Dividend Investor Portfolio #24: Banking on Income
1
Dear Investor,
Welcome to the 24th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
1
1
Market-Moving News: September 2, 2024
Stocks ended the turbulent week mixed, as the S&P 500 (SPX) eked out a 0.24% increase and the Dow Jones Industrial Average (DJIA) added 0.94%, posting a fresh record. Meanwhile, the tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) fell 0.92% and 0.74%, respectively, as Friday’s surge wasn’t enough to compensate for earlier losses.
Despite suffering whiplash at the beginning of August and registering significant swings through the month, all four major indexes managed to close the month with gains. For the DJIA and the SPX, August was the fourth consecutive month in the green. The S&P 500 added 2.28% over the month, helped by a surge in consumer staples, real estate, and healthcare stocks.
Now, investors are bracing for September, historically the weakest month for stock market returns. However, the widespread hope is that the Federal Reserve’s pivot to monetary easing will support the stock-market rally going forward.
The latest economic reports painted a near-perfect picture of a still-robust economy, resilient consumer spending, and gradually cooling inflation – which gives the Fed plenty of room to ease its monetary policy gradually. This picture will be tested this coming Friday with the release of the labor-market data, which will be key to the size of September’s rate cut and will influence the scope and pace of the Fed’s further actions.
1
1
This Week’s Quality Dividend Stock Idea
Bank Of Nova Scotia (BNS), aka Scotiabank, is a global financial services provider headquartered in Canada. Scotiabank offers personal and commercial banking, wealth management, as well as corporate and investment banking, and capital markets services.
1
International Expansion Supports Growth
Founded in 1832, BNS has been doing business internationally for more than 100 years. Today, with CAD1.2 trillion (~$890 billion) in total assets, Scotiabank is the third-largest Canadian bank, ranking #37 in the world.
BNS is also the most international of the Canadian banks, with more than 2,000 branches and offices in 50 countries. It has a strong presence across the Americas, the Caribbean region, and Asia-Pacific, while also operating in the U.K. and Ireland. BNS has a diversified business model, serving 10 million customers in Canada and an additional 11 million outside of the country.
The Canadian banking system is considered one of the safest and most stable in the world. It is also very concentrated, with the country’s “Big Five” banks (including BNS) holding over 90% of total assets. While this de-facto oligopoly shields the banks from competition, supporting very high profitability, the trade-off is high regulation in a country saturated with financial services, leaving the largest financial institutions with little room for growth initiatives.
Therefore, Canada’s leading banks seek growth south of the border, whether by opening branches abroad or by acquisitions of local banks. In contrast to most of its peers, Scotiabank has largely concentrated on the underbanked areas in South and Latin America. This strategy is paying off, as was reflected in the bank’s latest quarterly report which showed strong business growth both at home and abroad.
However, fueled by its success overseas, recently BNS has made its first strategic expansion investment, as it doesn’t intend to leave the lucrative U.S. playing field to its competitors. In August, Scotiabank announced it would buy a minority stake in KeyCorp – one of the largest U.S. regional banks – for $2.8 billion, representing approximately 15% ownership. The acquisition will strengthen the Canadian bank’s U.S. market foothold and position it for new opportunities in the world’s most important market. In addition, increasing its U.S. presence can help BNS in its bid to optimize its emerging-market exposure and reduce risk.
1
Low Risk, Strong Capitalization
Scotiabank has a significant retail banking market share in Canada, with a longstanding top three position in loans and customer deposits. That is one of the factors for the bank’s overall low risk, as customer deposits cover about 75% of BNS’ funding. Besides, the bank has a very low loans-to-assets ratio, around half the level deemed appropriate. This adds to the bank’s low-risk status as it signals very high liquidity – which is also underscored by Scotiabank’s moderate loans-to-deposits ratio. The bank’s strong capital position is reflected in its high common equity Tier 1 (CET1) ratio.
The bank has long managed to combine a higher risk appetite than that of its peers – given its high exposure to emerging markets – with very conservative underwriting. Compared to other large competitors, BNS has a lower exposure to unsecured consumer credit within its retail portfolio, with over 94% of retail loans being secured. As a result, despite high exposure to emerging economies, its bad loan ratio is low at 0.8%. In addition, Scotiabank’s allowance for bad loans is more than sufficient, shielding it from possible losses.
