Attractive Dividend Yields in Canadian Financials

Published Tue, 20 Oct 2015 11:00 CET by

Over the last few months, the global economic environment has been challenging, forcing the Bank of Canada to cut interest rates twice within 2015. Forecasts for growth in the Canadian economy are modest due to the strengthening US economy and a weaker Canadian dollar that is expected to drive export growth. Also, declining commodity prices, especially oil, are sustaining economic uncertainty, creating a fairly volatile market.
The S&P/TSX Composite is an index of the stock prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization, serving as the basis for multiple sub-indices, including the S&P/TSX 60. The index comprises of many dividend-paying stocks with an average yield below or around 3%, yet with strong operating performance to support dividend sustainability.
This article discusses three S&P/TSX Composite Index stocks that trade in the financial sector. Financials account for the 36.28% of the TSX Index and the three stocks analyzed are in the top 10 of the Index in terms of market cap. The average D/E ratio of the three companies is 0.12, while their average payout ratio is 37.4% and their average dividend yield is 3.21%. Also, their average beta is 0.80, suggesting top-tier safe choices for dividend investors.

Royal Bank of Canada, The Bank of Nova Scotia and The Toronto-Dominion Bank YoY Performance Graph
Royal Bank of Canada (TSX: RY) is a financial services company that operates through Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services, and Capital Markets segments to provide financial products and services directly to institutional and retail customers both in Canada and worldwide.
Strong Q3 Results: the Q3 2015 results reflect record earnings in the Personal & Commercial Banking segment with $1.28 million, up by 12.6% YoY ($1.14 million in Q3 2014) and 6.7% QoQ ($1.2 million in Q2 2105) in Canadian banking and $42 million in the Caribbean & U.S Banking. This is a significantly improvement compared to the net loss of $47 million in Q3 2014. The Caribbean Banking results highlight improved credit performance, progress from RY’s restructuring activities and the benefit of a stronger U.S. dollar. In addition, RY reported a total net income of $2.48 million, up by 4.1% from $2.38 million in Q3 2104. Overall, the company’s results reflect solid volume growth of 6%, including loan growth of 5% and deposit growth of 7%. On the downside, the markets were more challenging in the third quarter, resulting in lower fixed income and equity trading, with the net income of the Capital Markets segment being down by 17.6% YoY, $545 million from $641 million in Q3 2014.
Dividend Policy: Royal Bank of Canada has raised its dividend by 2.6%, bringing it to $0.79 per quarter, or $2.45 annualized. From 2000 to 2015, the company has increased its dividend payment by 485% (from $0.135 to $0.79), suggesting an underlying strength across RY’s segments while maintaining a strong credit and capital position. Analysts estimate an average EPS of $5.22 through 2017, down by 20.5% from current EPS of $6.57, and a 5-years average annual earnings growth of 10%. On the upside, Royal Bank of Canada has achieved a good credit and market risk performance as a result of portfolio diversification in terms of geography and industry.

The Bank of Nova Scotia (TSX: BNS) is a financial services company providing diversified personal, commercial, investment and corporate banking products and services to retail and institutional clients both in Canada and around the world. Currently, BNS operates a network of 1,040 branches and 3,942 ATMs.
Strong Line Results: in Q3 2015 results, BNS reported strong results in Canadian Banking with a net income of $863 million, up 4.1% QoQ ($829 million in Q2), mainly as a result of a longer quarter and growth in both assets and deposits, partly offset by higher non-interest expenses. Net income of International Banking was $537 million, up by 10.3% QoQ ($487 million in Q2), mainly due to a longer quarter, strong operating performance in Latin America, acquisitions in Peru and Chile, and higher contributions from Asia.
Dividend Policy: currently BNS delivers an annualized dividend of $2.10 while, from 2000 to 2014, the company has increased its dividend by 156% ($1.00 to $2.56).
Future Outlook: the restructuring of BNS in 2014 has generated benefits of approximately $40 million YTD, with roughly another $20 million expected in Q4 2015. These benefits, along with other initiatives, are expected to fund BNS’s investment in technology in order to drive a more efficient Bank. Furthermore, The Bank of Nova Scotia seeks to capitalize on commodities that make up for more than 90% of Canada’s GDP, excluding mining, oil and gas and expects good growth in the transportation, agriculture and manufacturing sectors, that could drive global growth for commodities. Through 2020, analyst forecast an annual earnings growth of 12% and an average EPS of $4.52.

Name Price (CAD) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap (CAD b) P/E D/E Payout Ratio
Royal Bank of Canada 74.02 68.05 83.87 8.77% -11.74% 106.83 11.3 0.12 37%
Bank of Nova Scotia 60.20 52.60 71.17 14.45% -15.41% 72.69 11.3 0.12 39%
Toronto-Dominion Bank 52.35 51.04 35.93 2.57% 45.70% 97.05 12.6 0.13 36%

The Toronto-Dominion Bank (TSX: TD) provides personal and commercial banking, wholesale banking, wealth management, and insurance to institutional and retail customers through a network of 1,165 branches and 2,867 ATMs.
Strong Customer Relationships: in Q3 2015 results, Canadian Retail delivered a net income of $1.6 billion, up by 11% YoY as a result of high-quality customer service that led to increased loan deposit and wealth asset volume growth and strong insurance earnings. TD Canada Trust was acknowledged for the tenth consecutive year by J.D. Power for achieving “Highest in Customer Satisfaction Among the Big Five Retail Banks”. TD puts an emphasis on building strong customer relationships in order to enhance its position compared to its peers, going forward. Net income for Wholesale Banking was $239 million, up by 11% YoY, mainly as a result of stronger trading and a growing U.S portfolio.
Future Outlook: Currently, TD’s D/E ratio and payout ratio are low, suggesting a financially strong company. This is further sustained by the fact that the restructuring that took place in 2014 has made The Toronto-Dominion Bank more effective and has lowered the rate of expense growth. The company’s focus remains on permanently improving its policies in order to deliver the highest shareholder value by managing risk and capitalizing on investment opportunities. Q3 2015 results suggest the earnings power and TD’s flexibility in managing a challenging economic environment, while increasing its productivity. Analyst consensus estimates an average EPS of $3.69 through 2017, down by 12% of current EPS of $4.19 and an average earnings growth of 12% annually for the next five years.