Rising dividends and capital gains

And for both, you can ‘take it to the bank’—any of the Big Five banks will do just fine. Canada may have been founded by a department store but it’s run by its banks.

153 years young and counting.

A mari usque ad mare proclaims the Canadian Coat of Arms. It’s short one sea, of course, but it’s doubtful the drafter of the original phrase in Psalm 72, from which it was lifted, knew of the Arctic Ocean—or even the Pacific Ocean, for that matter—at the time. But we get the idea. Canada is one very big place.

The country occupies the second largest national land mass on earth with a population of some 37 million that ranks only 39th among the world’s nations, but with a per capita Gross Domestic Product that ranks 17th in the world according to the International Monetary Fund.

Since our beat is investment advice, our role, to put it bluntly, is to help you make a buck out of all of this. So we thought we’d round up a selection of iconic Canadian brands, worthy of your investment dollars, on this 153rd anniversary of confederation.

As Canadian as . . .

A first draft of what we considered to be truly iconic Canadian names was quickly becoming a list of the ones that got away. Tim Hortons, Hudson’s Bay, Canada Goose, Grand & Toy, Roots, Bauer Hockey, CCM Hockey and Bicycles, Dofasco and Stelco, Sleeman, Labatt and Alexander Keith’s Breweries, Redpath Sugar, Noranda and Falconbridge, Seagram, even Canada Dry, have all largely been sold off-shore.

On the other hand, there are Canadian corporate names that have kept their Canadian roots but become highly-recognized international brands. Magna, Thomson Reuters, Manulife, Power Corp., Stantec, Shopify, Open Text, Saputo, Couche-Tard, Barrick, Celestica, CAE, High Liner, lululemon and Corus come to mind.

But, as an industry, nothing beats Canadian banks for brand recognition, time in business, market capitalization, growing profits, long-term share price gains and dividends that grow most years.

The big five Canadian banks remain buys

The big five Canadian banks, all of whom have roots that stretch back prior to Confederation, remain buys for attractive dividends that grow most years as well as long-term share price gains. While building their provisions for credit losses relating to COVID-19 will reduce their earnings this year, they remain highly profitable and well capitalized.

The big five Canadian banks earned less in the quarter to April 30. That’s because they each added billions of dollars to their provision for credit losses that will result from the global pandemic. The banks know that some businesses will fail and some families will fall into bankruptcy. Despite adding so much to their provisions for credit losses, the big five remain highly profitable and well capitalized. They remain buys for high dividends and long-term share price gains.

We expect all five to continue to pay their dividends. It’s possible that OSFI (the Office of the Superintendent of Financial Institutions) may ask them not to raise their dividends any further in the year to October 31, 2020. But you’ll continue to earn attractive dividends. The big five banks pay dividends that yield more than the overall Canadian market.

Bank of Montreal (TSX—BMO), or BMO, pays $4.24 a share, for a yield of six per cent.

Bank of Nova Scotia (TSX—BNS), or Scotiabank, pays $3.60 a share, for a yield of 6.3 per cent.

Canadian Imperial Bank of Commerce (TSX—CM), or CIBC, pays $5.84 a share, for a yield of 6.3 per cent.

Royal Bank of Canada (TSX—RY), or Royal, pays $4.32 a share, for a yield of 4.6 per cent.

Toronto-Dominion Bank (TSX—TD), or TD, pays $3.16 a share, for a yield of 5.1 per cent.

The big five also trade at attractively-low forward P/E (Price-to-Earnings) ratios. That’s despite the fact that all five are expected to earn less in fiscal 2020 as the fallout from COVID-19 hurts the economy.

BMO trades at 10.5 times the $6.70 a share that it’s expected to earn in fiscal 2020. Scotiabank trades at 11.6 times the $4.96 a share that it’s expected to earn in fiscal 2020. CIBC trades at 10.3 times the $9.04 a share that it’s expected to earn in fiscal 2020. Royal trades at 11.7 times the $8.06 a share that it’s expected to earn in fiscal 2020. TD trades at 13.2 times the $4.65 a share that it’s expected to earn in fiscal 2020. These are lower than a P/E ratio of 19 times for the S&P/TSX Composite Index as a whole.

The big five Canadian banks remain buys for attractive dividends that grow most years and long-term share price gains.

And that you can take to the bank.

This is an edited version of an article that was originally published for subscribers in the June 12, 2020, 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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