It’s earnings week for the six big Canadian bank stocks, making this the perfect time to look at these not-ballyhooed-enough dividend stocks.
Bank of Montreal (BMO) and National Bank (NTIOF) have already delivered their numbers, and the rest are expected to come tomorrow and Friday. The major Canadian bank stocks are expected to grow earnings between 5% and 7% over last year’s fourth quarter, which is excellent.
However, there are some signs the good times are coming to an end. While Canada’s bank stocks continue to be a good place to invest because they provide consistently strong returns for shareholders, the days of easy gains are likely behind us.
So, which of these high-yield bank stocks deserves your consideration? All of them, to some extent. Let’s look at each in order from weakest to strongest “buy” recommendation.
Bank of Montreal (BMO)
Dividend Yield: 4.4%
Bank of Montreal’s (BMO) fourth-quarter earnings were definitely hurt by its U.S. operations, which saw adjusted net income decline by 28% year-over-year to C$113 million. As a result, the bank’s total adjusted net income was down 2% to C$1.1 billion.
However, BMO does have some areas of strength. Its Canadian personal and commercial banking unit — its biggest — saw adjusted net income grow by 5% year-over-year to C$472 million, or 43% of overall adjusted net income. Wealth management has become almost as important with adjusted net income up 89% in the quarter to C$319 million. Together, the two units represent almost three quarters of its profits.
While analysts weren’t overly impressed with Bank of Montreal’s performance in Q4, it did announce a couple of moves that will make shareholders happy. First, it said that starting in February, the bank will buy back up to 15 million shares of its common stock; secondly, BMO announced a 2-cent dividend increase to C$0.76, or C$3.04 annually, providing investors with a 4.4% dividend yield.
BMO Rating: 6.5 (of 10)
National Bank of Canada (NTIOF)
Dividend Yield: 4%
The smallest of the major banks, National Bank of Canada (NTIOF), announced an 8% year-over-year increase in adjusted net income to C$370 million. Its adjusted net income for all of 2013 was a record C$1.5 billion, 7% better than before.
CEO Louis Vachon said this about 2014:
“We remain optimistic for 2014 with Canadian growth expected to accelerate from 1.6% in 2013 to 2.2% next year. Quebec is expected to be a main contributor to this improvement.”
If you’re looking for a national bank to invest in, this isn’t your cup of tea. However, if you’re interested in a good bank stock to invest in, this one should be on your radar.
In the fourth quarter, NTIOF’s three operating segments — personal & commercial banking, wealth management and financial markets — all contributed to its success. But probably the best news was National Bank’s 6% increase to its quarterly dividend to C$0.92 per share, producing a current yield of 4%.
In addition, NTIOF announced a 2-for-1 stock split effective Feb. 13, 2014.
NTIOF Rating: 7
Canadian Imperial Bank of Commerce (CM)
Dividend Yield: 4.4%
According to a report by TD Securities, Canadian Imperial Bank of Commerce (CM) generates 80% of its total loans in Canada, higher than any other major Canadian bank.
While the International Monetary Fund believes the Canadian economy will grow by 2.2% in 2014, it’s important to remember that rising house prices, along with record levels of debt, makes it harder for every Canadian bank to grow their personal lending businesses.
CM, therefore, potentially has the most to lose from any real estate slowdown.
Nonetheless, analysts expect CM to deliver a 5.4% year-over-year increase in adjusted net income to C$995 million, which isn’t half bad, although much less robust than its three bigger competitors. In its second quarter, CM increased its dividend by 2 cents to C$0.96 per share. The bank has averaged one dividend increase per year in recent history, so I’m doubtful that it will do anything when it announces earnings tomorrow.
I would, however, look for Canadian Imperial Bank of Commerce to continue buying back its stock after it initiated an 8 million-share buyback at the end of August.
CM Rating: 7
Royal Bank of Canada (RY)
Dividend Yield: 3.9%
Royal Bank of Canada (RY) is having an excellent 2013. Its adjusted net income for the first nine months of the year through the end of July was up 12.3% to C$6.3 billion, and is expected to grow by 8.7% in Q4 to C$2.2 billion.
Driving the bus — like all Canadian banks — is RY’s personal and commercial banking segment, which generates about 51% of its overall net income. Like BMO, Royal Bank’s wealth management business has become a key second driver of profits for the bank thanks to rising global stock markets.
The Royal Bank doesn’t really jump out at you for anything in particular except for making money, and that’s the name of the game.
RY recently has been increasing its dividend twice annually (did so in Q1 and Q3), so don’t expect an increase when the company announces earnings tomorrow. However, its current dividend yield of 3.9% still is higher than many of its major peers in the U.S., such as JPMorgan (JPM) and Wells Fargo (WFC).
What you lose in excitement, you gain in stability.
RY Rating: 7.5
Toronto-Dominion Bank (TD)
Dividend Yield: 3.7%
Canada’s biggest bank when it comes to doing business in the U.S. is Toronto-Dominion Bank (TD), which has branches running from Maine all the way down the East Coast to Florida, where thousands of Canadians spend the winter avoiding the cold.
For the most part, its U.S. expansion has been successful, although it did pay a financial price to claim this prize. Nonetheless, its U.S. personal and commercial banking in the first nine months of the year increased 15% year-over-year to C$1.2 billion. The U.S. operations generate profits that are 44% of those in its Canadian personal and commercial banking unit.
TD’s Canadian retail unit, which is highly respected amongst Canadian customers, increased adjusted net income in the first nine months of the year by 9%. That’s good, but not quite the growth down south.
While investors have reason to worry that the same Q4 problems that beset BMO in the U.S. might also happen to Toronto-Dominion, I see TD side-stepping the issues that knocked BMO off stride. Analysts expect TD to increase Q4 adjusted net income by 8.7% year-over-year to C$1.9 billion.
If there were any doubt the U.S. is a vital part of its business, the news of Ed Clark’s successor — TD announced in April that Bharat Masrani, its head of U.S. banking, was taking over as CEO in November 2014 — should eliminate any such talk.
Much like Royal Bank, the fact that TD has already bumped the dividend twice this fiscal year means it’s doubtful to happen in Q4. Also, like RY, its 3.7% dividend yield is still better than its large American counterparts.
TD Rating: 7.5
Bank of Nova Scotia (BNS)
Dividend Yield: 3.9%
The last of the major Canadian banks is Bank of Nova Scotia (BNS). Not known for its Canadian retail banking, its biggest calling cards are its businesses outside of Canada in Latin America and Asia. Analysts expect it to deliver a 9.1% increase in adjusted net income in the fourth quarter to C$1.6 billion, 47% of which will come from outside of Canada.
In terms of diversification, no other Canadian bank comes close.
The bank’s three main targets in 2013 were to increase earnings per share by at least 5%, generate a return on equity of at least 15% on those earnings and maintain a productivity ratio (operating expenses as a percentage of total revenue) of less than 56%.
As of the third quarter, BNS’ earnings per share had grown by 12%, its return on equity was 16.6% and its productivity ratio was 53.4% — a winner all around. Its dividend yield is 3.9%, right in line with its other Canadian peers.
BNS Rating: 8
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.