Scotiabank Stock Has a High Yield, But Is it a Buy?

The Bank of Nova Scotia (TSX:BNS) stock is very cheap and high yielding, but faces a lot of currency risk.

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The Bank of Nova Scotia (TSX:BNS), better known as Scotiabank, has one of the highest yields among Canadian bank stocks. Clocking in at 6.66%, BNS’ dividend is quite generous.

But as is often the case, BNS’s overall investment value is arguably less than its dividend would make it seem. One of the ways that stocks acquire high dividend yields is by poor stock price appreciation, and that has indeed been the case with the Bank of Nova Scotia. As you can see in the chart below, the stock is barely up over a full five-year period.

Scotiabank has not delivered much in the way of capital gains recently, and its dividend yield, while high, is quite a ways behind the TSX Index’s total return over the last five years. However, past results are not future results. It is certainly possible for Scotiabank to turn things around and become a big winner among Canadian banks in the years ahead. In this article, I will explore Scotiabank’s recent earnings and what they mean for investors.

Recent results

Bank of Nova Scotia’s most recent earnings release was pretty good, boasting metrics like:

  • $8.4 billion in revenue, up 6%.
  • $2.2 billion in net income, up 25%.
  • $1.70 in diluted earnings per share, up 25%.
  • An 11.8% return on equity (ROE), up 20.4%.
  • A 12.9% common equity tier one (CET1) ratio, well above the regulatory requirement.

A little explanation of the items above is in order. “ROE” is net income divided by revenue; it tells you how profitable a company is. The “CET1” ratio is a risk measure, it tells you how much high-quality capital a bank has compared to risk-weighted assets. All of the figures above grew considerably in the first quarter, making the quarter a fairly successful one for Scotiabank.

The long-term results for Scotiabank have been less positive. Over the last five years, it has delivered the following compounded annual growth rates (CAGR):

  • Revenue: 2%.
  • EPS: 1.7%.
  • Book value: 2.3%.

Not exactly the best growth track record. Then again, the most recent quarter was an improvement, so perhaps we’re seeing the start of a new trend here.

Valuation

Having looked at Scotiabank’s recent results, we can now turn to its valuation. At today’s prices, BNS stock trades at:

  • 9.9 times earnings.
  • 2.6 times sales.
  • 1.1 times book value.
  • 4.4 times operating cash flow.

It’s a pretty cheap stock. However, the company’s performance over the last five years has not been as good as that of the other Canadian banks. The company is doing well enough to keep paying its juicy dividend, but it probably won’t do much more than that.

The big problem

Despite all of the above, the big issue with Scotiabank stock, from the perspective of a Canadian investor, isn’t its actual past results, but the difficulty in estimating future results. The Bank of Nova Scotia operates in many foreign markets that are not familiar to most Canadian investors. Examples include Latin America and Asia. Currency fluctuations can dramatically impact results from Scotiabank’s segments located in these regions. So, this stock isn’t the easiest one to analyze. Perhaps, if you are very familiar with the foreign markets BNS operates in, it’s worth owning. Apart from that, this might be one to pass on.

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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Bank of Nova Scotia. The Motley Fool has a disclosure policy.

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