Canadian Banks: Solid Dividend Growth Coupled With Sustainable Payout Ratios

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Includes: BMO, BNS, CM, RY, TD
by: Jeff Williams

The Canadian "Big 5" Banks which include Royal Bank of Canada (RY) Toronto Dominion Bank (TD), Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CM) and Bank of Nova Scotia (BNS) have all had a very strong history of paying dividends. Over the years the Canadian "big 5" banks have been very diligent in how they payout and increase their dividends.

RY: Royal Bank of Canada:

The Royal Bank of Canada has had a rich history of dividend payments. Looking back from the year 2000, Royal bank has had a steady history of dividend increases. Even during the financial crisis of 2008 into 2009, the Royal bank of Canada was able to maintain it's dividend.

Below is a Chart of the dividend payout per year, for Royal Bank of Canada common shares.

Royal Bank 2000 - 2011

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The current dividend payment as of April 25th 2012 will be $.57 CDN per common share. The estimated dividend payout for 2012 is $2.25 CDN. Estimating Royal Bank sales at $28.12 billion, a profit margin of 25.6% and a projected profit of $7.2 billion, the bank will have an estimated EPS of $5.00. With an estimated dividend payout of $2.25 and an EPS of $5.00, the bank has payout ratio of 45%. Based on a 45% payout ratio, Royal bank should be able to maintain the dividend.

In the Royal Banks Q1 2012 earnings release (PDF under Press release) stated: "This morning, we announced a $.03 or 6% increase in our quarterly dividend," said Gord Nixon, RBC President and CEO. "Looking ahead through 2012, we believe that we are very well positioned to continue extending our lead in Canada and building client relationships in select U.S. and international markets, while maintaining our strong capital position and strict risk and cost discipline."

Currently the Royal Bank of Canada offers a DRIP (Dividend Reinvestment Plan). Under the current plan the bank may offer a discount from the average market price, but "at this time, the bank has decided to issue shares from treasury with no applicable discount". (Royal Bank Investors page Dividend Reinvestment)

TD: Toronto Dominion Bank

Like the Royal Bank of Canada, the Toronto Dominion Bank also has had a rich history of dividend payments. Looking back from the year 2000, TD Bank has had a steady record of dividend increases.

Even during the financial Crisis of 2008 into 2009, TD bank was able to grow it's dividend. In 2008 the dividend was $2.36 CDN per year while in 2009 the company paid its shareholders $2.44 CDN per year. This was an increase of .96%.

Below is a Chart of TD Banks dividend payout per year for common shares.

Toronto Dominion Bank 2000 - 2011

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In Q1 2012 TD Bank announced a dividend increase of 5.6%. The current dividend payment as of April 30th, 2012 will be $.72 CDN. The estimated dividend payout for 2012 is $2.85. Estimating TD Banks sales at $23.81 billion, a profit margin of 26.2% and a projected profit of $6.23 billion, the bank will have an estimated EPS of $6.90. With an expected dividend payout of $2.85 and an EPS of $6.90, the bank will have payout ratio of 41.3%. Based on a 41.3% payout ratio, TD bank should be able to maintain the dividend.

Holders of TD common shares have the option to participate in TD's Dividend Reinvestment Plan (the "Plan"). Under TD's current plan TD may offer a discount. TD bank explains: "The common shares will be purchased either at the market price on the open market or at the Average Market Price when purchased from the treasury of TD. There may also be a discount of up to 5% to the Average Market Price if TD issues the common shares from treasury. TD will announce by way of press release and in dividend announcements whether common shares purchased under the Plan will be purchased on the open market or from treasury, and any applicable discount if shares are issued from treasury."

For more information on TD bank view my article: Strong Earning and Controlled Costs will Keep Margins Strong in 2012.

CIBC: Canadian Imperial Bank of Commerce

CIBC is proud to state on their dividend payment history page: "CIBC has not missed a regular dividend since its first dividend payment in 1868."

Looking back to 2000, The Canadian Imperial Bank of Commerce has been able to grow or maintain their common shares dividend. Even during the financial crisis in 2008 - 2009, CIBC was able to maintain its dividend. In 2011 CIBC raised their dividend by .98% to $3.54 per common share.

Canadian Imperial Bank of Commerce 2000 - 2011

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The current dividend payment as of April 28th 2012 for CIBC will be $.90 CDN per common share. The estimated dividend payout for 2012 is $3.60 CDN. Estimating CIBC Banks sales at $12 billion, a profit margin of 26.44% and a projected profit of $3.17 billion, the bank will have an estimated EPS of $7.34. With an expected dividend payout of $3.60 and an EPS of $7.34, the bank has a payout ratio of 49%. Based on a 49% payout ratio, CIBC should be able to maintain the dividend.

Holders of CIBC common shares have the option to participate in CIBC's Dividend Reinvestment Plan (the "plan"). Recently CIBC has made some changes to their "dividend reinvestment plan" CIBC states: (PDF Under Changes to CIBC shareholder reinvestment plan) "On March 8, 2012, CIBC announced that common shares of CIBC purchased under the Plan with reinvested dividends will be purchased at the Average Market Price (as defined in the Plan) of the shares without further discount. Previously, shares issued under the "Dividend Reinvestment Option" or "Stock Dividend Option" portions of the Plan were issued at a 2% discount to the Average Market Price."

