Bank of Nova Scotia (TSX:BNS) is one of Canada’s more under-appreciated bank stocks. Boasting a 6.4% yield, it has a lot of income potential. However, BNS’s income potential comes at a very real price: growth.
BNS has one of the worst growth track records among big Canadian banks, with revenue rising at just 2.3% annualized over the last five years and earnings per share (EPS) actually down slightly over the same period. This isn’t the kind of growth you’d get with the likes of Royal Bank or Bank of Montreal.
In this article, I will explore whether BNS stock is worth owning for its high yield, despite the poor growth.
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Upcoming earnings
One thing worth mentioning about Bank of Nova Scotia is that its earnings are coming up soon. The earnings release should come out on August 28, which is less than two months from now.
The release will tell investors whether BNS was able to achieve positive growth in revenue and earnings in its most recent quarter. The bank did not do so last quarter: EPS declined 22%. The release missed analyst expectations and sent the stock tumbling after it came out. This time around, Bank of Nova Scotia has a fairly easy comparison to beat, so it may do better relative to last quarter.
Regardless, this earnings release will be one for BNS shareholders to watch.
Historical trends
Having looked at Bank of Nova Scotia’s most recent quarter, it’s time to pull back and take a long-term, historical look at earnings. Bank of Nova Scotia has historically not grown as rapidly as some of its peers, although it had a good run in the more distant past.
Over the last five years, Bank of Nova Scotia has grown its financial performance metrics at the following compounded annual growth rates:
- Revenue: 2.3%
- Net interest income: 3.35%
- Net income: 0.03%
- Diluted EPS: -0.33%
- Book value: 5.74%
- Assets: 8.5%
Overall, there was decent growth in the company’s assets and equity, but profits are down over an entire five-year period. Investors will want to see that growth pick up; otherwise, BNS’s 6.4% yield is the stock’s only appeal.
Valuation
Having looked at the Bank of Nova Scotia’s historical performance, we can now turn to its valuation. BNS stock is pretty cheap at today’s prices, trading at the following:
- 8.7 times earnings
- 2.77 times sales
- 1.04 times book value
That’s a pretty cheap valuation, even for a bank. If BNS never grows again in the future, it will take just 8.7 years for the company’s profit to pay back your investment. That’s a reasonably good payback period, so BNS just needs to not shrink in order to be worth the investment today. The 6.4% dividend yield alone easily beats treasury yields.
Foolish takeaway: Bank of Nova Scotia is a decent buy
Taking everything into account, we can conclude that Bank of Nova Scotia is a decent buy. It’s not the kind of stock that will make you rich, but it could supply you with considerable cash flows. If you’re looking to add some quarterly income to your portfolio, this could be just the stock to do it with. Just don’t expect explosive gains.
