Regularly investing in the equity markets can help Canadians take advantage of the underlying volatility and benefit from outsized gains when sentiment improves. In the last three years, TSX banking stocks have trailed the broader markets as investors worried about elevated interest rates, the possibility of higher defaults, and a tepid lending environment.
The ongoing underperformance allows you to identify quality bank stocks that offer you a tasty dividend yield. So, in addition to a steady stream of dividend income, Canadian investors are positioned to benefit from capital gains, too.
Valued at a market cap of $92.8 billion, Bank of Nova Scotia (TSX:BNS) currently trades 20% below all-time highs. Notably, the ongoing pullback has raised its forward dividend yield to 5.7%. Let’s see why I’m bullish on this TSX stock right now.
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Is BNS stock a good investment today?
Despite a tough macro environment, Bank of Nova Scotia grew its adjusted earnings sequentially in the fiscal third quarter (Q3) of 2024 (ended in July). Its balance sheet strength and focus on cost optimization allowed the Canadian banking giant to benefit from operating leverage and expand profitability in Q3.
Like other lending companies, BNS is focused on developing primary client relationships to help it gain access to capital at a low cost. In Q3, BNS grew its deposits by 7% in its Canadian and international retail business. In the last 18 months, these deposits have risen by $43 billion.
During its earnings call, BNS explained, “Credit costs are at the high end of our previously communicated range as we see the impact of sustained higher rates on our retail portfolios. In our international markets, we expect to see credit conditions begin to stabilize in response to the monetary easing over the past few quarters, and we remain focused on delivering favourable risk-adjusted margins and returns.”
In Q3, BNS reported quarterly earnings of $2.2 billion or $1.63 per share. Its return on equity stood at 11.1%, while the return on tangible common equity was higher at 13.7%. In Q3, revenue grew by 5% as net interest income rose by 6% due to interest margin expansion.
BNS explained that it expects profit margins to improve over the next 12 months as interest rates will continue to move lower. These rate cuts will translate to a lower provision for credit losses (PCL) and boost earnings for BNS. In Q3, its PCL stood at $1.1 billion, while the PCL was 55 basis points.
Priced at 10.8 times forward earnings, BNS stock is cheap, given that adjusted earnings growth is forecast to average 8% between fiscal years 2025 and 2029.
The Foolish takeaway
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| BNS | $75.05 | 25 | $1.06 | $26.5 | Quarterly |
Investing $1,000 in BNS stock 20 years back would have allowed you to purchase 25 company shares. Given an annual dividend payout of $1.2 per share in November 2004, the investment would help you earn $30 in annual dividends, indicating a yield of 3%. Today, the 25 BNS shares would generate $106 in annual dividends, enhancing the effective yield to 10.6% over time.
In the last 20 years, BNS stock has returned 95% to shareholders. However, if we adjust for dividend reinvestments, cumulative returns are closer to 350%.