For More information on CIBC view my article: Margins To Remain Healthy Inspite of Economic Uncertainty.

BMO: Bank of Montreal

BMO bank like the other "big 5" Canadian banks also has a rich history of dividend payments. Looking from the year 2000, BMO Bank has had a steady history of dividend increases. Even during the financial Crisis of 2008 into 2009, BMO bank was able to maintain it's dividend.

Below is a Chart of BMOs dividend payout per year for common shares.

Bank of Montreal 2000 - 2011

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The current dividend payment as of February 1st 2012 for BMO was $.70 CDN per common share. The estimated dividend payout for 2012 is $2.80 CDN. Estimating the Bank of Montreal sales at $15.63 billion, a profit margin of 26.7% and a projected profit of $4.17 billion, the bank will have an estimated EPS of $6.51. With an expected dividend payout of $2.80 and an EPS of $6.51, the bank has a payout ratio of 43%. Based on a 43% payout ratio, BMO should be able to maintain the dividend.

The Bank of Montreal dividend pages states:"Dividends are generally increased in line with long-term trends in earnings per share growth, while sufficient profits are retained to support anticipated business growth, fund strategic investments and provide continued support for depositors. BMO's policy is to maintain a dividend payout ratio of 45% to 55%, over time."

Holders of BMO's common shares have the option to participate in BMO's Dividend Reinvestment Plan (the "plan"). Currently the Bank of Montreal offers a 2% discount from the average market price. BMO states: The Bank of Montreal Shareholder Dividend Reinvestment and Share Purchase Plan (the "Plan") permits the reinvestment of a shareholder's cash dividends to purchase additional common shares of Bank of Montreal (the "Bank"). The purchase price of such common shares, if purchased on the open market, will be based on the average of the actual cost incurred by the Agent to purchase such common shares and, if purchased from the Bank, will be based on the Average Market Price, being the average of the closing prices for a board lot of the Bank's common shares on the Toronto Stock Exchange on the five trading days on which at least a board lot of the Bank's common shares was traded immediately preceding the Investment Period (as defined in the Plan).

There may also be a discount of up to 5% from such Average Market Price if the Bank issues new common shares from its treasury.

At this time, the Bank has decided to issue shares from treasury at a 2% discount from the Average Market Price (as defined in the Plan) until such time as the Bank elects otherwise".

To get more information on the Bank of Montreal please view my article: Well Postitioned For Future Profits.

BNS: Bank of Nova Scotia

The Bank of Nova Scotia has as also been proud of their dividend history. In Scotiabanks Philosophy for dividends they state:

"Scotiabank's practice has been to relate dividends to the trend earnings, while ensuring that capital levels are sufficient for both growth and depositor protection.

This practice, coupled with the Bank's strong earnings growth, has led to dividend increases in 35 of the last 40 years - one of the most consistent records for dividend growth among major Canadian corporations."

Looking at the years 2000 to 2011, Scotiabank has had the most up and down dividend payments of the "big 5" banks. In 2004 and 2005 the bank reduced it's dividend payout, but during the financial crisis in 2008 into 2009, the bank raised it's dividend from $1.92 to $1.96 a 2% increase.

Below is a Chart of the dividend payout per year for common shares.

Bank of Nova Scotia 2000 - 2011

Click to enlarge

In Q1 2012, the bank of Nova Scotia announced a dividend increase of 5.5%. The current dividend payment as of April 30th, 2012 will be $.55 CDN. The estimated dividend payout for 2012 is $2.17. Estimating BNS Banks sales at $18.91 billion, a profit margin of 30.83% and a projected profit of $5.83 billion, the bank will have an estimated EPS of $4.90. With an estimated dividend payout of $2.17 and an EPS of $4.90, the bank will have a payout ratio of 44.2%. Based on a 44.2% payout ratio, the Bank of Nova Scotia should be able to maintain the dividend.

Holders of the Bank of Nova Scotia common shares have the option to participate in BNS's dividend reinvestment plan (the "plan"). Currently the plan states that shareholders in the dividend reinvestment plan will receive a 2% discount on their shares.

Scotiabank states: (PDF under Shareholder Dividend & Share Purchase Plan) "On August 26, 2008, the Bank announced that participants in the Plan will receive a two per cent discount from the Average Market Price (as defined in the Plan) on the purchase of additional common shares with reinvested dividends. The discount will not apply to the purchase of common shares with the optional cash payment or interest reinvestment options of the Plan. The first dividends for which this discount will be effective are the dividends on the Bank's common and preferred shares declared by the Board of Directors on August 26, 2008 for the quarter ending October 31, 2008. These dividends will be payable on October 29, 2008 to holders of record at the close of business on October 7, 2008. Prior to this announcement, common shares issued under the Plan have been issued with no discount to the Average Market Price (as defined in the Plan).

Based off of the forward looking EPS, all the Canadian banks have a payout ratio less than 50%.

1. Royal Bank of Canada = 45%

2. Toronto Dominion Bank = 41.3%

3. Canadian Imperial Bank of Commerce = 49%

4. Bank of Montreal = 43%

5. Bank of Nova Scotia = 42.2%

With all of the banks having payout ratios under 50% in 2012, all of the banks look like they will be able to maintain their current dividends and in some cases increase them going forward into 2013.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.