Despite a weak economy and tumbling oil and gas prices, the big five Canadian banks posted better-than-expected earnings in the most recent quarter. Too bad that won’t prevent these dividend stocks from falling farther in the months ahead.
The reality is, fears over bad loans to Canada’s oil and gas industry are likely overblown, but there’s no arguing with market psychology.
The Canadian economy is far more diverse than the market gives it credit for (energy accounts for a bit more than 10% of gross domestic product), as are the banks’ loan books. Indeed, only about 5% of Canadian banks’ loans are tied to the oil and gas industry.
To be fair, it’s not like the bears don’t have a case: There’s also the possibility that, based on past experience, the full burden of bad loans won’t hit Canadian banks until next year. Value investors could argue that with Canadian bank stocks down as much as 20% for the year-to-date, the negativity has been more than priced in.
Maybe so, but fear trumps reason. Much like pipeline companies in the U.S., Canadian bank stocks are going to be under disproportionate pressure as long as energy prices remain in a funk. Which, in many ways, is unfair. Just have a look at how the big five Canadian Bank stocks fared in the most recent quarter.
Canadian Dividend Stocks Under Pressure: Toronto-Dominion Bank (TD)
Dividend Yield: 3.71%
On an adjusted basis, Toronto-Dominion Bank (TD) beat analysts’ average earnings estimate, according to a survey by Thomson Reuters. The top line exceeded Wall Street expectations too.
TD said retail banking, trading and the weak Canadian dollar all boosted results. Credit quality remained strong, cost cuts continued apace and TD said it will buy back 9.5 million shares.
And yet TD stock — already down 14% for the year-to-date — still fell soon after the market open.
With a dividend yield of 3.71%, TD might be tempting for income investors, but that payout will be more than offset by further price declines. Only the most patient investors need apply.
Canadian Dividend Stocks Under Pressure: Royal Bank of Canada (RY)
Dividend Yield: 4.13%
Royal Bank of Canada (RY) likewise got no love from the market after posting surprisingly strong results this week. True, revenue came in light vs. Street forecasts, but adjusted earnings per share clobbered estimates by $1.77 to $1.64.
RY defied analysts predictions due to strength in its capital markets business (thanks mostly to trading), as well as personal and commercial banking. Heck, U.S. bank earnings swung to a profit from a year-ago loss.
Growth in those businesses more than offset the damage done by bad loans to the oil and gas sector, but the market remains focused on the oil patch and a weakening Canadian economy.
As a dividend stock with a yield of 4.13%, RY looks mighty generous, but a poor outlook for the Canadian economy means this year’s 17% slump in share price has farther to go.
Canadian Dividend Stocks Under Pressure: Bank of Nova Scotia (BNS)
Dividend Yield: 4.72%
Bank of Nova Scotia (BNS) has the greatest exposure to the energy of any Canadian bank, and yet it largely shrugged off tumbling oil prices and a sluggish economy.
On net basis, profit jumped 28%, while on an adjusted basis earnings exceeded Street estimates by 3 cents a share. The top line just barely missed expectations.
The bank, more commonly known as Scotiabank, said loan-loss reserves increased quarter-to-quarter, but declined year-over-year.
Although provisions for credit losses are a real concern, it’s important to keep in mind that the oil and gas industry represents just 3.5% of the BNS loan book.
Shares are down 13% for the year-to-date and will likely remain under pressure as long as the intermediate-term outlook for the Canadian economy is somewhat gloomy. Further declines could easily offset the amazing dividend yield of 4.72%.
Canadian Dividend Stocks Under Pressure: Bank of Montreal (BMO)
Dividend Yield: 4.22%
Bank of Montreal (BMO) is another dividend stock with a fat yield that probably isn’t worth it anytime soon. Shares are down 16% for the year-to-date, pushing the yield on the payout up to 4.3%.
As with the other big Canadian banks, BMO reported an unexpectedly good quarter — the lender even raised its dividend by 2.4% to 84 cents a share — and yet that did little for the stock.
On an adjusted basis, earnings beat by 16 cents a share, thanks to strength in capital markets, retail and commercial banking, and the wealth-management business. U.S. operations were especially good, the bank noted.
Revenue surpassed analysts’ forecast by a comfortable margin. True, results were juiced by some one-time items, but the bottom line is that BMO is performing pretty well in a tough environment.
Canadian Dividend Stocks Under Pressure: Canadian Imperial Bank of Commerce (CM)
Dividend Yield: 4.72%
Canadian Imperial Bank of Commerce (CM) hiked its dividend by 3 cents to $1.15 a share (PDF) for the quarter ending Jan. 31 and exceeded Street estimates by 2 cents a share. Sure, revenue came up short of expectations, but usually you’d expect a stock to get a lift from such news.
Instead, CIBC sold off Friday, pushing the yield on the dividend up to 4.72%.
CIBC saw growth in all main businesses, which include retail and commercial banking, wealth management and capital markets. At the same time, its restructuring initiatives — that is, cost cuts — continued apace.
Even though CIBC (and all the big Canadian banks) have so far been unharmed by a weak economy and collapse in the oil patch, the market remains convinced the worst is yet to come.
That’s just how it is with Canadian bank stocks. The dividends are high and the earnings are fine, but that won’t be enough to push up share prices.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.