Yahoo Finance Should You Buy Scotiabank Stock for its 6.6% Dividend Yield?
Written by Aditya Raghunath at The Motley Fool Canada
Large-cap Canadian bank stocks have created massive shareholder wealth over the last few decades. The big Canadian banks enjoy an entrenched position in Canada due to strict regulations and high entry barriers, providing them with a wide competitive moat.
Moreover, as Canadian banks are highly regulated they are fairly conservative compared to peers south of the border. However, a conservative lending policy has allowed them to maintain strong balance sheets amid economic downturns.
While several U.S. banks were forced to cut dividends during the 2008 financial crash, all the big TSX banks could maintain these payouts, showcasing their resiliency.
One top blue-chip bank stock is Bank of Nova Scotia (TSX:BNS) which offers shareholders a forward yield of 6.6%, given it pays an annual dividend of $4.24 per share. In the last 20 years, BNS stock has returned more than 300% to shareholders if we adjust for dividend reinvestments. Today, Scotiabank trades over 30% below all-time highs, allowing you to buy the dip and benefit from a tasty yield in 2024.
Is Scotiabank stock a good buy right now?
In the fiscal second quarter (Q2) of 2024 (which ended in April), Scotiabank reported adjusted earnings of $2.1 billion, or $1.58 per share. Revenue growth was tied to higher net interest income and fee income, while earnings were strong due to a focus on expense management.
BNS emphasized that its productivity initiatives across business segments helped it improve productivity ratios by 100 basis points in the Canadian business and by 200 basis points in the international segment.
Its earnings were offset by higher credit provisions reflecting an uncertain macro environment, while the impact of higher interest rates on certain segments impacted profit margins. The higher cost of debt also meant that net loans were down 3% year over year and in line with Q1.
During the Q2 earnings call, Scotiabank chief executive officer Scott Thomson stated, “Balances have stabilized in the Canadian residential mortgage portfolio, while we have seen moderate growth in other personal and commercial portfolios. We continue to reposition our business banking portfolios with a view to optimize risk-weighted assets and profitability by client.”
Similar to its peers, Scotiabank has focused on operational efficiency amid a challenging and inflationary environment. Armed with a strong balance sheet, it has enough liquidity to navigate the current economic cycle, as evidenced by its CET1 (common equity tier-one) ratio of 13.2%.
The CET1 ratio is calculated by dividing a bank’s tier-one capital by its risk-weighted assets. A higher ratio is favourable because it showcases a bank’s ability to navigate an economic downturn.
An uncertain lending environment
Scotiabank explained that its loan-to-deposit ratio has improved due to a deposit growth of $26 billion in the last 12 months. In fact, deposit growth has outpaced loan growth in each of the last five quarters. Comparatively, wholesale funding has been reduced by $34 billion, indicating a wholesale funding ratio of less than 20%, compared to 23% in the year-ago period.
According to BNS, higher interest rates are weighing heavily on consumers and small businesses. While the monetary tightening phase of the rate cycle in Canada is complete, interest rates might not move significantly lower in the next 12 months.
Priced at 9.8 times forward earnings, BNS stock is quite cheap and trades at a discount of 3% to consensus price target estimates. Investors can hold BNS for its steady and growing dividend yield. However, it is unlikely to deliver market-beating returns in the near term.
The post Should You Buy Scotiabank Stock for its 6.6% Dividend Yield? appeared first on The Motley Fool Canada.
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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.
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