A Dirt Cheap Canadian Bank With a Massive 7% Yield!

Laurentian Bank of Canada (TSX:LB) looks too cheap to pass up on after dropping nearly 40%.

| More on:

The Big Six Canadian banks are best-in-breed dividend stocks, no doubt about it, but none of them are in bear market territory yet, and that’s off putting for some deep value investors who are looking to score a huge bargain to go with an enhanced dividend yield.

Fortunately, Laurentian Bank of Canada (TSX:LB), a Quebec-based regional bank whose shares now sport a whopping 7% dividend yield after falling 38% from its high, looks to be ripe for picking for contrarian investors on the hunt for the best deals to pick up before 2018 draws to a close.

It’s been a while since I covered Laurentian. In the Spring of 2017, I encouraged investors to take a raincheck on Laurentian in favour of a Big Five bank, which I thought was a better bank for the buck. At the time, Laurentian stock had a modest 4.3% yield, with shares hovering around the $60 level. While Laurentian was a robust dividend-growth stock with steady and growing cash flows, I failed to understand why investors would opt for the regional bank over a cheaper, higher-quality Big Five bank at the time.

Unsurprisingly, since my spring 2017 piece, Laurentian has plummeted over 33%, and is now considerably cheaper than its bigger brothers in the Big Five. The stock’s valuation now makes a lot more sense, but given the recent issues with its mortgage underwriting in the third quarter, investors may want to exercise caution before jumping into the stock head first, even though shares are the cheapest they’ve been in recent memory.

For the fourth quarter, Laurentian clocked in some pretty weak numbers that fell well short of analyst expectations. Net income dropped 13% on a year-over-year basis, and the top line flopped alongside loan growth numbers.

So, you’re getting a great price on Laurentian, but you’re also getting the baggage, which you may end up holding as the market continues to retreat. As such, I’d only recommend dollar-cost-averaging into a position today if you’re enticed by the bountiful 7% yield, which I think will continue to swell further.

The dividend, while artificially high due to the nosediving in shares, is sustainable, as it’s entirely covered by operating cash flows. Moreover, the TTM payout ratio remains conservative at just under 50%, which leads me to believe that Laurentian will continue its dividend growth streak.

Foolish takeaway on Laurentian Bank

At the time of writing, Laurentian stock trades at a 7.3 forward P/E, a 0.7 P/B, and a 1.5 P/S, all of which are considerably lower than the company’s five-year historical average multiples of 11.8, 1.1, and 1.7, respectively. That’s a pretty steep discount to book value, and although the bank has its fair share of issues, I think you’re getting a fairly wide margin of safety at this juncture, even with the “mini mortgage crisis” that was unique to Laurentian.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Dividend Stocks

Hand Protecting Senior Couple
Retirement

These 2 Dividend ETFs Are a Retiree’s Best Friend

These two dividend ETFs could provide retirees with a diversified and stable income stream, while providing some price appreciation.

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Earn $2,000 in Passive Income in 2025 With Less Than $51,000 in Savings

You can invest in Canadian high yield stocks via the Vanguard FTSE Canadian High Yield Dividend ETF (TSX:VDY).

Read more »

monthly desk calendar
Dividend Stocks

This 7.8% Dividend Stock Pays Out Every Month

Not all monthly dividend stocks are created equal. And this top stock is certainly a strong choice for passive income.

Read more »

A worker gives a business presentation.
Dividend Stocks

Is TMX Group Stock a Buy, Sell, or Hold for 2025?

TMX Group (TSX:X) stock has been a consistent wealth-builder, generating 4,630% in total returns since 2002. Should you buy, sell,…

Read more »

Man data analyze
Dividend Stocks

2 Deeply Undervalued Dividend Stocks to Buy in November

Here are two stocks that I view as deeply undervalued this November.

Read more »

Dividend Stocks

The 2 Best Canadian Blue-Chip Stocks to Buy Now

Blue-chip stocks can be some of the best stocks to have in any portfolio. But when they're trending upwards, investors…

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These top dividends stocks have consistently paid and increased their dividends. Further, this trend will continue.

Read more »

dividends can compound over time
Dividend Stocks

Want a 7% Yield? The 3 TSX Stocks to Buy Today

These TSX stocks are offering high yields of over 7%, making them attractive for investors seeking steady passive income.

Read more »