synergies that are expected to come from the bank’s acquisitions.

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 Karen Thomas has no position in any of the stocks mentioned.

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