Canada has taken its lumps of late. But amidst the wreckage, might there be value in Canada’s hard-hit financials?
Let’s take a look at the big picture. The collapse in the price of oil was devastating to Canada’s high-cost oil sands producers. And while the data is still rolling in, it looks like the growth miracle in Canada’s wild west is falling flat.
Alberta, the province that is home to most of Canada’s energy industry, has provided nearly half of all new Canadian jobs since the beginning of 2013 and about a third of Canadian GDP growth. Without a booming oil industry, Alberta’s success goes into reverse … and takes the rest of Canada with it.
Canadian stocks, as tracked by the iShares MSCI Canada ETF (NYSEARCA:EWC), are down by nearly 20% from their late summer highs, with a lot of the damage coming from the ETF’s 37% allocation to financials. But after the fall, many of these financials sport attractive dividend yields.
Might Canadian financials be worth considering as dividend stocks in an income portfolio?
Maybe, but we should be careful here. Canada’s financials are exposed to inflated real estate prices the same way American financials were pre-2008. Canadian home prices have grown faster than rents for years, and the price-to-rent ratio, at 175.9, is one of the highest in the world.
There are only two with higher ratios — New Zealand and Hong Kong.
Mortgage writedowns were what brought down the U.S. banking system seven years ago. So, we should naturally be cautious when looking at financials in a country experiencing a housing bubble. At the first sign of trouble in the mortgage market, we should sell financials as a precaution and ask questions later.
With no further ado, let’s take a look at some of Canada’s largest financials and judge their worthiness as dividend stocks.
Royal Bank of Canada (NYSE:RY)
I’ll start with the Royal Bank of Canada (NYSE:RY), which also happens to be the largest holding of the iShares MSCI Canada ETF at 7.5% of the portfolio. It’s also the 12th largest bank in the world by market capitalization and one of the top 10 largest investment banks by client assets.
The Royal Bank of Canada (“RBC”) is essentially a Canadian financial supermarket, offering commercial banking, wealth management, personal banking, insurance, auto loans, and just about everything in between. Importantly, RBC sports a Tier 1 capital ratio of 11.4%, putting it well above the Basil 3 threshold for a “well capitalized” bank.
RBC is Canada’s blue chip among financials.
RBC has big-time exposure to the Canadian mortgage market — about C$219 billion of its total C$448 billion in loans outstanding are in Canadian mortgages — so we should watch out for any weakness in the Canadian housing market.
Looking at the dividend, RBC pays a respectable 4.3% dividend yield, and the payout has been rising in recent years. The C$0.75 quarterly payout has grown by 50% since 2011, and it’s worth noting that RBC never cut its dividend during the 2008 meltdown and aftermath.
Toronto-Dominion Bank (NYSE:TD)
Next up is Toronto-Dominion Bank (NYSE:TD), better known on the American side of the border as the parent company of online broker TD Ameritrade. But like RBC, Toronto-Dominion is a diversified financial services group with business lines that span commercial and investment banking, wealth management, auto finance and insurance. Toronto-Dominion also maintains a high Tier 1 capital ratio at 10.9%.
Toronto-Dominion has a large portfolio of mortgages at C$188 billion, so in the event of a severe slide in Canadian home prices you’d want to sell your shares and move on. But in the meantime, Toronto-Dominion is a diversified financial powerhouse with a long history of raising its dividend.
Let’s take a look at that dividend. Toronto-Dominion currently yields 4.1%, which is very competitive in a world where most 10-year government bonds trade for less than half that yield. Toronto-Dominion also managed to avoid cutting its dividend during the 2008 meltdown and has raised its dividend by about a third over the past two years.
Investors looking for dividend yield could do a lot worse.
Bank of Nova Scotia (NYSE:BNS)
Moving on, we come to Canada’s third-largest bank by market cap, the Bank of Nova Scotia (NYSE:BNS), more commonly known as Scotiabank.
Scotiabank bills itself as “Canada’s most international bank” and with good reason. The bank serves 21 million customers spread out across 55 countries. Canada accounts for about 56% of the bank’s earnings with another 7% coming from the U.S. The remainder 37% comes from places as far away as Peru, Colombia and Chile.
Scotiabank’s reliance on the emerging world give it a very different profile than its competitors. With emerging markets — and particularly Latin American markets — suffering from low growth and sagging currencies, that’s not such a good thing at the moment. But if you believe in the long-term growth story in Latin America, then BNS is a stock to consider buying on dips.
BNS sports a dividend yield of 4.7%, making it the highest yielder of the group. And like the others, Scotiabank managed to avoid cutting its dividend during the crisis. Scotiabank has raised its dividend by about 17% over the past two years.
Bank of Montreal (USA) (NYSE:BMO)
And finally, we get to the Bank of Montreal (USA) (NYSE:BMO), Canada’s fourth-largest bank. Founded in 1817, BMO is also one of Canada’s oldest banks. In an industry marked by constant turbulence, that kind of longevity is something to be appreciated.
BMO is a diversified bank, with operations spread between commercial, retail and investment banking and wealth management. Though like most of its peers, Canadian mortgages make up a large chunk of its loan portfolio. In BMO’s case, it’s about a third.
At current prices, the Bank of Montreal sports a dividend yield of 4.4%, about in line with its peers. BMO avoided a dividend cut during the crisis, but it has been a lot stingier with dividend hikes than its peers. It kept its quarterly payout at C$0.70 from 2007 to the end of 2012 before eventually raising it to C$0.80 at the end of last year.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.