The big five Canadian banks are expected to earn more this year and next. They remain dividend aristocrats as they continue to raise their generous dividends. Despite getting better, the banks remain undervalued buys for share price gains and attractive income.
We’ve often pointed out that it pays to bet with the big five Canadian banks—not against them. That’s partly because they just keep on getting better. Their earnings per share regularly set new records. Their generous dividends go up every year. Despite their stellar record, the banks look cheaper than the overall market. As a self-made friend put it: “If I had bought only the banks and utilities, I would’ve been a millionaire a lot sooner.”
■ Bank of Montreal (TSX—BMO) is expected to earn $8.95 a share in fiscal 2018 (fiscal years end on Halloween). That would represent earnings growth of 8.9 per cent from $8.13 a share last year. Next year BMO’s earnings are expected to rise by another seven per cent, to $9.47 a share. These growing earnings enable the bank to raise its dividend each year. BMO yields an attractive 3.7 per cent.
■ Bank of Nova Scotia (TSX—BNS), or Scotiabank, is expected to earn $7.01 a share in fiscal 2018. That would deliver earnings growth of 7.2 per cent from $6.54 a share last year. Next year, Scotiabank’s earnings are expected to grow by 6.7 per cent, to $7.48 a share. It has just raised its dividend again, to $3.40 a share. Scotiabank yields a generous 4.5 per cent.
■ Canadian Imperial Bank of Commerce (TSX—CM), or CIBC, is expected to earn $11.97 a share this year. That works out to earnings growth of 7.7 per cent from $11.11 a share last year. Next year, its earnings are expected to climb by 5.3 per cent, to $12.60 a share. CIBC, too, has raised its dividend again, to $5.32 a share. That yields a generous 4.6 per cent.
■ Royal Bank of Canada (TSX—RY), or Royal, is expected to make $8.41 a share this year. That would represent rapid earnings growth of 11.1 per cent, from $7.57 a share last year. Next year, its earnings are expected to advance by 7.02 per cent, to nine dollars a share. Royal also increased its dividend, to $3.76 a share. This yields an appealing 3.7 per cent.
■ Toronto-Dominion Bank (TSX—TD), or TD, is expected to earn $6.35 a share. That works out to outstanding earnings growth of 14.6 per cent from $5.54 a share last year. In fiscal 2019, its earnings are expected to rise by 7.9 per cent, to $6.85 a share. TD pays a dividend of $2.68 a share. While it yields less than the others, a yield of 3.5 per cent is still attractive.
All of the big five banks are what’s known as ‘dividend aristocrats’. That’s because they have raised their dividends for more than five years in a row. We award all of the big five with our top quality rating of ‘Very Conservative’. As they diversify abroad and into new business lines, they become even safer.
Most outstanding stocks trade at high P/E (Price-to-Earnings) ratios. This can hurt shareholders even if the company does well—but less well than anticipated. The big five, by contrast, trade at low multiples: BMO at 11.8 times; Scotiabank, 10.9 times; CIBC, 9.7 times; Royal, 12.1 times; and TD at 12 times. This is well below the P/E ratio of 25.1 times for the S&P/TSX Composite index. Similarly, the big five trade at below-average Price-to-Book ratios and yield much more than the overall market.
A flatter yield curve makes long-term lending less profitable for the banks. Still, as interest rates have risen, they now charge more on assets such as mortgages. They pay little more on liabilities such as GICs (Guaranteed Investment Certificates). Also the diversified banks have ‘a finger in every pie’.
The banks are all solid blue chip stocks and remain a buy for further long-term share price gains plus generous, growing, dividends.
This is an edited version of an article that was originally published for subscribers in the September 7, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
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The Investment Reporter •10/18/18 •