I continue to advise you to bet on the big five Canadian bank stocks: That is, 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). While National Bank of Canada remains a buy, it’s significantly smaller than each of the big five banks.
The price-to-earnings ratio of the S&P/TSX Composite index averages more than 19.8 times. The big five banks trade at much lower forward price-to-earnings ratios:
* BMO at 11.4 times its expected 2014 EPS of $6.37
* Scotiabank at 11.5 times its expected 2014 EPS of $5.47
* CIBC at 10.6 times its expected 2014 EPS of $8.79
* Royal at 12.1 times its expected 2014 EPS of $5.92
* TD at 11.9 times its expected 2014 EPS of $4.21
Lower price-to-earnings ratios are preferable. That’s because they provide you with what’s known as a ‘margin of safety’.
That is, there’s less room for these low-cost shares to fall if something goes wrong. They’ll fall, too, in a market setback, but less than stocks that trade at excessively high price-to-earnings ratios.
The big five bank stocks also offer high yields (see box).
By way of comparison, the 30 dividend yields on the Dow Jones Industrial Average index average about 2.16 per cent.
Keep in mind, too, that each bank has raised their dividends in the first quarter of fiscal 2014.
These financial stocks regularly raise their dividends. Earning high and rising dividends assist you in paying your bills even if share prices go nowhere. Still, rising dividends attract income-seeking investors. They’re apt to bid up the share prices of the banks.
The big five banks are well diversified across the entire financial services industry.
They all offer loans to individuals and companies, of course. This was their traditional business. They also offer credit cards. The big five took over the major trust companies.
This lets them offer wealth-management services. They gobbled up the major brokerage firms. As a result, they can offer brokerage services, underwrite new issues of securities, trade for their own accounts and offer advisory services – such as advising companies about mergers and acquisitions.
The big five own some of the biggest mutual funds in Canada. Now they want to further penetrate the insurance industry. This diversification makes the big five banks safe compared to companies known as ‘one-trick ponies’.
Add this to their low price-to-earnings ratios and high and rising dividends and it’s hard to go wrong in the long run, if not in the short.
They are essentially money-making machines. As an experienced broker once told me, “If I had bought nothing but the banks and utilities, I would’ve become a millionaire much sooner.”
* My Advice: All five of the big banks remain buys for long-term share price gains and growing streams of income. t
Canada’s Big Five – At a glance
Canada’s bank stocks yield more than the market and regularly raise their dividends. And thanks to their diversification, they offer more safety than most companies.
Bank and symbol Price Dividend * Yield
Bank of Montreal (BMO) $73.03 $3.04 4.14%
Bank of Nova Scotia (BNS) $64.91 $2.56 3.94%
CIBC (CM) $95.76 $3.92 4.09%
Royal Bank (RY) $72.14 $2.84 3.93%
Toronto-Dominion Bank (TD) $51.71 $1.88 3.63%
* annual dividend
- Marc Johnson, CFA