Bank Of Nova Scotia: 185 Years Of Consecutive Dividends And Counting

| About: The Bank (BNS)
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Summary

Bank of Nova Scotia, the third largest and most international of Canadian banks can be a good foundational stock in any portfolio.

BNS has paid uninterrupted dividends since 1832.

BNS has come back stronger than ever since the financial crisis.

While other Canadian banks focus on growth in US, BNS focus in other international countries -- an interesting hedge for investors looking for such exposure.

Bank of Nova Scotia (NYSE:BNS) is the third largest of the Canadian banks by market cap. The company provides a diversified array of financial services operating via four segments: Canadian Banking, International Banking, Global Banking and Markets, and Other. Scotiabank, as it is commonly known, is the most international of the Canadian banks with an extensive operation outside Canada. BNS was founded in 1832 and is headquartered in Halifax, Canada.

Note: All mentions to the stock in this article refer to the TSX-listed security and in Canadian dollars (CAD$) (native currency) unless otherwise noted.

A Closer Look

Bank of Nova Scotia's peers include Royal Bank of Canada (NYSE:RY), Toronto-Dominion Bank (NYSE:TD), Bank of Montreal (NYSE:BMO), and Canadian Imperial Bank of Commerce (NYSE:CM).

The Canadian banks are regarded as some of the safest financial institutions in the world. The companies have a long track record of being conservative and focused on long-term stability and prosperity. Most of these institutions have existed and paid dividends for more than 150 years and make for great core positions in any investor's portfolio.

Bank of Nova Scotia is touted as the most international of the Canadian banks and is well diversified across various geographies. Over the last few years, the bank has decided to pull back from some Latin American markets, but has increased its exposure to other countries such as Mexico, as it sees better opportunity.

(Image Source: Bank of Nova Scotia's 2016 Annual Report)

The following chart has been constructed by perusing the segmented information in each year's annual report at BNS. This provides us a window into the management's strategy for overall growth. As can be seen, BNS's main focus is the Canadian market and Other International markets - a divergence from the other Big Five Canadian banks strategy, which focus on the growth in the US market.

(Image Source: Created by author. Data from BNS's annual reports for each year)

Dividend Stock Analysis

Financials

Expected: A growing revenue, earnings per share and free cash flow year over year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations.

(Source: Created by author. Data from Morningstar)

Actual: Bank of Nova Scotia continues to grow at a good pace both in revenue and earnings. The company suffered just like any other financial institution during the global financial crisis, but has come back stronger than ever.

BNS's yield of maturity is as shown below. A lot of debt repayments are upcoming this year with a couple of big dues in the summer.

(Image Source: Morningstar)

It is interesting to note that both DBRS and Moody's have a negative outlook on BNS, but the other two rating agencies give BNS a stable outlook. Moody's also downgraded six Canadian banks' (including BNS) ratings by one notch earlier this month.

(Image Source: Bank of Nova Scotia's website)

Dividends and Payout Ratios

Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low/Manageable payout ratio to indicate that the dividends can be raised comfortably in the future.

(Source: Created by author. Data from Morningstar)

Actual: BNS is legendary when it comes to dividend payments. The company has dividend ever since 1832. The company has maintained paying dividends through all the rough times that followed. During the global financial crisis, the bank froze raises for a year, but has restarting raising them since. The current streak of dividend raises stands at 6 consecutive years. The 1-, 3-, 5-, and 10-yr dividend CAGR (Compound Annual Growth Rates) are 5.9%, 6.4%, 7.0%, and 6.7% respectively.

Outstanding Shares

Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble.

(Source: Created by author. Data from Morningstar)

Actual: The number of shares have increased steadily over the years, although seems to have slowed down and finally shrinking starting 2016.

Book Value and Book Value Growth

Expected: Growing book value per share.

(Source: Created by author. Data from Morningstar)

Actual: The book value has increased steadily over the years although a dip was noted in 2015.

Valuation

To determine the valuation, I use the Graham Number, average yield, average price-to-earnings, average price-to-sales, and discounted cash flow. For details on the methodology, click here.

The Graham Number for BNS with a book value per share of $31.91 and TTM EPS of $5.91 is $65.14.

BNS's average yield over the past five years was 3.47% and past ten years was 3.72%. Based on the current annual payout of 3.04, that gives us a fair value of $87.61 and $81.72 over the 5- and 10-year period, respectively.

BNS's 5-year average P/E is 11.70, and the 10-year average P/E is 12.23. Based on the analyst earnings estimate of $6.91, we get a fair value of $80.85 (based on 5-year average) and $84.51 (based on 10-year average).

The average 5-year P/S is 3.38 and average 10-year P/S is 3.41. Revenue estimates for next year stand at $23.60 per share, giving a fair value of $79.78 and $80.48 based on 5- and 10-year averages, respectively.

The consensus from analysts is that earnings will rise at 9.05% per year over the next five years. If we take a more conservative (2/3 of the value) value of 6% and run the three-stage DCF analysis with a 10% discount rate (expected rate of return), we get a fair price of $97.37.

Images below come from Simply Wall St, a financial visualization tool that has an intuitive way of representing value, future performance, past performance, financial health and dividends -- all in one single image called Snowflake. I recently posted a review of Simply Wall St where I explain the features. If you are unfamiliar with the tool, be sure to check out the review. However, the images used below are fairly intuitive to understand.

(Source: Simply Wall St)

Conclusion

Bank of Nova Scotia is the third largest of the Canadian banks by market cap. The company is well diversified, across both segments and geographies. BNS is touted as the more international of the Canadian banks for good reason - the geographical diversification speaks for itself. BNS, like other banks suffered during the global financial crisis, but has come back stronger than ever. The company is rock solid when it comes to sending dividends to shareholders - having paid them consecutively each quarter since 1832. The current streak stands at 6 consecutive years of dividend growth and a 10-yr CAGR of 6.7%. The current share price appears slightly undervalued. If we give equal weight to all valuation metrics used in this article, the fair value for BNS is CAD$81.94.

Further Reading: Be sure to check out the dividend stock analysis of the other Canadian banks as part of this series:

Royal Bank of Canada (RY) Toronto-Dominion Bank (TD) Bank of Montreal (BMO)

Full Disclosure: Long TD, BMO. My full list of holdings is available here.

Disclosure: I am/we are long TD, BMO.

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.