Investment Jungle

Next up for analysis is the Bank of Nova Scotia. This stock is not only in Mergent’s North American Dividend Achievers Top 50 list, it is also listed in Mergent’s Canadian Dividend Achievers.

Company Profile:

From MSN Money:

The Bank of Nova Scotia is a full-service financial institution, active in both Canadian and international markets. In Canada, the Bank provides a range of retail, commercial, corporate, investment and wholesale banking services through its network of branches and offices in all 10 provinces and two territories. The Bank has three major business lines: Domestic Banking, International Banking and Scotia Capital. The Domestic Banking business line provides a range of banking and investment services to retail and small business banking, commercial and wealth management customers across Canada. The International Banking business line operates in more than 40 countries and includes operations in three geographic regions: the Caribbean and Central America, Latin America and Asia Pacific. Scotia Capital provides full service wholesale banking to corporate, government and investor clients across the North American Free Trade Area (NAFTA) region, as well as other selected niche markets.

BNS is a large cap stock with a market capitalization of $53.50B.

Financial Analysis:

Management has been doing a stupendous job. Return on Investment Capital (ROIC) has been extremely consistent over the last 10 years. The 5 year average is 18.16% and the 10 year average is 16.96%. The last 3 years have been particularly good at just around 20%.

The Equity growth rate has been fairly steady over the last few years. It seems to hover around the 7% to 9% range. For a Rule #1 investor, this would not meet our criteria of a wonderful business as it is below 10%. However, at least it has been consistent.

Earnings per share growth rate has had some interesting swings. During the 10 year period, there was a low of -10.69% and a high of 32.58%. However, the median seems to sit around the 12% range.

Sales growth rate has been particularly low although it has picked up in the last couple of years probably due to their recent international expansion.

Cash flow growth rate is nice and steady at 11% over the last 2 years.

Stock Analysis:

Using a future EPS growth rate of 9% and a PE of 13, the sticker price comes to $28.30. At today’s price of $54.48, that is a premium of 92.51%. I won’t even bother looking at the MOS price. But I believe that these solid dividend paying stocks cannot get to their MOS price due to the stock price being supported by the dividends.

Even at this sticker price, the dividend yield would be 5.9%.

Dividend Analysis:

BNS is currently yielding 3.08%. That is above the S&P/TSX Composite Index dividend yield of 2.26%.

The dividend growth rate has been superb over the last 10 years at an average of 18%.

The dividend payout ratio has been increasing over the last few years. However, back in 2002, the dividend payout ratio had hit 40.73%. It currently stands at 42.25%. So it is still a fairly conservative payout ratio.

Looking at the 10 years average high and low dividend yields, I come up with 3.53% and 2.48%. However, the last couple of years has seen a high dividend yield of 3.63% and 3.61% respectively. So I decided to use these as the high water marks.

Using 3.60% as the high dividend yield, then a good price to pay for BNS would be $46.67. At today’s price of $54.48, that is a premium of 16.74%

Conclusion:

From a Rule #1 investor perspective, this business would not be attractive as it fails to hit the 10% thresholds for many of its Big Five numbers. However, as a dividend paying stock, it is quite impressive. However, I feel it is currently price at a premium. And since the S&P/TSX Composite Index is setting records for all time highs daily, I think there will be opportunities to purchase this stock at its average high yield in the future.

Here is a summary of my findings.

I will be adding this one to my watchlist.

Disclosure:

I own shares in Bank of Nova Scotia (TO:BNS).

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