Is National Bank of Canada Stock a Buy for Its 3.4% Dividend Yield?

National Bank of Canada stock has surged over 1,000% in the past two decades, if we adjust for dividend reinvestments.

Aditya Raghunath

Aditya Raghunath joined the Motley Fool Canada team in 2019 and has close to seven years of experience in covering publicly-listed companies. With a post-graduate degree in finance, Aditya aims to educate and engage Canadians by writing extensively about growth, dividend, and value stocks. If you are considering investing in the stock market, he recommends reading The Intelligent Investor by Benjamin Graham before taking the plunge.

Published October 25, 2024 8:00 am EDT

National Bank of Canada (TSX: NA) has created massive wealth for long-term shareholders. In the last 20 years, National Bank of Canada stock has returned 470%. Notably, if we adjust for dividend reinvestments, cumulative returns are much higher at 1,200%. Comparatively, the TSX Index has returned “just” 415% in dividend-adjusted gains in this period.

Despite its outsized gains, the National Bank of Canada offers shareholders a forward dividend yield of 3.4%, given its annual payout of $4.40 per share. Let’s see if this blue-chip dividend stock remains a top buy in October 2024.

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Should you invest in National Bank of Canada stock?

Valued at $45 billion by market cap, the National Bank of Canada is the sixth-largest bank in the country. In fiscal Q3 2024 (ended in July), National Bank reported adjusted earnings of $2.68 per share and a return on equity of 17%, reflecting its diversified earnings mix and strong credit profile. The Canadian banking giant’s focus on execution has allowed it to balance revenue growth, costs, and credit performance in a complex environment.

National Bank expects interest rate cuts to offer relief for consumers and support business investment, both of which should lead to higher demand for loans across verticals. It ended Q3 with a CET1 (common equity Tier 1) ratio of 13.5%. The ratio is a percentage of a bank’s risk-weighted assets and includes retained earnings and equity. A higher CET1 ratio is preferable as it measures the quality of the bank’s capital. Basically, it ensures that a bank has enough capital to cover unexpected losses during turbulent economic periods.

National Bank’s strong balance sheet has allowed it to return capital to shareholders through consistent dividend hikes. In the last 27 years, it has raised its annual dividend payout from $0.30 per share to $4.40 per share. It ended Q3 with a dividend payout ratio of 41.2%, which is sustainable while providing enough room to target accretive acquisitions.

In June 2024, National Bank agreed to acquire Canadian Western Bank, which would help it accelerate its pan-Canadian growth. During the earnings call, National Bank’s CEO, Laurent Ferreira, stated, “The combination will strengthen our Western presence and national reach and would also provide more choices to individuals, entrepreneurs, and businesses across the country.”

Is National Bank stock overvalued?

In Q3 2024, National Bank increased:

Personal & Commercial Banking sales by 7% due to growth in the personal mortgage segment.
The commercial loan portfolio by 14% due to insured residential real estate momentum.
Net interest income by 14% due to solid deposit flows in private banking and brokerage channels.

Moreover, its fee-based revenue was up 12%, while transaction revenue grew by 21% year over year. Thus, National Bank continues to grow steadily despite a challenging macro environment.

Analysts expect NA’s adjusted earnings to grow from $9.6 per share in fiscal 2024 to $10.35 per share in 2025 and $10.7 per share in 2026. The TSX bank stock trades at 12 times forward earnings, which is reasonable given its earnings estimates and growing dividends.

National Bank remains a solid investment in October 2024 due to its entrenched position in Canada, the possibility of interest rate cuts, and attractive valuation.