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Canadian Bank Stocks Look Severely Undervalued: Here’s 1 With a 7.6% Yield

Bank sign on traditional europe building facade
Image source: Getty Images

Written by Joey Frenette at The Motley Fool Canada

Canadian bank stocks are looking like “dead money” these days, with shares picking up negative momentum in recent weeks.

Indeed, when you’ve got a sizeable stake in a name that’s lost more than 10% in the past month or so, it can be nerve-wracking. And hitting that “Sell” button certainly seems tempting. While selling before things worsen can ease the pain, I’d urge investors to take a step back and consider taking a viewpoint as a long-term investor.

Indeed, bank stocks are not immune to recession-driven pullbacks. In fact, they tend to crumble at the first signs of economic woes. Now, some bank stocks have fallen harder than others. And as they enter severely oversold conditions, I’d argue that they’re intriguing buys for investors who want a good bang for their buck.

Bank of Nova Scotia now offers a 7.6% dividend yield. No, that’s not a typo!

Dividend yields seem to be swelling across the board. And though higher interest rates could keep spooking investors, I’d urge investors to consider the historically impressive risk/reward tradeoff to be had with the bank stocks. A name like Bank of Nova Scotia (TSX:BNS), or Scotiabank for short, is actually down 22% over the past five years! Over the past 10 years, things aren’t much better, with the stock off around 13% over the timespan.

Indeed, Scotiabank seems to have lost its way. And I don’t think you can pin this one solely on macro headwinds, either. The bank’s exposure to emerging markets was supposed to give the firm a growth edge. After all, there’s more growth to be had in emerging markets. Though at the cost of higher risks.

Until now, Scotiabank’s Latin American exposure seems to have just introduced risk. Can this change over the next 10 years?

Probably. However, investors aren’t banking on it (forgive the pun, please!). Not while shares are in a multi-year rut at $55 and change per share. Further, at 8.67 times trailing price to earnings, investors are bracing for a rocky landing. The 7.6% dividend yield is arguably the main attraction to the shares. Indeed, there’s not much else to look forward to as the Canadian bank flirts with lows not seen since 2020.

Recently, Scotiabank said it plans to close eight locations in rural Newfoundland. Indeed, such closures aren’t a jolt of confidence for investors. Despite the closures, Scotiabank still maintains what it calls a “strong presence” on the Atlantic coast.

Indeed, it’s still a force to be reckoned with in Newfoundland. As the firm improves its digital banking presence, one has to wonder if physical branches are necessary, especially as the big banks fall under pressure from rising macro headwinds.

Should you bank on Scotiabank?

Personally, I think BNS stock is so undervalued that it may not take a whole lot for shares to shoot higher. Of course, everybody fears the recession to come.

Only time will tell if there’s anything more to fear than the fear itself. At such ominous depths, I view a nice margin of safety to be had in the unloved Scotiabank while it’s off more than 40% from its highs. Its Scene+ credit cards and headcount reduction aren’t huge needle movers, but I think they will pay off in the long term.

The post Canadian Bank Stocks Look Severely Undervalued: Here’s 1 With a 7.6% Yield appeared first on The Motley Fool Canada.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.

2023