The big five Canadian banks remain buys for further long-term share price gains, an attractive and growing stream of dividends, and for being high-quality blue chip stocks that should hold up better than most when the next inevitable correction or bear market strikes.
Each year, we’ve advised you to buy the big five Canadian banks. This has paid off. The late chairman of our Investment Planning Committee often said: “If I had bought only the banks and utilities, I would’ve become a millionaire a lot sooner.” Of course, it pays to diversify. Lots of homeowners in Vancouver and Toronto, for instance, have become millionaires as well.
The big five are a cozy oligopoly
Only American short-sellers—betting against the big five banks—lost money as Canadian bank share prices went up. These American short-sellers seem to forget that Canada’s banking industry is essentially a cozy oligopoly of only five big banks that dominate the industry. This is in sharp contrast to the competitive American industry, where hundreds of financial institutions battle for deposits as well as lending and investment opportunities.
The big five Canadian banks remain solid value, blue chip stocks. They continue to earn more money most years. This gives them attractively-low p/e (price-to-earnings) ratios. The big five continue to raise their dividends each year. This gives them better yields than most stocks in the overall stock market.
The big five earned more than expected
All of the big five earned more than expected in the year to October 31. In fiscal 2017:
BMO, or Bank of Montreal, (TSX—BMO) earned an adjusted $8.16 a share. This was up by 5.3 per cent from the $7.75 a share it was expected to earn last year;
Scotiabank, or Bank of Nova Scotia, (TSX—BNS) earned an adjusted $6.54 a share. This was up by 1.1 per cent, from the $6.47 a share it was expected to earn last year;
CIBC, or Canadian Imperial Bank of Commerce, (TSX—CM) earned an adjusted $11.11 a share. This was up by 7.3 per cent from the $10.35 a share it was expected to earn last year;
The Royal, or Royal Bank of Canada, (TSX—RY) earned an adjusted $7.57 a share. This was up by 3.8 per cent from the $7.29 a share it was expected to earn last year; and
TD, or Toronto-Dominion Bank, (TSX—TD), earned an adjusted $5.54 a share. This was up by 4.7 per cent from the $5.29 a share it was expected to earn last year.
Even better, all of the big five banks are expected to earn more money both this year and next. In fiscal 2018 (which began on November 1), we expect BMO’s earnings to rise by 5.3 per cent, to $8.59 a share. Next year, we expect the bank’s earnings to go up another 1.9 per cent, to $8.75 a share.
In fiscal 2018, Scotiabank’s earnings are expected to increase by 5.2 per cent, to $6.88 a share. The following year, its earnings growth is expected to accelerate to seven per cent, for earnings of $7.36 a share.
CIBC’s earnings are expected to inch up by 0.8 per cent, to $11.20 a share in 2018. In 2019 its earnings are expected to advance by a more respectable 6.9 per cent, to $11.97 a share.
In fiscal 2018, Royal’s earnings are expected to rise by 5.9 per cent, to $8.02 a share. The following year, its profits are expected to improve by 7.9 per cent, to $8.65 a share.
And TD’s profits are expected to go up by 6.7 per cent, to $5.91 a share this year. Next year, its profits are expected to rise by 6.1 per cent, to $6.27 a share.
They also continue to raise your dividends
Thanks to this earnings growth, the big five banks often see fit to raise your dividends. In fact, BMO has increased its dividend again.
BMO’s dividend of $3.72 yields an attractive 3.7 per cent. Scotiabank’s dividend of $3.16 yields an even better 3.9 per cent. CIBC’s dividend of $5.20 a share yields 4.3 per cent—the best of the big five. Royal’s dividend of $3.64 yields an appealing 3.6 per cent. And TD’s dividend of $2.40 a share yields an attractive 3.3 per cent.
The dividend yields of the big five banks beat the dividend yield of the overall market and safe yields paid by most companies. This is apt to attract income-seeking investors. They’ll bid up the prices of your bank shares over time. With growing earnings and dividend payments, these high-quality stocks offer you safety in stock market setbacks.
They trade at low P/E ratios
Given their benefits, you might expect the big five banks to trade at high share prices. But in fact, they’re cheap. Consider, for instance. their p/e (price-to-earnings) ratios based on this year’s earnings estimates.
BMO’s forward p/e ratio is an attractively-low 11.6 times; Scotiabank’s, 11.9 times; CIBC’s, 10.7 times; Royal’s, 12.6 times; and TD’s, 12.4 times. This is lower than the stock market’s overall p/e ratio. And it’s lower than those of most companies with growing earnings.
True, the shares of the big five banks usually trade at bargain prices. But as long as they do, you have an opportunity to build a meaningful position in wonderful stocks. We believe that the outlook is improving for the banking industry.
The consensus recommendation of four analysts is that Scotiabank is a ‘strong buy’. We rate it a ‘buy’. The four analysts rate Royal and TD ‘buy’. We agree They rate BMO and CIBC ‘hold’. We disagree. We rate all of the big five ‘buy’ for further long-term share price gains, attractive and growing dividends, as well as price resiliency in stock market setbacks.
Keep in mind, too, that the poorest-performing bank stock in one year often leads the pack in the following year. That’s partly because the bank has more room to improve than its rivals. Also, low expectations can lead the stock to jump if it does significantly better than expected.
Since predicting relative future gains is difficult, we feel that it’s better to diversify by putting some of your money into each of the big five Canadian banks.
This is an edited version of an article that was originally published for subscribers in the December 15, 2017, 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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