Tuesday, August 14, 2007

bought some Bank of Nova Scotia

Stay away from the banking sector.......banks are scary right now....subprime is a mess....loan loss potential.....fear.....more fear.....GREAT TIME TO BE A BUYER OF A BANK THAT DOES THE LEAST OF ITS BUSINESS IN THE GOOD OLD U.S.OF A!

I initiated a position today in Bank of Nova Scotia (BNS). Scotiabank is trading far below my fair value estimate, and I believe it might be oversold because of the current debt-related fears in the market. This bank has proven itself to be an exceptional international growth story (operates in 50 countries), while proving to be a reliable and lucrative investment in the process. This play on the developing world, is a perfect compliment to the strong domestic operations of Royal Bank of Canada in my portfolio. Scotia ranks in the top 10 banks in several countries, they are Mexico's 7th largest commercial bank.

BNS is the most efficiently run Canadian bank and probably has the least U.S. exposure of any of the big five. Scotiabank is probably the strongest large Canadian bank in terms of growth, while today it is yielding around 3.8%, which I like because you are getting some growth as well as a nice 'value-oriented' dividend yield. Their record of dividend increases has been phenomenal long term, with their latest year over year increase clocking in at 16.7%.

Return on Equity is over 21% and has been on the rise, while debt levels are very low at a debt/equity of 0.17%. The bank has a modest payout ratio of around 41%.

As far as valuation goes Scotia has been been good value for months. P/E is currently around 12, with a forward P/E of 10.8. In a recent post I described how I like the bank below $52, obviously I was very happy to pick this one up at $47.56 today.

Recently some of these banking stocks including Bank of Montreal, Royal Bank of Canada, Bank of America, etc. have been trading as if the subprime mess is going to actually cause their earnings to plummet for several quarters or even years, while their dividends are halted or even cut. I don't believe this to be the case with Bank of Nova Scotia. If the market continues to sell BNS based on these fears I will not hesitate to pick up more lower down.

The world economy is still strong and BNS will continue to benefit from the growth of the developing market as well as the strong Canadian economy. The bank could very well be hurt by the trickle down affect of all of the subprime losses and fears, however I would rather be buying at a time of fear than a time of exuberance in the market. Over the last full year Scotia's stock has returned a paltry 2.6% before dividend, despite its great operational performance, dividend increases, and gains all over the board.


FourPillars said...

If this isn't a dip then I don't know what is...

Middle Class Millionaire said...

I've also been taking a hard look at BNS. It's impossible to pick the bottom but I think in 5 years your going to look pretty smart for buying when everyone else was selling.