3 Canadian Bank Stocks for Value and Income Investors

We consider companies with long track records of paying dividends to be among the best possible investments for investors looking for safe and secure income. These companies have demonstrated the ability to raise payments to shareholders through thick and thin. We consider these companies to be blue-chip stocks.

The market indexes are down close to 10% for the beginning of 2022, leaving many blue-chip stocks looking more attractive right now.

One area we think looks especially attractive is the banking industry, specifically Canadian bank stocks. Each looks to be trading at a reasonable valuation and offers a high dividend yield, with a potential growth catalyst in the form of rising interest rates.

This article will examine our three favorite Canadian bank stocks:

  • Bank of Montreal (NYSE:BMO)
  • The Bank of Nova Scotia (NYSE:BNS)
  • Royal Bank of Canada (NYSE:RY)

Bank Stocks: Bank of Montreal (BMO)

First up on our list of Canadian bank stocks is the Bank of Montreal, which was founded in the early 1800s. Over time, the bank has transformed into one of the largest banks in North America. The $74 billion company generates revenue approaching $22 billion annually.

The Bank of Montreal ranks fourth in Canada in terms of assets, giving it a large foothold in the country. The company has also expanded its reach into the U.S. as well. In total, the Bank of Montreal has close to 1,500 branches in North America.

This expansion southward has brought diversification to the company’s business. Canada still accounts for 60% of revenue, but the U.S. now contributes nearly a third.

This contribution is likely to grow. It was announced late last year that Bank of Montreal would be purchasing the U.S. retail business of BNP Paribas for more than $16 billion. This will add $105 billion of assets to Bank of Montreal’s U.S. business, which had $166 billion of assets at the time of the announcement. The deal will expand the company’s presence in San Francisco and Los Angeles markets and should close near the end of this year.

This round of consolidation will make Bank of Montreal the 13th largest bank in the U.S. The company has shown it has a willingness to make purchases to grow its positioning in the U.S. market, something that could continue in the future.

We believe that the company’s positioning as a leading Canadian financial institution coupled with its increased U.S. operations will lead to annual earnings growth of 5.5% over the next five years.

Bank of Montreal paused its dividend for the 2008 to 2011 time period as the company dealt with the impact of the Great Recession. The company has raised its dividend every year since, including a 25% increase for the upcoming Feb. 28, 2022, payment date. Shares yield 3.7% at the moment.

Bank of Montreal is trading at just under 11 times our 2022 earnings-per-share estimate of $10.23. This is very close to the long-term average price-to-earnings ratio of 11.1. At this point, we feel that valuation will be a small tail wind to total returns.

In total, we expect that the Bank of Montreal will provide a total annual return of 9.6% for the next five years. This projection stems from a 5.5% earnings growth rate, 3.7% dividend yield, and a slight contribution from multiple expansion.

Scotiabank (BNS)

Next is the Bank of Nova Scotia, typically referred to as Scotiabank, is the third-largest financial institution in Canada. The company has a market capitalization of $86 billion and produces annual revenue of $25 billion.

Like its peers, Scotiabank has a large Canadian business, with the region contributing more than half of its annual revenue.

Unlike its peers, Scotiabank has really placed a large bet on international markets. The company has the largest international presence of any of the major banks, with more than 40% of revenue coming from outside of North America. This includes countries such as Mexico, Peru, Chile, and Colombia. The less-developed regions of the world does offer a higher risk, but also comes with a greater reward for the company.

The company does have a U.S. business, but this makes up just a single digit of total revenue. This sets Scotiabank apart from its peers as it has seen much of its expansion unfold outside of North America.

Scotiabank is also outspending its peers in terms of technology, which should lead to a smoother digital experience for customers. This could help move new customers to the bank.

Earnings are expected to grow at 5% annually over the next half-decade, slightly lower than the long-term average.

Scotiabank’s dividend was kept the same in just 2009 and 2010 as the bank held its distribution constant less than its peers during that period of time. U.S. investors will see their dividend payments rise nearly 11% for the Jan. 27, 2022, payment date compared to the prior year. The stock offers a high yield of 4.5%.

Scotiabank is trading at just over 11 times earnings estimates of $6.33 for the year. We have a target price-to-earnings ratio of 11.4, in-line with the stock’s average valuation over the last decade. Multiple expansion could aid annual returns by 0.5% per year through 2027.

Therefore, our expected annual returns for the next five year for Scotiabank is 10% due to a 5% earnings growth rate, a starting yield of 4.5%, and a small contribution from multiple expansion.

Bank Stocks: Royal Bank of Canada (RY)

Our last entry in bank stocks to consider is the Royal Bank of Canada, which oscillates between the largest and second largest bank in Canada by assets. The company has a market capitalization of $161 billion and annual revenue of more than $39 billion.

Royal Bank of Canada’s prime competitive advantage is its size. The company has a clear leadership position in Canada, making it one of the most well-known banks in the region. As a result, Royal Bank of Canada holds the No. 1 or No. 2 position in multiple banking categories. This gives the company an entrenched position among consumers that is difficult for other banks to replicate.

This leadership position also extends to the international market, where Royal Bank of Canada is recognized as one of the largest names in the industry. Royal Bank of Canada has also expanded into the U.S., including its purchase of City National Bank in 2015. This business has seen strong growth rates from this area over the past few years.

We expect Royal Bank of Canada to grow earnings-per-share at a rate of 7% annually for the next five years.

The company heled its dividend constant for 2008 through 2010, but has increased it every year since. This includes a 11.1% increase for the Feb. 24, 2022, payment date. The stock offers a yield of 3.4% today.

Currently, the stock trades at 12.8 times our expected earnings-per-share of $8.73 for 2022. This is slightly ahead of our five-year target price-to-earnings ratio of 12.3. Multiple compression could be a 0.8% headwind to annual returns over this period of time.

We project that Royal Bank of Canada will provide annual returns of 9.6% through 2027. A 7% earnings growth rate and starting yield of 3.4% are expected to be partially offset by a small amount of multiple compression.

Final Thoughts

When it comes to banks, we believe that some of the best reside in Canada. The Bank of Montreal, Scotiabank, and Royal Bank of Canada are three of favorite names in the industry.

We project that each name will offer at least high single-digit total returns annually for the next five years. Each stock also offers a dividend yield of at least 3.4% as well.

For investors looking for high quality sources of income, any of these three bank stocks could be strong additions to their portfolio.

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