On August 27th, Scotiabank released its FQ3 2024 results, which reflected a healthy increase in its Net Interest Margin (NIM) year-over-year. While revenues also rose, net income stayed flat due to higher costs associated with its new strategy. In December 2023, BNS unveiled a new five-year plan aiming at realigning its balance sheet and business lines to achieve higher returns. Canadian banking, Global wealth management, and International banking divisions grew their net incomes year-over-year, compensating for a decline in income from its separate International Banking and Markets segment, which was caused by higher provisions for credit losses and investments to support business growth.
1
Paying Dividends Since The 1800’s
The bank’s strong financials, large market share, and positive prospects support its position as one of the most reliable dividend payers among high-yielding companies.
Amazingly, Scotiabank declared its initial dividend in 1833, and payments have been made without fail ever since. Its current dividend yield stands at 6.3%, triple the average for the Financial sector.
Even though BNS’s yield is high, the bank has been increasing its payout at a CAGR of over 6% in the past decade. Its reasonable payout ratio and strong finances allow for an outlook for further moderate, but steady dividend increases for years to come.
1
Total Return in Focus
Scotiabank’s shares have seen recurring periods of pressure in the past couple of years, which were the result of macroeconomic concerns related to the Canadian and global economy. However, shares have been strongly rising in the past month, as interest-rate pressures on Canadian households have been subsiding, while the local economy is holding up well.
Still, BNS is up by only about 5% year-to-date, with the value proposition still in place as valuations remain very attractive. The bank’s shares trade below the average for the U.S. Financial sector and come in near the bottom of the price range for its Canadian peers in the industry. Moreover, based on its forecasted cash flows, Scotiabank appears undervalued by about 50%.
1
Investing Takeaway
Scotiabank is one of the world’s most stable and solid financial institutions. It is one of the very few companies globally that has been paying dividends constantly for almost two centuries. Given its robust finances, strong market position, solid growth prospects, and prudent management, the bank is expected to continue paying dividends for the foreseeable future. Coupled with its attractive valuation, this makes BNS a valuable addition to long-term income portfolios.
1
1
1
Dividend Investor Portfolio
1
Portfolio News
¤ Qualcomm (QCOM) will go ex-dividend on September 5th. In other company news, QCOM announced the signing of a definitive agreement to acquire 4G Internet of Things (IoT) technology from France-based Sequans Communications. The acquisition is expected to enhance Qualcomm’s Industrial IoT portfolio and reinforce its edge in digital transformation.
¤ Kroger (KR) is scheduled to report its Q2 2024 earnings on September 6th.
¤ BlackRock (BLK) will go ex-dividend on September 9th.
¤ Philip Morris (PM) said it will invest $232 million to expand production of ZYN nicotine pouches at its Kentucky factory. The pouches have experienced surging demand, with sales rising by double digits in recent quarters. However, in the second quarter, the company reported supply constraints, which impacted volume growth. The Kentucky plant expansion, to be completed by the second quarter of 2025, is expected to remedy the supply problem.
1
Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
1
1
Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.60% | +10.21% | $3,821.72 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Sep 10, 2024 | Oct 03, 2024 | 2.16% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
| Amgen (AMGN) | Aug 16, 2024 | Sep 06, 2024 | 2.62% | $9.00 |
| BlackRock (BLK) | Sep 09, 2024 | Sep 23, 2024 | 2.41% | $20.40 |
| Edison International (EIX) | Sep 27, 2024 | Oct 31, 2024 | 3.97% | $3.12 |
| EOG Resources (EOG) | Oct 17, 2024 | Oct 31, 2024 | 3.95% | $3.64 |
| JPMorgan Chase (JPM) | Oct 05, 2024 | Oct 31, 2024 | 2.04% | $4.60 |
| Kroger (KR) | Nov 15, 2024 | Dec 01, 2024 | 2.12% | $1.28 |
| LyondellBasell (LYB) | Aug 26, 2024 | Sep 03, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Sep 12, 2024 | Oct 10, 2024 | 4.59% | $5.20 |
| Qualcomm (QCOM) | Sep 05, 2024 | Sep 26, 2024 | 1.85% | $3.40 |
1
1
1
Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
1
Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
