The market is definitely vulnerable. While the S&P 500 and its tracking exchange traded fund, SPY (SPY), as well as stocks such as Apple (AAPL), have had massive runs since the summer of last year, poor recent economic data and renewed fears over sovereign debt issues in the Euro-Zone have caused a nearly month long sell-off in most of the broader indexes.
Despite strong recent earnings reports from most of the major U.S. banks, such as Citigroup (C) and JP Morgan (JPM), showing significant credit and debit transaction growth, banking stocks have been some of the hardest hit stocks during the recent sell-off.
Still, while the recent embarrassing trading loss at JP Morgan and renewed fears over Euro-Zone debt issues have hurt the financial sector, not all banks are created equally. I think the best value in the financial sector is with Canadian banks.
The Bank of Nova Scotia (BNS) is a nearly 60 billion dollar company with an over 4% dividend. The company had strong growth, both in Canada and in its significant overseas branches last quarter, and its payout ratio is around 50%. The company has also consistently raised its dividend by a compound annual rate of 12.5% since 2002.
The Bank of Nova Scotia is very well-positioned in Latin America and Asia, and is known for being the most internationally focused Canadian bank. This past quarter, the Bank of Nova Scotia reported an 11% year-over-year rise in revenue; it raised its dividend by 6%. The company showed strong growth in retail and business loans across its different business segments.
Bank of Nova Scotia is known for being Canada's most internationally focused bank, and the company's position in Latin America is particularly strong. Bank of Nova Scotia is well-positioned in Asia as well. The company is very well funded with tier one capital levels over 11%, and it has a strong wealth management business in Canada as well. The Bank of Nova Scotia trades at just 10x an average estimate of next years likely earnings, and has grown in the high single digits for nearly a decade.
Toronto-Dominion Bank (TD) is a 70 billion dollar bank that focuses on personal and commercial banking, as well as wealth management and insurance. The company has grown its dividend by 20% a year since 1999 as the company's payout ratio has grown from 15% to 50%.
Toronto-Dominion gets about a third of its revenues from the U.S., and its strong cash position has enabled to purchase assets and businesses from U.S. banks. Toronto-Dominion recently purchased an over 8 billion dollar credit portfolio from Bank of America's (BAC) Canadian branches.
Toronto-Dominion recently reported year-over-year revenue growth of over 20%, and the company's historic return on equity is at the high end of its industry at around 30%. The company currently trades at around 10x an average estimate of next years likely earnings.
Canadian Imperial Bank of Commerce (CM) is a nearly 29 billion dollar bank specializing in retail and investment banking, as well as wealth management.
The company recently reported 9% year-over-year growth on strong lending in its lending and mortgage businesses in Canada.
Canadian Imperial Bank of Commerce is a smaller bank more focused on North America, but the company's strong financial position has also enabled it to take advantage of opportunities in the U.S.. Canadian Imperial Bank of Commerce recently took a large stake in American Century, a company with over 100 billion in assets under management.
Canadian Imperial Bank of Commerce is paying out 49% of the company's revenues in dividends, the company has raised its dividend by over 5% each of the last six years, and the stock currently yields around 5%. Canadian Imperial Bank of Commerce trades at around 8.5x an average estimates of next years likely earnings, and analysts are projecting double digit growth on average over the next five years.
To conclude, while many Canadian Bank have strong positions in the U.S., the financial strength of many of these institutions enabled them acquire businesses and other assets at good prices. Despite fears over Euro-Zone debt issues, the U.S. economy continues to expand at 2-2.5% a year, and recent earnings reports from companies such as Citigroup and JP Morgan suggest consumer spending remains at healthy levels as well.
While dividend investing is primarily about income, strong revenue growth is necessary to sustain inflation adjusted returns longer-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
