Valued at a market cap of $3.3 billion, EQB (TSX:EQB) is one of the fastest-growing banking companies in Canada. In the last decade, EQB stock has risen by 193%. After adjusting for dividends, total returns are closer to 244%. Comparatively, the TSX index has returned “just” 120% in this period after accounting for dividends.
Despite its outsized gains, EQB also offers shareholders a dividend yield of 2%, given its annual payout of $1.68 per share. Let’s see if EQB can continue to beat the broader markets in 2024 and beyond.
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An overview of EQB stock
EQB is a Canada-based financial services company with $119 billion in assets under management. It offers banking services through Equitable Bank, a wholly-owned subsidiary and the seventh-largest bank by assets. EQB also provides wealth management services through ACM Advisors, a majority-owned subsidiary specializing in alternative assets.
With more than 600,000 customers and six million credit union members, EQB stock is positioned to deliver inflation-beating returns to shareholders. Let’s see why.
A strong performance in Q1 of fiscal 2024
In the fiscal first quarter (Q1) of 2024 (which ended in January), EQB reported an adjusted ROE (return on equity) of 15.6%. Despite a challenging macro backdrop, EQB increased sales by 27% year over year to $299 million and net income by 17% to $108 million.
The mid-cap bank attributed its strong performance in Q1 to growth in loans under management, margin expansion, customer growth, risk management, and higher non-interest revenue.
EQB is a pure-play digital bank in Canada and attracts customers due to its high-interest savings account. Similar to other challenger banks, EQB offers a widening portfolio of products and solutions.
Its personal banking business now manages $1.6 billion in total assets, up from $1 billion in fiscal Q4 of 2022. The ACM business marks EQB’s entry into wealth and alternative asset management, diversifying the company’s revenue base and securing a new source of non-interest income.
EQB aims to double its high-margin wealth management business in the next five years. EQB’s non-interest revenue accounts for 14% of total sales in Q1, up from just 7% in Q4 of 2022. It expects non-interest sales to account for 15% of revenue by fiscal 2027.
Is EQB stock undervalued?
Analysts tracking EQB stock expect adjusted earnings to rise by 22.7% to 11.53 per share in fiscal 2024. Its earnings are forecast to widen by 19.5% annually in the next five years. Priced at 7.6 times forward earnings, EQB stock is really cheap.
Given its earnings forecast, the company should end fiscal 2028 with earnings of $22.5 per share. If the stock is priced at 10 times trailing earnings, EQB should trade at $225 per share in April 2029, indicating an upside potential of more than 150% from current levels.
In addition to capital gains, investors are poised to benefit from a regular dividend payout. In the last four quarters, its free cash flow totalled $108 million, while EQB paid shareholders roughly $55 billion via dividends, indicating a payout ratio of 50%.
In the last 20 years, EQB stock has raised dividends by 14% annually, enhancing the effective yield over time.
