Bank of Nova Scotia (TSX:BNS) is up 15% since late October last year. Investors who missed the rally are wondering if BNS stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
Bank of Nova Scotia share price
The stock currently trades near $64 compared to its 12-month low of around $55 per share. Despite the bounce, BNS is still way off the $93 it reached roughly two years ago at the peak of the rally that occurred after the 2020 market crash.
Much of the decline can be attributed to the impact of rising interest rates. The Bank of Canada and the U.S. Federal Reserve raised rates over the past two years to try to get inflation under control. The rate of inflation topped 8% in Canada and 9% in the United States in June 2022. Raising interest rates drives up borrowing costs for households and businesses. This normally reduces spending on discretionary goods and services and forces companies to reconsider investment in growth initiatives. As a result, upward pressure on prices and wages should drop as economic activity declines.
The central banks need to walk a fine line. They need to get inflation back to their 2% target, but they don’t want to drive the economy into a deep recession to achieve the goal. The steep rise in interest rates over a short timeframe has investors worried that there could eventually be a large jump in unemployment and a surge in bankruptcies. This is why bank stocks took a hit over the past 24 months.
Bank of Nova Scotia and its peers raised provisions for credit losses (PCL) last year, and the trend is expected to continue in 2024. However, the overall loan book remains in good shape, and economists are largely of the opinion that the economy will go through a short and mild recession and inflation declines rather than fall off a cliff.
Even if things get ugly, Bank of Nova Scotia has a solid capital cushion to ride out some market turbulence.
Earnings
Bank of Nova Scotia remains very profitable. The bank generated adjusted net income of $8.4 billion in fiscal 2023 and expects 2024 to be marginally better. Staff cuts of about 3% of the workforce that occurred in 2023 will reduce expenses this year.
Looking ahead, Bank of Nova Scotia’s new chief executive officer is focused on driving better returns for shareholders. The business will focus on growth investments in Canada, the United States, and Mexico. Operations in Chile, Peru, and Colombia could be sold if turnaround efforts are not successful. These markets offer attractive growth potential, but investors have not benefitted yet from earlier big bets on the Pacific Alliance members.
Dividend
Bank of Nova Scotia recently raised the dividend. This suggests the board is comfortable with the profits outlook. At the time of writing, investors can get a 6.6% dividend yield.
The bottom line on BNS stock
Bank of Nova Scotia pays an attractive dividend that should continue to grow. Investors who already own the stock should probably hold the position. New investors might want to start nibbling and look to add to the holdings on any new pullbacks.
Ongoing volatility is expected, but BNS stock looks cheap for a buy-and-hold portfolio, and you get paid well to wait for the next leg of the recovery.
