Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) or Scotiabank and Manulife Financial (TSX: MFC)(NYSE: MFC) are bargain stocks! They should appeal to income investors as they offer safe dividend yields of +4.6% and tend to increase their dividends.
Putting Scotiabank’s dividend growth in perspective
Scotiabank has paid dividends to its common stockholders every year since 1832. This year marks the 186th year of dividend payments!
From fiscal 2001 to 2009, the bank experienced tremendous dividend growth with a compound annual dividend growth rate of nearly 15.2%! During that eight-year period, Scotiabank’s earnings per share growth rate of 8.1% and payout ratio expansion from the 30% level to 50% supported the high dividend growth.
The aftermath of the financial crisis of 2007-2008 brought Scotiabank’s dividend growth to a halt in fiscal 2010. Since then, the international bank has stepped on a path of stable growth.
For the next three to five years, the bank should be able to increase its dividend by about 6% per year while maintaining a payout ratio of about 50%.
How cheap is Scotiabank?
Because Scotiabank has been experiencing slower growth since the financial crisis, it makes sense to look at its normal multiple since that period instead of looking at a longer time frame. Its normal multiple from the financial crisis is about 11.6.
Assuming the international bank continues its stable growth, it can normally trade at about $86.80 per share in about a year for about 22% near-term upside potential. Moreover, at $71 per share as of writing, the stock offers a safe 4.8% yield. In aggregate, that’s about 27% near-term total returns potential, which is quite attractive for a conservative investment.
Putting Manulife’s dividend growth in perspective
Manulife has operated for more than a century in Asia and North America. It didn’t fare as well as Scotiabank in the last financial crisis, as it slashed its dividend per share by 48% between 2008 and 2010. After that, the life and health insurance company took several years to recover before it began increasing its dividend per share by 10% or higher since 2014. In fact, Manulife just increased its November dividend that’s payable in December by 13.6% to $0.25 per share.
Manulife has been experiencing double-digit earnings per share growth since 2013, which has supported its dividend growth. Based on the new quarterly dividend per share, Manulife’s payout ratio is 45% of its 2017 earnings. The payout ratio, based on this year’s earnings, would be even more conservative.
How cheap is Manulife?
Based on Manulife’s recent double-digit growth, the stock is trading very cheaply at about $21.44 per share at a price-to-earnings multiple of about 8.3. Some analysts are now estimating 6% earnings-per-share growth in 2019 and 2020, but even with the huge slash in the forecast, the stock is still cheap. The reason for the ridiculously cheap stock is because Manulife is in a lawsuit.
Thomson Reuters has a 12-month consensus target of $29.30 per share on Manulife, which represents near-term upside potential of more than 36%. Of course, the big drag is the lawsuit. Meanwhile, the stock offers a yield of 4.66%.
Investor takeaway
Both Scotiabank and Manulife look cheap. Although Manulife has more upside potential, Scotiabank is a more conservative and safer investment. The bank also offers a slightly bigger dividend yield of about 4.8%.
