Bank of Nova Scotia (TSX:BNS), better known as “Scotiabank,” is one of Canada’s highest-yielding bank stocks and the highest-yielding Big Six bank. At today’s prices, it yields 6.66%, meaning that it can add a lot of income potential to a portfolio if everything goes well.
The question is whether things will go well. Over the last five years, BNS has lagged behind its Big Six peers in both revenue growth and earnings growth. Although it has managed a moderate amount of revenue growth, its earnings per share (EPS) have actually gone down over that entire five-year period!
I don’t mean to exaggerate that point — the decline is only about 1% on a compound annual growth rate (CAGR) basis. However, most TSX banks have experienced significant positive growth over the same period in which BNS’s earnings declined.
Past performance does not predict future performance. Nevertheless, based on its history, BNS would not appear to be a “best-in-class” Canadian bank stock. The question, then, is whether its cheapness and high dividend income make up for the risk of poor overall performance. In this article, I will explore BNS’s dividend in detail and attempt to gauge whether it is sustainable. So, without further ado, here’s how much the Bank of Nova Scotia will likely pay in dividends this year.
Between $4.24 and $4.35 per share
Scotiabank is likely to pay at least $5.18 billion in dividends this year, which works out to $4.24 on a per-share basis. I determined this by looking at the bank’s dividend history and payout and multiplying the latter by 1.22 billion shares outstanding. The current payout is $1.06 per quarter, which works out to $4.24 per year. I found that the bank usually raises its dividend about halfway through the year. This means that a dividend raise is possible this year, but it isn’t guaranteed.
I can’t say whether Scotiabank’s management will raise BNS’s dividend again this year, but I can estimate how much they would raise the payout by if they did. The bank’s five-year CAGR dividend-growth rate is 5%. This rate can be used to model future dividend growth. If BNS were to raise its dividend by 5% again, then the stock would pay roughly $4.35 in dividends this year. That is, the two $1.06 dividends already paid ($2.12) plus two $1.113 dividends ($2.226), which totals roughly $4.35.
Is the dividend sustainable?
As we’ve seen, the Bank of Nova Scotia has a lot of dividend potential in a scenario where the dividend is raised 5%, or stays where it is now. Even if the payout remains at $1.06, those who buy today will enjoy a 6.66% yield. However, you can’t rule out the possibility that the dividend will be cut. I don’t think that a cut is likely — BNS’s dividend track record is exceptional, having maintained its dividend in 2008/2009 as well as in 2020. However, you never know when something game-changing will happen.
Fortunately, BNS’s dividend appears to be about as safe as its illustrious history says it is. The payout ratio (dividends divided by earnings) is 66%. That’s a little high for a TSX bank, but it’s low compared to other high-dividend sectors like real estate investment trusts and pipelines.
Last year’s operating cash flow exceeded dividends paid by six times. One source online says that BNS’s free cash flow in the trailing 12-month period was $25, in which case, free cash flow also covers the dividend nearly six times over. Finally, the bank has high margins, a high return on equity, and a geographically diversified business. On the whole, BNS’s dividend appears safe. Those buying the stock today will likely get the dividends they expect.
