3 Canadian Bank Stocks With Stable Dividends

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Having grown up on the Canadian border, I enjoy many things about Canada: good beer, clean streets, great donuts and friendly people.

canadian-bank-stocks

When I was working in the mortgage industry pre-recession, I never understood how Canadian banks could survive under such tight regulation while we in the U.S. were driving the American dream of home ownership down to the lowest rung of the ladder. How could Canadian banks not be left behind?

As it turned out, I could not have been more wrong.

The Canadian banking industry is highly concentrated with eight domestic banks, five of which hold more than 93% of the market. All of them are very highly regarded within global banking due to their sound business models and high regulatory oversight. They are frequently ranked as some of the soundest in the world by the World Economic Forum.

However, Canadian banks are not immune to the global economy and have the need for growth as well as the ever-increasing burden of compliance costs. Although their dividend yields are traditionally very high, Canadian bank stocks are not only about the dividends. The following is a break-down of the top three Canadian bank stocks by market share trading in the U.S. market, complete with what you need to know before investing in them for your high-yield portfolio.

Canadian Bank Stocks — Toronto-Dominion Bank (TD)

TD stock toronto dominion bankToronto-Dominion Bank (TD) is the largest bank holding company in Canada and operates under four operating segments: Canadian Personal and Commercial Banking, U.S. Personal and Commercial Banking, Wholesale Banking, and Wealth and Insurance.

Over the past several years, TD Bank has continued its expansion in the U.S. with a focus less on banks and more on filling out its other consumer businesses with acquisitions like HSBC’s private label credit card business, Target Corp.’s (TGT) U.S. Visa (V) and private-label card portfolio, as well as Chrysler Financial Corp.

Year-to-date, TD stock has dramatically underperformed both the KBW Bank Index and the S&P 500. TD Bank has a trailing 12-month return on assets of 0.87% — lower than the 1% threshold I typically look for — and return on equity of 14.65% — above the 10% threshold average I look for.

TD Bank recently reported disappointing fourth-quarter performance, causing many Analysts to drop their price targets. The bank reported that it will have difficulty achieving its 2015 growth targets due to lower interest rates and competitive pricing.

TD Bank maintains a great efficiency ratio compared similar bank stocks: 55.1% for the twelve months ended Oct. 31, and TD stock offers a nice dividend of 3.6% at a 45% payout ratio. TD Bank has a price-to-earnings-growth ratio of less than one, making it a positive potential value play. Investors should take advantage of 2014’s less than par stock price performance to pick up TB Banks stock for 2015.

Canadian Bank Stocks — Royal Bank of Canada (RY)

Royal Bank of CanadaRoyal Bank of Canada (RY) has five business segments: Personal & Commercial Banking, Capital Markets, Wealth Management, Insurance, and Investor & Treasury. Its Personal & Commercial Banking segment is the primary driver of the business, accounting for 39% of 2014 revenues and 51% of profits.

For the quarter ended October 31, RBC saw its Personal & Commercial Banking earnings grow 8% from last year. Wealth Management earnings increased 41% from increases in fee-based client assets, the Insurance segment saw an adjusted 14% increase in earnings, and the Investor & Treasury segment was up 24%. Offsetting these increases was a profit drop of 14% in the capital markets segment due to lower trading volumes.

RY stock has performed better than TD stock, but it currently still lags the KBW Bank Index and S&P 500 for the year. RBC’s trailing twelve months return on assets is 1.00% and its return on equity is over 17% — both measures meeting or exceeding what I would look for in a bank of this size.

RBC’s efficiency ratio was 51.8% for the most recent quarter, and the bank has been able to consistently keep this ratio in the low 50% range. RY stock offers a 3.8% dividend yield at a 48% payout ratio and a PEG ratio of 1.21, or neutral. Even better: The consensus price target of $80 is 13% above the stock’s current trading range RY stock offers a higher yield than TD and better price appreciation potential, given the choice between the two, I would suggest RY stock.

Canadian Bank Stocks — Bank of Novia Scotia (BNS)

Scotia Bank

Bank of Nova Scotia (BNS) (aka “Scotiabank”) operates under five business segments: Canadian Banking, International Banking, Global Wealth and Insurance, Global Banking and Markets and Other. It is Canada’s most international bank, with the International segment making up 32% of 2014 revenues.

Of all the segments, the Canadian Banking segment produces the highest return on equity of 31% followed by Global Banking and Markets at 30.4%, Global Wealth & Insurance at 28.2% and finally International Banking at 11.7%. With Canadian household debt as a percentage of disposable income already above 160%, Scotiabank is looking to expand in other segments and markets to increase earnings.

BNS stock price has crumbled more than 9% this year, primarily driven by downgrades caused by Scotiabank’s announcement of charges totaling $451 million CAD across all segments in November. Scotiabank’s trailing twelve months return on assets is 0.94%, which less than the 1% I look for in bank stocks. But its return on equity is 15.24%, which exceeds the 10% threshold I look for in a bank of this size.

Scotiabank’s efficiency ratio (the bank refers to it as its productivity ratio) for the fiscal year end 2014 was at 52.6%, compared to 54% in the prior year. BNS stock offers a 4.1% dividend yield at a 44% payout ratio. The consensus price target is $67.50, which represents a 20% improvement over current levels. BNS stock’s PEG ratio of 0.95 implies that the stock is trading at a decent value compared to earnings.

I would not expect more than 5% to 10% earnings growth for 2015 due to lower interest rates, slower Latin American growth and lower commodity prices. But growth in other segments may more than offset, which means BNS stock could surprise on the upside next year.

BNS stock is trading below its 50- and 200-day simple moving average. But while I like the yield, I would avoid buying until I see a trading floor emerge.

As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.

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