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Canada’s ‘Big 5’ banks remain buys

Canadian banks face some headwinds, but the big five are expected to earn more in 2020. They pay attractive dividends and they trade at low price-to-earnings ratios.

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The Big 5 banks’ office towers dominate Toronto’s financial district skyline.

We cover Canada’s big five banks: Bank of Montreal (TSX—BMO), Bank of Nova Scotia (TSX—BNS), Canadian Imperial Bank of Commerce (TSX—CM), Royal Bank of Canada (TSX—RY) and Toronto-Dominion Bank (TSX—TD). All five remain buys for long-term share price gains as well as attractive and growing dividends.

The big banks face headwinds. One is a flat yield curve. This squeezes the net interest income they earn from their traditional banking businesses. A second headwind is high consumer debt. This limits how much more money they can lend and has led to more defaults and bankruptcies. A third headwind is slower commercial lending.

A fourth headwind is the rise of low-cost exchange-traded funds. This makes the banks’ actively-traded mutual funds less competitive. A fifth headwind is fee-free stock brokerage trading. This is likely to come to Canada. A sixth headwind is new financial technology firms that are competing with the banks. This has darkened the outlooks of the big banks.

Earnings up, but P/E ratios are attractive

On the positive side, all five are expected to earn more money both this year and next. And all five trade at better P/E (Price-to-Earnings) ratios than the market as a whole.

BMO’s fiscal 2020 earnings are expected to rise by 5.1 per cent, to $9.91 a share (fiscal years end on Halloween). This gives the stock an attractive P/E ratio of only 10.3 times. In 2021, BMO’s earnings are expected to go up by 3.6 per cent, to $10.27 a share.

Scotiabank’s 2020 earnings are expected to rise by 4.1 per cent, to $7.43 a share. This gives it a P/E ratio of only 10 times. In 2021, Scotiabank’s earnings are expected to advance by 5.2 per cent, to $7.82 a share.

CIBC’s 2020 earnings are expected to inch up by 1.4 per cent, to $12.09 a share. Its P/E ratio is just 9.1 times. In 2021, CIBC’s earnings are expected to grow by 3.1 per cent, to $12.47 a share.

Royal’s 2020 earnings are expected to rise by 4.5 per cent, to $9.29 a share. Its P/E ratio is 11.3 times. In 2021, Royal’s earnings are expected to go up by 4.3 per cent, to $9.69 a share.

TD’s 2020 earnings are expected to rise by 3.3 per cent, to $6.91 a share. Its P/E ratio is 10.8 times. In 2021, TD’s earnings are expected to go up by 4.8 per cent, to $7.24 a share.

Yields range from 4% to 5.2%

Admittedly, this earnings growth is slower than the banks’ earnings growth in the past. Then again, the banks reward their shareholders by paying generous dividends and raising them every year. That is, you’re paid to wait.

BMO’s dividend of $4.24 a share yields 4.2 per cent. Scotiabank’s dividend of $3.60 a share yields 4.8 per cent. CIBC’s dividend of $5.76 a share yields 5.2 per cent—the highest of the big five banks. Royal’s dividend of $4.20 a share yields four per cent. And TD’s dividend of $2.96 a share also yields four per cent. These yields are much higher than the yields on most fixed-income investments.

In addition, the banks are ‘dividend aristocrats’ that raise their dividends every year. The Globe And Mail writes that “independent research firm IncomeResearch.ca reports that average annual dividend growth from 2016 through 2020 will be in a narrow band between 5.8 per cent and 7 per cent.” The growing dividends will enable you to keep up with the rising costs of living. The growing dividends will also likely attract income-seeking investors who will bid up the prices of your shares. But whether you earn growing dividends, share price gains, or both, you win.

This is an edited version of an article that was originally published for subscribers in the January 10, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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