If I asked you what the best-performing bank stock in Canada has been over the past decade, you probably would not say National Bank of Canada (TSX:NA). Yet it is. Over the past decade, it has returned 342% to shareholders. The second-place performer, Royal Bank, was almost 500 basis points lower with only a 296% return.
What makes National Bank the best bank to own?
What differentiates National Bank from the other banks, and why might it be the best Canadian bank stock to own for the rest of 2021?
Of Canada’s Big Six banks, National Bank is the smallest. It only has a market capitalization of $33 billion. That is almost half the size of it next closest peer, CIBC. While the bank started out as a mostly regional bank in Quebec, it has worked hard to build out integrated retail, wealth, capital markets, and U.S. specialty finance/international operations.
Since it is smaller, it has been able to acquire and invest into smaller, more niche businesses. While these businesses would fail to move the needle for its larger bank peers, they have helped accrete industry-leading earnings growth over the years.
Likewise, being the smallest player has meant it has had to compete very efficiently. As a result, many investors consider National Bank as one of the best capital allocators amongst its peers.
A great track record of outsized earnings growth
This mentality has resulted in a very solid track record of results. Over the past five years, it has steadily grown revenues by an 8% compounded annual growth rate. Likewise, earnings per share have compounded annually by 12%.
In its most recent third quarter, National Bank grew revenues by 13.9%. Net income increased by 39% to $839 million. Diluted earnings per share increased by 42% to $2.36. The company saw strong year-over-year growth across all its business segments. Organic growth was particularly supported by its wealth management and U.S. specialty finance business. It accomplished this all while maintaining a solid tier-one capital ratio of 12.2%.
Strong dividend growth ahead
Today, National Bank does not pay the largest dividend among its peers. It only pays a 2.85% dividend. However, its dividend-payout ratio is sitting below 35%. That is among the lowest in the industry. Currently, regulators are restricting the banks from raising their dividends or buying back stock. Yet, National Bank should be positioned for a substantial dividend hike once allowed. Prior to the pandemic, it has a history of raising its dividend by a compounded annual rate of around 7%. So, a dividend hike by that rate or more could come as soon as next year.
National Bank has a forward-thinking strategy
There is one particular development that could be very interesting for National Bank. In August, it was the first major Canadian bank to announce zero commission trading fees. While it already operates the highest ranked discounted brokerage, this appears to be an opportunity to further capture market share. Certainly, in the short term, it will stand to lose revenue. However, this move is definitely a way to capture the attention of the next generation of trading-friendly investors.
The Foolish takeaway
Frankly, most Canadian investors can’t go wrong owning any of the top banks over the long term. They are well capitalized, highly regulated, and dividend-growth machines. Yet given National Bank’s solid history of outperformance, its strong results in 2021, potential for above-average dividend growth, and its forward-thinking strategy, I think it continues to be the top Canadian bank stock to own in 2021 and far beyond.