Most Canadian bank stocks offer investors the opportunity to benefit from a steady stream of dividend income and long-term capital gains. Due to their strong fundamentals and conservative business decisions, Canadian banks have managed to deliver outsized gains to long-term investors.
Yes, lending is a cyclical industry, and the fears of multiple interest rate hikes, rising inflation numbers, and the onset of a global recession might impact revenue and earnings for banks in the near term. However, it also offers investors the opportunity to buy stocks at a lower multiple.
Let’s take a look at two bank stocks TSX investors can buy right now.
National Bank of Canada
With an asset base of $367 billion and $773 billion in assets under management, National Bank of Canada (TSX:NA) is one of the largest companies on the TSX valued at $31.3 billion, by market cap. In the fiscal Q1 of 2022 that ended in January, National Bank of Canada reported revenue of $2.46 billion and a net income of $932 million, or $2.65 per share.
It pays investors $3.48 per share in annual dividends, indicating a forward yield of 3.8%. The bank’s payout ratio stands at 31.3%, which is sustainable. In the medium term, National Bank aims to grow adjusted earnings at an annual rate of between 5% and 10%. Comparatively, Bay Street expects NA stock earnings to expand by 9% annually in the next five years.
After adjusting for dividends, National Bank of Canada has returned close to 300% to investors in the last 10 years. Despite its stellar gains, the stock is valued at an attractive forward price-to-earnings multiple of 9.7. According to consensus price target estimates, National Bank stock is trading at a discount of more than 10% right now.
Laurentian Bank of Canada
Valued at $1.66 billion by market cap, Laurentian Bank of Canada (TSX:LB) has underperformed the broader markets in the last decade. Since, May 2012, Laurentian Bank has returned 52.4% to investors, after accounting for dividends. At the time of writing, Laurentian Bank pays annual dividends of $1.76 per share, amounting to a forward yield of 4.6%.
In Q1 of fiscal 2022, Laurentian Bank of Canada reported a net income of $59.5 million and earnings per share of $1.26. In the year-ago period, its net income stood at $47.6 million with adjusted earnings of $1.03 per share.
Further, Laurentian Bank of Canada reported a return on shareholder’s equity of 9.2% in Q1 compared to 7.5% in the prior-year quarter.
Laurentian Bank unveiled a strategic plan to achieve long-term profitable growth. It expects commercial banking to remain a key driver of revenue as Laurentian Bank will focus on growing its portfolio mix contribution from the U.S. and diversifying into new focus industries.
The company explained, “Capital Markets has a unique value proposition that provides mid-sized customers with personalized service and will further align its capabilities to meet the needs of Commercial Banking customers, expand product capabilities and build out ESG-focused advisory services.”
LB stock is valued at eight times forward sales, which is quite cheap, given its earnings are forecast to rise at an annual rate of 7% in the next five years.
