Better Buy in February 2024: BNS Stock vs. Canadian National Railway Stock

It’s hard to dismiss BNS stock today because of its low valuation and high dividend yield. And it would be nice to buy CN Rail on dips.

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Bank of Nova Scotia (TSX:BNS) and Canadian National Railway (TSX:CNR) are both good dividend stocks. They’re very different businesses, though, so they’re not good for direct comparisons. That said, it’s still possible to compare them across multiple factors.

Businesses

Bank of Nova Scotia is an international bank that provides financial services, including personal and commercial banking, wealth management and private banking, corporate and investment banking, and capital markets. Other than having core operations in Canada, it also has an international focus in Latin America — namely, Mexico, Peru, and Chile. In fiscal 2023, the bank earned $7.4 billion in net income.

Canadian National Railway is a Class I railroad company in Canada whose network stretches across the country from the West Coast to the East Coast as well as goes from Chicago to the Gulf of Mexico in the United States. Last year, it earned net income of $5.6 billion with revenue diversification as follows: 23% from hauling intermodal containers, 19% from petroleum and chemicals, 19% from grain and fertilizers, 12% from forest products, 12% from metals and minerals, 6% from automotive, and 6% from coal.

Earnings quality

Canadian National Railway has delivered more quality earnings. Other than its earnings falling less during bad economic times, it was also able to grow its earnings at a faster pace. For example, over the last 10 years, CNR increased its adjusted earnings per share by 9% per year. During the pandemic-triggered recession, the railroad company’s earnings fell 8%. In comparison, in the period, Scotiabank increased its earnings by 2.4% per year, and during the pandemic recession, it experienced an earnings cut of 25%, no thanks to a higher expectation of bad loans. As a bank that’s an entirely different business from a railroad, Scotiabank’s business is innately more sensitive to economic downturns.

Dividend

Bank of Nova Scotia has a long dividend-paying history. It has paid dividends every year since 1833. Its five- and 10-year dividend-growth rates are 5% and 5.7%, respectively. In fiscal 2023, Bank of Nova Scotia’s payout ratio was 73%. Based on adjusted earnings, its payout ratio was about 64%, which was still higher than the normal levels of about 50%. So, the bank will probably deliver below-average dividend growth over the next few years. It last raised its dividend by 2.9% in May. However, BNS stock offers an outsized dividend yield of approximately 6.7%, which may attract income investors.

CN Rail has increased its dividend every year since 1996. For your reference, its five- and 10-year dividend-growth rates are 11.7% and 13.9%, respectively. Its last dividend hike was 7% in January. Its sustainable payout ratio was 37% last year. Investors can anticipate higher dividend growth from CN Rail, but it starts you off with an initial dividend yield of almost 2%.

Valuation and price momentum

BNS stock has underperformed the large Canadian bank peer group over the last five years. Needless to say, its price momentum has been weak. Consequently, its valuation has also been relatively low. At $63.26 per share at writing, it trades at a cheap price-to-earnings ratio of about 9.7.

At about $173 per share at writing, CN Rail trades at about 23.5 times earnings. So, it’s not a cheap stock. However, it has a stronger price momentum than Scotiabank and can potentially deliver earnings growth rate in the high single digits over the next few years.

Investing takeaway

Investors would buy and own BNS and CNR for different reasons. Bank of Nova Scotia is an income stock that offers a safe dividend yield of 6.7% today. Investors who need income now or soon might consider buying and holding it for income. Then there’s CN Rail, which offers higher growth for higher total returns potential as well as likely higher dividend growth.

Income-focused investors could buy some BNS shares today and buy more on further weakness. Interested investors of CN Rail may be better served by looking for a pullback in CNR. If I had to choose between the two, I’d say BNS is a better buy today.

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 Kay Ng has positions in Bank Of Nova Scotia. The Motley Fool recommends Bank Of Nova Scotia and Canadian National Railway. The Motley Fool has a disclosure policy.

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