Saturday, February 8, 2014

The Bank of Nova Scotia Dividend Stock Analysis




The Bank of Nova Scotia is listed on the Toronto Stock Exchange (TSE) with ticker BNS.TO and on the New York stock exchange (NYSE) with ticker BNS. 


Company Background (source Yahoo Finance):


The Bank of Nova Scotia, together with its subsidiaries, provides various personal, commercial, corporate, and investment banking services in Canada and internationally. The company operates through four segments: Canadian Banking, International Banking, Global Wealth Management, and Global Banking and Markets. The Canadian Banking segment provides retail and small business banking products and services, such as debit cards, deposit accounts, credit cards, investments, mortgages, loans, and related creditor insurance products to individuals and small businesses; and commercial banking solutions, including lending, deposit, and cash management solutions to medium and large businesses. This segment offers its products through a network of 1,037 branches and 3,488 automated banking machines (ABMs) in Canada, as well as through telephone, mobile and Internet banking, and third party channels. The International Banking segment offers retail and commercial banking services to customers located in the Caribbean, Latin America, Central America, and Asia through a network of approximately 2,800 branches and offices, 6,833 ABMs, mobile, Internet and telephone banking, in-store banking kiosks, and specialized sales forces. The Global Wealth Management segment provides wealth management and insurance products and services. The Global Banking and Markets segment offers corporate lending, equity and debt underwriting, and mergers and acquisitions advisory services, as well as capital markets products and services comprising fixed income, derivatives, prime brokerage, securitization, foreign exchange, equity sales, energy and agricultural commodities, precious and base metals, and trading and research services to corporate, government, and institutional investor clients. The Bank of Nova Scotia was founded in 1832 and is headquartered in Toronto, Canada.


Analysis


Current Yield and Dividend Growth:

The Bank of Nova Scotia currently pays a dividend of CAD 0.62 per quarter for a CAD 2.48 annual dividend. At the close of market on Friday, February 7th BNS.TO’s price per share was CAD 61.70. This gives the stock a current dividend yield of 4.02%. Normally I look for a dividend yield of at least 3%, so I will be satisfied with this dividend yield from BNS.TO. In 2004, The Bank of Nova Scotia paid an annual dividend amount of CAD 1.10 per share. The dividend trend has been up each year as it now pays CAD 2.48 annually per share. This gives BNS.TO a 10 year annual compound dividend growth rate of 11.02%. The Bank of Nova Scotia has increased its dividend now 3 years in a row. The Bank of Nova Scotia´s dividend growth rate had been fair on last 3 and 5 years, 6.84% and 4.48%. 1 year growth rate is excellent 9.13%. The Bank of Nova Scotia normally pays dividend in January, April, July and October.

EPS Growth:

The Bank of Nova Scotia's EPS has grown an average of 8.21% over the past 10 years, 11.05% in the past five years and 9.62% in the past three years. Last year EPS went down -1.34%. The Bank of Nova Scotia's EPS of development in the past years seems to be very good. Analyst estimates for 5 year earnings growth rate per annum are 8.74% (http://finance.yahoo.com/q/ae?s=BNS.TO+Analyst+Estimates) If that will occur, investors can be satisfied.

Net Income:

The Bank of Nova Scotia's net income has increased by an average of 10.00% over the past 10 years, 15.39% in the past five years and 14.85% in past three years. Last year net income grew up only 2.87%. The net income trend looks similar to the EPS trend.

Revenue Growth:

The Bank of Nova Scotia's revenue has increased 7.87% over the past 10 years, 12.75% in the last 5 years, 11.76% in the last 3 years and 8.41% in the last year. The development of revenue looks very good.


 

Outstanding Shares:

The Bank of Nova Scotia's amount of shares went down nicely until a year 2008. From year 2009 those has increased every year. That I don’t like, because more shares outstanding, my shares are giving me a smaller portion of the earnings.





Payout Ratio:

The Bank of Nova Scotia's dividend payout ratio has been in the past 10 years on average 47.22%. Last 12 month period, the payout ratio was about 46.60%. This means that The Bank of Nova Scotia was distributed around 50% of profits to shareholders and keeping 50% of profits to grow the company and increase shareholder value through share repurchases. I like this payout ratio because it is fairly low and I don’t believe The Bank of Nova Scotia's should have any trouble maintaining dividend growth in the future.

ROE:

The Bank of Nova Scotia's ROE has been around 19% over the past 10 years, which are ok for me.




Net Profit to long term debt:

This number tells me how many years it will take to pay off the current long term debt of the company by using all net profit in it. I would like to see this ratio to be less than 5, because in that case the company is able to pay for all long-term debt for less than five years and on my opinion then the company doesn´t have too much debt. The Bank of Nova Scotia's long term debt had been clearly under 5 times net profit in last 10 years. In year 2010 it was the highest 3.53, but has gone down after that, last year it was only 1.01.




Value

To find out share fair value I mainly use these methods.

Graham Number:

The Graham Number valuation method was conceived by Benjamin Graham, the father of value investing, and calculates the maximum price one should pay for a company given the earnings and book value. The Bank of Nova Scotia has earned CAD 5.15 per share in the last twelve months and has a current book value per share of CAD 33.56. The Graham Number is calculated to be CAD 62.36, suggesting that BNS.TO is undervalued by 1.1%.

