3 Canadian Dividend Darlings Worth Holding

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Includes: RY, SJR, TD
by: Louis Koen

Summary

These Canadian Dividend Stocks have all seen multiple consecutive years of dividend increases.

The stocks are generally fairly valued.

I am not concerned that any of these companies may reduce their dividend in the near term.

The stocks discussed in this article all offer a dividend yield of more than 3% and are attractively valued, please note that an attractive valuation doesn't mean undervalued it simply indicates that the stock is not substantially overvalued. The stock included in this list have also shown consistent dividend growth for at least 5-years.

The three companies are Toronto Dominion Bank (NYSE:TD), Royal Bank of Canada (NYSE: RY) and Shaw Communications (NYSE: SJR).

Toronto Dominion Bank

TD currently has a TTM dividend yield of 3.64% and has been rated as one of the 50 safest banks in the world by Global Finance. TD Bank is one of Canada's big 5 banks and also has substantial operations in the US.

Note that TD is to be construed as a reference to the US ticker symbol whilst TD Bank refers to the company, this is an important distinction for currency purposes.

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TD Bank reported a 9% improvement in revenue for 3 rd Quarter of 2016 over the same quarter in the previous financial year. The company also reported a 4% increase in net income and diluted EPS over the same quarter in the previous financial year. The increase in net income was strongly supported by a 12% YoY improvement in net income at its US based retail operations and a 26% YoY increase in net income in wholesale banking.

TD Bank's reported earnings has grown at a compounded annual growth rate (CAGR) of 7.3% over the past 5-years while reported EPS has grown at a CAGR of 7% over the past 5-years. The company is currently aiming towards a 7-10% adjusted EPS growth in the medium term. Readers should take note thereof that TD Bank's adjusted EPS refers to non- GAAP EPS.

The chart below indicates the company's consistent dividend growth. Given the consistent growth in EPS and a payout ratio that is still slightly below 50%, I do not see any reason for concern off a decline in the dividend. The bank has a targeted payout ratio of between 40-50%.

(Source: TD Bank Group Q3 Investor Presentation)

My view that the dividend is unlikely to be decreased in the near term is further bolstered by the banks Common-Equity Tier 1 (CET 1) ratio of 10.4%, at the time of reporting Q3 results, which is well above the 6% minimum CET 1 ratio required in terms of Basel III.

TD is currently trading at a TTM p/e ratio of 13.44 which is about 8% above its 5-year average TTM p/e ratio of 12.4. The stock is trading at 1.642 times book value which is slightly below its 5-year average price to book value of 1.74. TD is trading at 3.266 times sales which is also above its 5-year average of 3.025.

TD PE Ratio (<a href=

TD PE Ratio (TTM) data by YCharts

The stock is thus looking slightly overvalued in terms of its p/e ratio and price to sales ratio but undervalued in terms of price to book value. I am not too concerned about the slight overvaluation, but, many investors may prefer a slight pullback before picking up this share.

Royal Bank of Canada

RY currently has a TTM dividend yield of 3.83%. The bank has paid dividends every year since 1870 and currently has a payout ratio slightly below 50%.

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RBC reported a 16% rise in revenue for the 3 rd quarter of 2016 over the same quarter in the previous financial year. Net Income was up by approximately 17% over the same time period and was strongly supported by a 17% YoY improvement in net income in its capital market division.

The company also benefited from an improving oil price, given that its exposure to this sector is significantly higher than that of TD Bank. The results were also supported by a decline in delinquencies across all retail portfolios in its Canadian retail banking portfolio.

(Source: RBS Q3 Investor Presentation)

The bank may, however, face increasing pressure from oil exposed regions and particularly in the challenging economic environment seen in Alberta, which makes up about 16% of the banks Canadian retail loans. This slight increase in risk should, however, by no means be construed as an existential threat.

RY is currently trading at a TTM p/e ratio of 12.37 which is about 4% above its 5-year average TTM p/e ratio of 11.87. The stock is currently trading at 1.969 times book value which is below its 5-year average price to book value of 2.127. It is also trading above its 5-year average price to sales ratio of 3.007 compared to its current price to sales ratio of 3.342.

RY PE Ratio Chart

RY PE Ratio (TTM) data by YCharts

RY's slight overvaluation is so small that it doesn't give rise to any concerns for me. Given the continued growth and relatively low payout ratio I do not see the dividend being cut in the near term. This view is further bolstered by the improvement in CET 1 capital from 10.3% to 10.5% after the sale of its general insurance business.

Shaw Communications

Shaw Communications is certainly the riskier pick on this list given the challenges it has faced in the past few years. I do, however, believe that this company is undervalued and will continue to offer a good dividend yield. SJR currently has a TTM dividend yield of 4.11% and has increased its dividend every year for more than a decade.

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I believe that the company's sale of its media business and the expansion in the wireless internet market, through the acquisition of Wind Mobile, significantly improves the stocks longer term prospects. Wind Mobile is likely to generate significantly more cash flow than the media business was able to.

The company reported a 13% increase in revenue during the 3 rd quarter of 2016 over the same period a year ago. It also reported a 237% increase in net income which was largely the result of the sale of its media business.

SJR currently has a TTM p/e ratio of about 17 which is approximately 35% below that of its industry groups average TTM p/e ratio of 26.3. The stock is trading at 2.098 times book value which is below its 5-year average price to book value of 2.491 and below its industry groups average price to book value of 3.4.

It should be noted that SJR's payout ratio is higher than that of the other stocks listed in this article. I do, however, remain confident that this company will maintain its dividend; particularly if it can achieve better growth through its wireless internet business.

Conclusion

I currently favor TD bank for a strong and consistent dividend whilst I favor SJR from a valuation perspective. RY is also fairly valued and I see no significant reason for concern about the company. I also see no reason why investors cannot hold both the Canadian banking giants but they should, however, exercise caution so as not to become over concentrated in a single sector.

Disclosure: I am/we are long TD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.