The recent volatility in the stock market has demonstrated the importance of keeping a watch list of stocks on hand. This way, when equity markets crater downward it is possible to move quickly without needing to go into a full analysis of stocks and potentially miss an opportunity.
In accordance with keeping a watch list, it is equally important to keep some cash on hand for short term opportunities. After all, what is the use of watching the stock market without some ammunition to fire when the time is right?
As a result of doing both of the above, I recently purchased 25 shares of Bank of Nova Scotia (BNS).
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Operations
BNS is the third largest Canadian bank by market capitalization. The banking industry in Canada is represented by an oligopoly of huge, well recognized operators. It would be incredibly difficult for a small player to challenge the dominance currently exhibited by the big players. While technology and the rise of internet banking has provided an opportunity to steal market share, what we have seen is consolidation in the form of, for instance, BNS purchasing ING DIRECT’s online bank (2012) and recently rebranding it as “Tangerine”. So, even when a threat emerges, it is quashed.
BNS operates in four business segments; Canadian Banking, International Banking, Global Wealth & Insurance, and Global Banking & Markets. From this, it should come as no surprise that BNS is recognized as the most international of the Canadian banks.
The company has grown to become a significant player in the Latin American financial services market. This bodes well if the emerging middle class is able to develop over time. I believe that as the world becomes increasingly connected through technology that smaller markets are a great place to be positioned.
Valuation
BNS is currently trading with a price-to-earnings ratio of around 10.0. The dividend yield on my purchase price was 4.7%. BNS currently stands with a dividend payout ratio of 47%. Given the company’s commitment to increasing its dividend in the past and its solid earnings position, I expect such increases to continue.
The company reports earnings on August 28, which is bound to cause a spike one way or the other. Here at GRB, however, we do not try to play the earnings. Rather, because I believe BNS is a good value at current prices, I went ahead and claimed my stake in the company. Trying to time events over which I have little indication one way or the other would be, eventually, a losing strategy.
Dividend Growth History
BNS has one of the best dividend growth track records in Canada. The company has increased its dividend in 43 of the last 45 years, which is all the more impressive considering the shakeup of the financial crisis which saw many firms in this sector get demolished. The quarterly dividend payment has grown from the Fiscal 2012 amount of $0.52 to $0.68 at the time of writing, representing just over 30% in total progress.
While the world has certainly grown considerably since, it is well worth noting for interest’s sake that BNS has continuously paid a dividend since July 1, 1833.
Risks
As a major bank, BNS shares a similar risk profile to the other financial service operators in Canada.
The biggest risk to BNS will be whether it is able to leverage its Latin American platform and get things right over the longer term. While I expect these markets to provide a boon to earnings over the decades to come, this is by no means a sure thing. BNS is particularly exposed to the effects of potential global economic slowdowns in comparison with other domestic operators.
Conclusion
Just because the market has been bouncing like a pinball doesn’t mean your portfolio has to. Volatility like we have been seeing is an opportunity to acquire high quality companies at good prices.
Adding BNS to my portfolio is something I have been interested to do for years and finally the market conditions presented themselves to allow this to happen.
The 25 shares of BNS I acquired will add $68 to my annual passive dividend income based on the $0.68 quarterly dividend. At the right prices I will consider adding to this position. However, I will not be overeager as there are other industries I would like to bolster in my portfolio beyond financial services.
Thank you for reading.
– Ryan
What are your thoughts on BNS?
Full Disclosure: Long BNS
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