Average P/E Ratio:

The Bank of Nova Scotia`s current P/E is 11.89, which are lower as historical 5 years average high (13.46) and also lower as 10 years average high (14.37). By calculating using estimated EPS CAD 5.5 for year 2014 and the average 5 years low P/E ratio (9.84) shares fair value will be CAD 54.10. Using the 10 years the average low P/E ratio (10.57), fair value will be CAD 58.11. Calculating with 5 years average P/E ratio (11.65), fair value will be CAD 64.08, with 10 years average P/E ratio (12.47) fair value will be CAD 68.57.

Average Dividend Yield:

The Bank of Nova Scotia`s current annual dividend is CAD 2.48. At the close of market on Friday, February 7th BNS.TO’s price per share was CAD 61.70. This gives the stock a current dividend yield of 4.02%. Average 5 years high dividend yields has been 5.21% and average 10 years high dividend yields has been 4.65%. Those dividend yields give share fair value CAD 48.43 to 5 and CAD 53.37 for 10 years. Calculating with 5 year average yield 4.17%, the fair value will be CAD 59.46, with 10 year average yield 3.82%, the fair value will be CAD 65.00.

Average P/S Ratio:

The Bank of Nova Scotia`s current P/S ratio is 3.32 with revenue estimates for the year 2014 (22.46B). Average 5 years low P/S ratio are 2.72 and average 10 years low P/S ratio is 3.04. By calculating using the estimated revenue for the year 2014 and the average 5 years low P/S ratio fair value will be CAD 50.49. Using the 10 years the average low P/S ratio, the fair value will be CAD 56.55. Calculating with 5 year average P/S ratio (3.19), fair value will be CAD 59.26, with 10 years average P/S ratio (3.56) fair value will be CAD 66.21.

Discounted Cash Flow:

Analyst estimates for 5 year earnings growth rate per annum are 8.03%. I will use in my calculation 60% of that, which are 4.82%. Then I assume that continue growth after 5 years will be 3%. I use discount rate 10% and EPS CAD 5.15. Total I calculate for next 30 years. That will give me share fair value CAD 71.09.


Discount Rates8%9%10%11%12%
NPV of Future EPS$88.28$78.95$71.09$64.42$58.72




Dividend Discount Model:


The Bank of Nova Scotia`s current annual dividend is CAD 2.48. I assume that The Bank of Nova Scotia will be able to grow dividends for the next 5 years at the lowest of the 1, 3, 5, or 10 year growth rate or 15%. In this case that would be 4.48%. Then I assume that after 5 years grow rate will be 5%. To calculate the value I used a discount rate of 10%. Total I calculate again for next 30 years. That will give me share fair value CAD 73.02.





Discount Rate8%9%10%11%12%
NPV of Future Dividends$99.26$84.79$73.02$63.39$55.45




Gordon Growth Model:


The Gordon Growth Model is a quick way to calculate the fair value of a company using the current dividend, the expected dividend growth rate, and your required rate of return or discount rate. Assuming a constant 4.48% dividend growth rate and a discount rate of 10.00%, the GGM valuation method yields a fair price of CAD 44.93.




Gordon Growth Model Fair Value Estimate

Discount Rate
Dividend Growth Rate9.00%10.00%11.00%
3.48%$44.93$38.04$32.98
4.48%$54.87$44.93$38.04
5.48%$70.45$54.87$44.93





Future Price:


The Bank of Nova Scotia has EPS 5.15 (ttm). When I calculate The Bank of Nova Scotia`s future price with the analyst estimate for 5 years EPS growth (8.03%) and using the low P/E ratio last 5 years, I come from price CAD 74.56. That would give about 17% upside for BNS.TO´s current price.



Conclusion:




The Bank of Nova Scotia is one of the Canada’s largest banks with 3 years continuing dividend increase in a row now and I’m planning to add some financial company in my portfolio. Based on my analysis, I think The Bank of Nova Scotia is ​​currently fairly valued. The Bank of Nova Scotia`s growth development in past years looks fine for me, on last 10 years only year 2008 was negative for BNS.TO. The Bank of Nova Scotia`s payout ratio is under 50%, as it has almost always been in the past 10 years. So there will be a good reserve for dividend increases in the future. Based on my value calculation, BNS.TO is now trading over its average low P/E ratio, but lower as it`s an average P/E ratio. When I look the average dividend yield and average P/S ratio, I see that, BNS.TO are now trading a bit over of its historical average high yields and average P/S ratio. My calculation of Discounted cash flow gives price CAD 71.09 for the net present value, meaning that BNS.TO are trading at a 5.2% discount to the discounted cash flow analysis. Based on the dividend discount model, The Bank of Nova Scotia is worth CAD 73.02, meaning it's undervalued by 18.3%. Overall I feel that The Bank of Nova Scotia offers pretty good value at current levels. Shares of The Bank of Nova Scotia are currently offering around a 4% yield and they should be announcing an increase in July for their July payment or at the latest in January next year for their January payment.



Disclosure:  I don't own any shares of BNS.TO.

Click here to see my holdings.
 

5 comments:

  1. Hi DH,

    again a great post from you!
    I think about Wells Fargo, HSBC, Standard Chartered and Bank of Nova Scotia.
    Your analysis is very helpful for me!

    Best regards
    D-S

    ReplyDelete
    Replies
    1. Hallo D-S, Vielen dank für dein kommentar!

      Delete
  2. Dividend Hawk,

    Thank you for the excellent article and bringing my attention to a stock that was not previously on my radar. I will add it to my watch list as I currently don't hold any financials in my portfolio.

    Take care!

    -Dividendasaur

    ReplyDelete