I’ve long been a believer in Canadian bank stocks. They are wonderful businesses that have made countless investors rich over the last 50 years.
Many Canadian investors struggle with choosing a bank for their portfolio. Some investors default to owning each of Canada’s five largest banks, but some insist on more. They’re looking for a bank stock that will outperform its peers over the long term.
I’ve outlined a couple of strategies for buying bank stocks before. Buying a bank stock trading at a 52-week low is generally a good idea, for example. I think investors would be smart to compare each bank’s five-year performance and buy the laggard, with the expectation the situation will reverse itself in the next five years.
One Canadian bank checks off both these boxes today. It’s flirting with a 52-week low and has underperformed its peers over the last five years. That’s enough to make it a buy for my portfolio. Here’s why I think you should join me.
Canada’s international bank
Scotiabank’s Canadian operations are rock solid. The company is comfortably Canada’s third-largest bank, with the domestic banking operations bringing in approximately half of the company’s $8.8 billion in total profits. The Canadian operations saw an 8% increase to the bottom line in 2018, with the capital markets division adding an additional $1.8 billion to net earnings.
Perhaps 2019 won’t be as good of a year for the Canadian part of the business, with indications low interest rates will continue — something that hurts net interest margins. And weakness in many major real estate markets — especially Vancouver, which is looking particularly vulnerable right now — means fewer mortgage originations, which could hit the bottom line. Still, the Canadian operations should still deliver half-decent results this year.
The real prize, at least in this analyst’s opinion, is Scotiabank’s international division. These assets include significant operations in Central and South America, particularly in nations like Mexico, Peru, Chile, and Colombia.
Thanks to a series of acquisitions and strong organic growth, these international operations are expanding rapidly. In its most recent quarter, the company reported a 22% revenue increase for the international operations, with net income increasing 18% compared to the same quarter last year. Compare that to the Canadian operations, which grew the top line by 5% in the most recent quarter with a 7% net income increase.
Long-term growth for the international banking division looks strong as well. Latin America is experiencing better economic growth than here at home, and there are millions of citizens in these nations that will use their newfound prosperity to get their first credit cards, mortgage, or investment account. And higher interest rates in Latin America translates into better net interest margins.
Investors have to be excited about Scotiabank’s long-term emerging markets growth. It can easily add new assets to its international division, either in Latin America or in other parts of the world. The possibilities are endless.
But this exposure comes with a bit of a downfall. Whenever investors get bearish about emerging markets, Scotiabank shares take this squarely on the chin.
Today is no exception. Scotiabank shares are up just 4% thus far in 2019 and are only barely above their 52-week low. The other members of Canada’s Big Five banks are all doing better than Scotiabank.
This creates a great buying opportunity. Not only are investors picking up cheap shares that are trading for less than 10 times forward earnings expectations, but they’re also locking in one of the best yields out there. Shares currently pay $0.87 each for a quarterly dividend — good enough for a 4.9% yield.
The bottom line
Investing doesn’t have to be terribly complicated. Just buy great companies when they’re temporarily beaten up and hold for the long term. That’s the situation facing Scotiabank today. Load up on shares today and smile all the way to the bank five years from now when everyone has forgotten about this little short-term blip. Your future self will thank you.
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 Nelson Smith owns shares of BANK OF NOVA SCOTIA. Bank of Nova Scotia is a recommendation of Stock Advisor Canada.