The Canadian banks continue to look like a good place for investors seeking to find yield and low valuations. Many of the larger names have already reported earnings, but some have also announced dividend increases. All the of the stocks discussed have a dividend yield of more than 4% and trade with a low price-earnings ratio.
Bank of Montreal
Bank of Montreal (BMO, Financial) is one of the largest financial institutions in Canada based on assets. The company also operates in 17 international markets, including the U.S. The company is currently valued at $41 billion and has generated sales of $17.6 billion over the last 12 months. The stock has declined almost 18% year to date.
On Aug. 26, Bank of Montreal announced a 4% dividend raise for the Nov. 26 payment. This is the ninth year in a row that the bank has increased its dividend. The company's dividend remained the same, but was not reduced, in Canadian currency between 2008 and 2011. According to Value Line, U.S. investors have experienced a compound annual growth rate for the company's dividend of just 1.3% since 2010. U.S. investors should receive $3.16 of dividends per share in 2020, which is a 3.3% increase from 2019.
Shares yield 4.9% today. This is above the 10-year average yield of 4.2% that the stock has had since 2010. The Bank of Montreal's yield is also significantly higher than the 1.7% average yield for the S&P 500.
According to Seeking Alpha, the analyst community expects the Bank of Montreal to produce earnings per share of $5.47 this year. Using the recent price of $64, the stock has a forward price-earnings ratio of 11.7. This is nearly in line with the average of 11.4 times earnings that the stock has traded with since 2010. The valuation looks even better when compared to the average price-earnings ratio of 30 for the S&P 500.
While dividend growth has been anemic over the last decade, Bank of Montreal shareholders will have a year-over-year increase in dividends this year that far surpasses the long-term average. In addition, the increase for the upcoming payment is three times the annual growth over the last 10 years. The Bank of Montreal's valuation is close to its long-term average, so there may not be much multiple expansion to be had. That said, the stock isn't all that overvalued and offers a much higher than average yield.
Bank of Nova Scotia
The Bank of Nova Scotia (BNS, Financial), more commonly known as Scotiabank, ranks third among Canadian banks using assets. The company has more of an international presence than its peers, with operations in more than 50 international markets. Scotiabank has a market capitalization of $53 billion. The bank had sales of almost $24 billion over the last year. Shares have lost more than 22% this year.
Scotiabank raised its dividend 4% on Thursday for the payment to be made on Oct. 28. The bank now has a decade of dividend growth. The company paused its dividend growth in 2010, the shortest length of pause during the Great Recession of the three Canadian banks discussed. Scotiabank has compounded its dividend by a rate of 3.4% per year over the last 10 years. U.S. investors are expected to receive $2.67 in dividends in 2020, which is just 1.5% higher than last year's total.
While Scotiabank trails the other two names on this list in terms of year-over-year dividend growth this year, the stock has a current yield of 6%. The current yield compares very favorably to the 10-year average yield of 4.1%. This is the largest discrepancy between the current yield and the long-term yield on this list.
The stock trades at approximately $44 and analysts forecast that the bank can earn $3.93 per share this year, giving the stock a forward price-earnings ratio of 11.2. This is below the long-term average multiple of 11.8 times earnings.
Scotiabank's dividend growth is weaker than its peers, but the stock is undervalued against its historical average. The stock also offers an extremely high yield. Investors who find a more sizeable international presence as well as a grander yield might find Scotiabank an attractive investment option.
Royal Bank of Canada
With a market capitalization of more than $110 billion, Royal Bank of Canada (RY, Financial), or RBC, is the largest bank in Canada. The bank is also the largest in the country in term of total assets. RBC has generated nearly $36 billion in sales over the last year. The stock is down 2% year to date, but this is the best performance on this list.
RBC raised its dividend by 2.7% the same day that the Bank of Montreal did for the payment to be made on Nov. 24. This marks 10 consecutive years of dividend growth following pauses in 2009 and 2010. U.S. investors have seen dividends compound at an annual rate of 4.7% since 2010. These investors will see $3.19 in dividends per share this year, which is a 4.2% improvement from the previous year.
Shares currently yield 4.1%, which is just above the decade-long average yield of 3.9%. This is almost 2.5 times the average yield of the S&P 500.
Shares of RBC trade hands at around $78. Using analysts estimates for earnings per share of $5.83 for 2020, the stock trades with a forward price-earnings ratio of 13.4. This compares unfavorably to the 10-year average price-earnings ratio of 12.4.
RBC is slightly overvalued today, but has held up the best this year among the Canadian banks discussed. While the valuation is slightly above the long-term average, shares offer a greater than usual yield. Income investors may decide that the yield and share price resiliency is worth the valuation trade off.
The Canadian banks discussed trade with low valuations and generous dividend yields. Only Scotiabank has a forward price-earnings ratio lower than its 10-year average, but the earnings multiples for Bank of Montreal and RBS are far from stretched. Each stock also provides a yield that should appeal to income investors even if the dividend growth rates leave a lot to be desired.
Investors looking for low valuation and high yields should consider purchasing shares of the Bank of Montreal, Scotiabank and Royal Bank of Canada.
Disclosure: The author has no position in any stock mentioned in this article.
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