Dividend Analysis - National Bank of Canada (TSE:NA)
23 June 2007Banks have always been known for their steadily increasing dividends. So for today, we will take a look at National Bank of Canada which trades on the TSE under the symbol NA.
Company Profile:
From ADVFN Financials
Provides comprehensive financial services to consumers, small and medium-sized enterprises, and large corporations and has branches in every province in Canada. It is also represented in the U.S. and Europe through its subsidiaries and alliances.
There are 14,381 employees working at the National Bank which has a market capitalization of $9.88B.
Company Fundamentals:
Unfortunately, I always find it hard finding the Return on Invested Capital numbers for Canadian companies. And National Bank is no exception. I was able to find last year’s ROIC which was 12.2% and the 5 year average which was 13.97%.
However, I do have the Return on Equity numbers which parallel the ROIC assuming that there isn’t a large amount of leverage. In this case, we see a nice steady trend of increasing ROE over the last 10 years. The 10 year average is 15.77%, the 5 year average is 17.12% and last year’s ROE was 18.59%. Nice trend.
Equity growth rate has been quite consistent. The 10 year average is 7.74%, the 5 year average is 7.39% and last year’s growth rate was 7.02%.
Earnings per share growth rate has been steady in the 12% range. However, last year’s EPS growth was a lowly 3.06%.
Sales growth rate has been right around 8% over the whole 10 years.
Dividend Fundamentals:
The current dividend yield on National Bank of Canada is 3.48%. That easily outpaces the dividend yield on the TSX Composite Index of 2.34%.
One of our most important factors is the dividend growth. There has been some interesting moves there. From 1999 where it grew at only 6.06%, there has been a steadily increasing dividend growth rate right up to 2004 where the dividend growth rate was a whopping 31.48%. However, since then, the rate has dropped for the last 2 years down to last year’s growth rate of 13.95%. Still a very healthy dividend growth, but I don’t like the way the trend is heading.
Cash flow growth rate has been steady in the 12% range. However, last year’s cash flow growth rate was only 3.97%. I do not think that this is too much of a concern as the other years have produced solid numbers.
And the dividend payout ratio is quite conservative at almost 39%. Even if the earnings and cash flow do not grow at double digit rates, there is room to increase the dividend significantly with this level of payout ratio.
Historical Dividend Yields:
Consistent dividend yields can be seen over the last 10 years. The 10 year average high dividend yield is 3.87%. The 5 year comes in at 3.67%. I will use the 5 year rate as my required yield because it requests current interest rate conditions better than the last 10 years.
Demanding a yield of 3.67% implies that I will not pay more than $58.86 for this stock. As of Thursday’s close, the price was $61.99. That means a premium of 5.33%.
Graham Number:
Running through the Graham Number calculations, I came up with $57.40. Pretty close to my yield price. The Graham number means a premium of 8%.
Present Value:
For the future P/E, I used the 10 year average which was 10.37. It was lower than the 5 year P/E at 11.02 or the current P/E of 11.50.
For the future EPS growth rate, I looked at the equity growth rates and selected the 5 year rate which was 7.39%. However, I was able to find an analyst estimate for 7%. So I will go ahead and use the more conservative number.
Using these numbers, I came up with a value of $27.17. Whoa. This is way lower than my Graham number or my yield price. This value represents a premium of 128.12%!
Compare my calculations with yours.
Conclusion:
National Bank of Canada’s company fundamentals are quite consistent. Dividend growth rate has been decent and the payout ratio is quite conservative at under 40%.
Two of the valuation methods show a slight premium to close of Thursday’s price. And this premium can easily be made up within 1 year with another dividend increase of 13% (which was achieved last year). However, the 3rd valuation method determined that NA was severely overvalued. Well, 2 out of 3 ain’t bad!
This stock would make a good addition to a dividend yielding portfolio. Do I think we can find a superior dividend yielding stock? More than likely.
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