Bank of Nova Scotia (TSX: BNS) is up 18% in the past four months. Investors who missed the bounce 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 high-yield TSX stocks.
Bank of Nova Scotia share price
Bank of Nova Scotia trades for close to $65.50 at the time of writing. This is up $10 per share since late October but is still way off the $93 the stock reached about two years ago.
The extended decline has largely followed the path of falling bond prices caused by a sharp jump in interest rates in Canada and the United States. Central banks are trying to get inflation back down to 2%. The best way to do this is to cool off the economy enough to reduce upward pressure on wages and prices for goods and services. Too much demand for discretionary goods and services created shortages in both products and labour.
The fear among investors over the past couple of years has been that the central banks will have to drive the economy into a deep recession to get inflation under control. High rates are already taking a toll. Bank of Nova Scotia and its peers are increasing provisions for credit losses (PCL) as customers with high levels of debt struggle to cover the rising payments. The pain is already showing up in the numbers, and the trend is expected to continue this year.
Economists, however, broadly expect a soft landing for the economy. Inflation in Canada is down to 2.9% as of January 2024, and markets now expect the Bank of Canada to begin cutting interest rates later this year. That would take some of the pressure off businesses and households that are struggling to make debt payments.
As such, the extent of the drop in the share price of Bank of Nova Scotia might be overdone.
Earnings
Bank of Nova Scotia just released solid fiscal first-quarter (Q1) 2024 financial results, even as PCL increased compared to the same period last year. Adjusted net income was $2.2 billion compared to $2.35 billion in Q1 2023. The drop is largely due to a jump in PCL from $638 million to $962 million.
Management expects 2024 to deliver comparable or slightly better results than last year. The bank cut about 3% of its staff in 2023, so the lower expenses will help the 2024 results.
Dividends
Bank of Nova Scotia increased the dividend for 2024. Investors who buy the stock at the current levels can get a 6.5% dividend yield.
Is BNS stock still a good deal?
Ongoing volatility should be expected until there is clear evidence the economy won’t go into a deep downturn. That being said, investors might want to start nibbling and look to add to the position on any additional weakness. Looking three to five years out, the stock should be higher than it is today, and you get paid well to wait for the bounce.
