Most investors are familiar with Canadian banking giants, such as The Bank of Nova Scotia (NYSE:BNS) and Toronto-Dominion Bank (NYSE:TD), but the National Bank of Canada (OTCMKTS:OTCPK:NTIOF) generally flies under the radar. Montreal-based National Bank of Canada ranks as the sixth-largest commercial bank in Canada, with branches throughout Canada servicing 2.4 million personal clients. Its network included 448 branches and 892 ATMs in Canada. National is ranked as the largest bank in the Province of Quebec. In 2011, Bloomberg Markets ranked National Bank as the strongest bank in North America. National Bank also placed third in Bloomberg's list of the "The World's Strongest Banks".
My Investment Thesis and Why I Recently Increased My Position
With the recent rally in income-generating investments, most of the Canadian banks are now yielding less than 4%. Toronto-Dominion provides a yield of 3.4%, while The Bank of Nova Scotia is around 3.6%. This recent trend is a clear indication that the thought of a serious economic challenge or crisis has evaporated, for the time being. The rally in income-generating investments is also related to the fact that central banks have avoided raising key interest rates due to slower economic recovery.
The Canadian banks, which are greatly admired for their generous quarterly payouts, are breaking record highs, as the Bank of Canada continues to avoid increasing interest rates. By central banks delaying to hike interest rates, they are indicating to the market that we may be in a prolonged time with little economic growth and low inflation. Simply put, dividend darlings such as National Bank will continue to be attractive for investors. Note that a reserve to higher interest rates could have the opposite effect and pull the rug out from below Canadian bank shares. In my opinion, interest rates will stay low until at least 2016, as the Canadian economy still have much room for growth, and even if rates are hiked, they will still be floating around their historical lows
National Bank will continue to benefit from this macro trend, and is one of the few banks in Canada that still offer a yield greater than 4%.
Solid Recent Quarterly Profits and Dividends
In May 2014, National Bank reported its fiscal 2014 second-quarterly results. Excluding certain items, National Bank's profit would have been $375 million (all figures in CDN dollar) or $1.05/share, up from $352 million or $1 per share a year earlier. At the same time National bank announced that its quarterly dividend would rise by two cents per share to 48 cents.
Stock Upside Coupled with Dividends Offer Over 10% Upside
According to sources, the consensus forecast amongst 13 polled investment analysts covering National Bank advises that the bank will outperform the stock market. Further, the same source reports that the analysts offering 12-month price targets for National Bank have a median target of CDN $48.00 share. The highest projection on the stock is placed at CDN $51.00/share, which represents a potential of an additional 10% upside on the stock, coupled with a 4.1% dividend payment.
Disclosure: The author is long BNS, TD, NTIOF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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