High fives for the big five banks

The big five banks reported their results for the second quarter of fiscal 2018. They remain buys for further long-term share price gains as well as attractive and growing dividends. Despite their outstanding returns, the banks are better priced than the market.

Big_Five_BanksWe regularly point out that it pays to keep on buying the big five banks. They have delivered outstanding share price gains over decades. All five pay attractive dividends. What’s more, they raise their dividends year after year. The big five are top-quality stocks that we’ve included among our Key stocks for decades.

Highly-successful companies are often costly. Apple Inc., for instance, is worth nearly $1 trillion. It’s the first American company to reach this milestone. Despite their own success, the big five banks remain surprisingly cheap. In the first six months of fiscal 2018, to April 30, the banks continued to do well.

One standard yardstick of value is a stock’s price-to-earnings, or P/E, ratio. In general, lower is better. The forward P/E ratio of the Toronto stock market is 15.7 times. The P/E ratios of all five of the big banks are more appealing.

The big five banks are well priced

Bank of Montreal, or BMO, trades at about a P/E ratio of 11.4 times the $8.86 a share it’s expected to earn this year. That would represent earnings growth of 8.6 per cent from $8.16 a share that it earned last year.

Bank of Nova Scotia, or Scotiabank, trades at about a P/E ratio of 10 times the $7.68 a share it’s expected to earn this year. That would work out to excellent earnings growth of 17.4 per cent from the $6.54 a share that it earned last year.

Canadian Imperial Bank of Commerce, or CIBC, trades around a P/E ratio of just 9.6 times its expected earnings of $11.87 a share in fiscal 2018. This would represent earnings per share growth of 6.8 per cent from the $11.11 a share it earned last year.

Royal Bank of Canada, or Royal, trades at about a P/E ratio of 11.8 times the $8.42 a share that it’s expected to earn this year. This represents healthy earnings growth of 11.2 per cent from the $7.67 a share that it earned last year.

Toronto-Dominion Bank, or TD, trades around a P/E ratio of 11.9 times the $6.30 a share that it’s expected to earn. This would represent solid earnings growth of 13.7 per cent from the $5.54 a share that it earned last year.

Keep in mind, too, that each member of the big five banks is expected to earn even more in fiscal 2019 than in this year. This would reduce their forward P/E ratio to even more attractive levels.

A second yardstick of value is a company’s yield, if it pays dividends at all. Above-average, but not dangerously-high, dividend yields are preferable. All of the big five yield more than the Toronto Stock Exchange’s average yield of 2.5 per cent.

They pay high and growing dividends

BMO’s dividend of $3.72 a share yields about 3.7 per cent. Scotiabank’s higher dividend of $3.28 a share yields about 4.3 per cent. CIBC’s increased dividend of $5.32 a share yields around 4.7 per cent. Royal’s raised dividend of $3.76 a share yields around 3.8 per cent. TD’s improved dividend of $2.68 a share yields approximately 3.6 per cent.

The big five banks are ‘dividend aristocrats’. That is, they’re among the Canadian companies that have raised their dividends for at least five consecutive years. If their share prices stay the same, this growing stream of dividends will give you a higher and higher yield. The thing is, the banks’ high and growing dividends draw income-seeking investors. These investors typically bid up the share prices of the banks to the point where their dividend yields make sense. But whether you earn growing income, share price gains, of some combination of the two, you win. Keep on buying the big five banks.

We like other banks too

We include the big five banks among our Key stocks. Even so, we rate some other non-Key banks as buys.

These include National Bank of Canada, Canadian Western Bank and Laurentian Bank of Canada. Buy them for share price gains as well as attractive and growing dividends.

This is an edited version of an article that was originally published for subscribers in the June 15, 2018, 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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