Dividend Analysis - Bank of Nova Scotia (TSE:BNS)
29 June 2007Heading back to Canada, let’s have a look at the Bank of Nova Scotia. This stock trades on the TSE under the symbol BNS.
Company Profile:
From ADVFN Financial
The Bank is a full-service financial institution, active in both domestic and international markets. In Canada the Bank provides a full range of retail, commercial, corporate, investment and wholesale banking services.
Market capitalization is $51.45B.
Company Fundamentals:
As usual, collecting information on the Canadian companies is quite a bit harder.
For the return on invested capital, I was only able to obtain the 5 year average of 15% and last year’s ROIC of 18.06%. Both are a healthy size and seems to be increasing.
I do have the return on equity numbers. So lets have a look at those. The 10 year average is 16.85%, the 5 year average is 17.94% and last year’s ROE was 20.73%. So this has confirmed that the trend is headed upwards.
The equity growth rate has been fairly consistent. The 9 year average is 8.27%, the 5 year average is 5.91%, the 3 year average is 7.77% and last year’s growth rate was 9.54%. It seems to have hit a little lull in 2002 and 2003, but has been coming back strong since then.
Earnings per share growth rate has been fairly consistent. The 9 year average is 11.48%, the 5 year average is 15.55%, the 3 year average is 14.58% and last year’s EPS growth rate was 12.70%. However, there were two years that experienced negative growth rates: 1998 had a negative 10% and 2002 had a negative 16%.
Sales growth rate has been increasing over the last 5 years. The 5 year average is 4.02%, the 3 year average is 7.26% and last year, the sales growth rate was 10.77%.
Dividend Fundamentals:
BNS is currently sporting a dividend yield of 3.18%. That is better than the S&P/TSX Composite Index yield of 2.34%.
BNS has had excellent dividend growth over the last 10 years. Over the 10 year period, the dividend growth rate has been 18%. Over the last 5 years, it has been 20.36%. Last year’s dividend growth was only 13.64%. Still a very healthy dividend.
And the dividend payout ratio has been climbing steadily from a low of 25% in 1997 to a high of 42.25% in 2006. However, 42% is still a fairly conservative payout ratio so management still has some room to increase the payout ratio.
It takes cash to pay these dividends. And the cash flow growth rate has been fairly steady. Over the 10 year period, the cash flow growth rate has been 10.51%. In the last 5 years, it has been 13.08%. And last year, the growth rate was 11.52%. So they are growing their cash to pay for these dividends.
Valuation Models:
Looking at the historical yields, the 10 year average high dividend yield is 3.53%. Over the last 5 years, it has increased to 3.60%. So I am going to use the 5 year rate which implies that my model price based on yield is $46.67. As of Wednesday’s price of $52.89, that implies a premium of 13.34%.
The Graham number produces a model price of $38.57. That is a premium of 37.13%.
For the present value model price, I need to determine a future EPS growth rate and a future P/E.
Looking at the historical P/E, I can see that BNS has stayed in a fairly narrow range (11.96 - 13.70). I will use the more conservative value from the 10 year average of 11.96.
To determine the future EPS growth rate, I usually look at the equity growth rate. In this case, the 9 year average is 8.27%, the 5 year average is 5.91% and last year’s growth rate was 9.54%. Typically, I would take the most conservative value which in this case would be 5.91%.
These numbers give me a future stock price of $81.98 in 10 years. Now, normally I discount that to the present using 15%. However, BNS has paid steady dividends for many years. So this time, I am going to assume that BNS will continue to pay me the 5 year average high dividend yield of 3.60%. So, instead of demanding 15%, I will demand 15% less the 3.60%. So that the dividend yield plus the stock price appreciation together equals the 15%.
Using this technique, I come up with a model price of $27.85 which is a premium of almost 90%.
See all my calculations here.
Conclusion:
Bank of Nova Scotia looks like a good contender for a solid dividend yielding portfolio. All 3 valuation methods show that the stock is currently expensive. So I would definitely wait for the stock price to fall to the yield model price of $46.67.
If the TSX experiences a pullback of 10% this summer (as has been alluded to in the financial media), it would be the perfect opportunity to add BNS to your portfolio.
Full disclosure: I own shares in BNS.
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on June 30th, 2007 at 12:26 am
There are very few blogs that I like to be keep tabs on, on a regular basis. Yours is one of them! Keep up the good work. Y
on June 30th, 2007 at 1:05 am
Thank you very much for the compliment Yaser.
Coming from such a respected financial blogger as yourself, it is very humbling.
on July 5th, 2007 at 3:25 pm
I like the way you analyse stocks. I own a few stocks that you talk about and the fact that i’m canadian this is great. What about Wells Fargo? Is it better priced than BNS and by the way my data shows BNS is yielding 3.45 rather than 3.19 as of july 4. It shows up in my td waterhouse account at 3.45
Great job keep it up.
on July 5th, 2007 at 9:20 pm
Hi Brian,
Thanks for the compliment.
As for Wells Fargo, I am not sure. But I will analyze this stock.
As for the BNS yield, I logged on to the Scotiabank investor site and the last 4 quarters of dividends paid have been: $0.39, $0.42, $0.42 and $0.45. That adds up to $1.68 dividend per share.
When I did the analysis, the price of the stock was $52.89. That gives me a yield of 3.18%.
Average Joe
on June 3rd, 2008 at 2:47 pm
Hi again.
I have been trying to set up my own calculators, and calibrate them using your models, but I cannot replicate some of the data.
For example - The annual High & Low numbers you have don’t match any I can find - can you tell me how you found yours?
Annual dividends I was able to find, as well as EPS, and BV.
Thanks.