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:
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:
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:
Discount Rates | 8% | 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 Rate | 8% | 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 Rate | 9.00% | 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.
Great analysis, DH.
ReplyDeleteI am long BNS.
Hi R2R, thanks from your comment
DeleteHi DH,
ReplyDeleteagain 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
Hallo D-S, Vielen dank für dein kommentar!
DeleteDividend Hawk,
ReplyDeleteThank 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