The Bank of Nova Scotia (TSX:BNS), hereafter referred to as “Scotiabank,” has fallen nearly 12% in price over the last 12 months. The stock took a beating first in March as the Spring 2023 banking crisis got underway, and then again this fall in the overall market volatility that took hold at that time. Lately, investors have been moving money out of stocks and into treasuries to capitalize on the recent rise in long-term treasury yields. This trend has led to downward pressure on most types of stocks, but especially bank stocks, which are seen as having liquidity issues.
Funnily enough, the recent moves in interest rates are actually good for banks in one sense. Banks collect more interest revenue when interest rates are high compared to when they are low. Until recently, short-term treasuries have had far higher yields than long-term treasuries – for this reason, the banks’ profits haven’t been growing as much as you’d expect. Today, with long-term yields gaining on short-term yields, there is potential for banks’ margins to increase. Scotiabank could potentially make money off this phenomenon, so it’s worth exploring how its stock is likely to perform going forward.
A 7.3% yield
A big factor for investors to look at when researching Scotiabank stock is its yield. The stock currently yields 7.3%, meaning that it pays you $7,300 in annual cash for every $100,000 invested – assuming, that is, that the dividend doesn’t change. If the dividend is cut, then the yield will go lower; if it’s raised, then the yield will go higher. Historically, Scotiabank’s management has tended to raise the dividend: over the last 10 years, the dividend has increased by 6% per year. That is a healthy dividend growth rate. Today, Scotiabank’s dividend payout ratio is only 68%, so there is some room to raise the dividend further (although BNS doesn’t score quite as well on this metric compared to the other Big Six banks).
Heavy emerging markets exposure
One interesting factor that Scotiabank has going for it right now is heavy emerging markets exposure. Most Canadian banks have opted to achieve their international diversification by way of U.S. investments. BNS has instead gone with emerging markets investments. The bank is already a big player in Latin America and aiming to grow in Asia as well.
Historically, BNS’s Latin America operations haven’t done well. Whereas the bank’s competitors have grown by leaps and bounds in the States, BNS has mostly stagnated in Latin America. Today, however, many economists think that Latin American and Asian markets will gain on North American ones. If that forecast comes to pass, then BNS’s foreign investments should eventually start to pay off.
Foolish takeaway
Bank of Nova Scotia hasn’t been the easiest bank stock to hold over the last five years. In that period, the stock’s price has flatlined, while that of the rest of the Big Six has grown. The situation has tested investors’ patience, but now there is a chance for long-term shareholders to collect big dividends.
