Several Canadian banking stocks have generated inflation-beating returns to shareholders in the last two decades. The Canadian banking sector is extremely regulated, allowing the big banks to benefit from entrenched positions and steady market share.
Further, a conservative approach towards lending has ensured banking leaders in the country maintain dividends across economic downturns such as the financial crash of 2008 and the COVID-19 pandemic, showcasing the resiliency of their cash flows.
In this article, I’ll compare two big TSX banks: Bank of Nova Scotia (TSX:BNS) and Bank of Montreal (TSX:BMO), to see which is a better buy right now. In the last 20 years, BNS stock has returned 340% to shareholders after adjusting for dividends. In this period, BMO stock has surged over 430%.
Is BMO stock undervalued?
Bank of Montreal has diversified businesses that deliver resilient and robust earnings. For example, its premium commercial banking franchise has a top-four market position in North America, while its personal banking business enjoys a strong deposit base and growing market share. A high-margin wealth management business offers diversification, and its global markets business is well-positioned for growth.
Over the years, BMO has established a highly profitable banking business in Canada. It is a top 10 bank south of the border, the largest economy in the world. In the U.S., BMO has a presence in key growth markets and a digital platform that extends its footprint nationally.
BMO is well capitalized with strong credit ratings. It is also the longest-running dividend-paying company in Canada. BMO currently pays shareholders an annual dividend of $6.04 per share, indicating a yield of 4.8%. These payouts have risen at an annual rate of 7.7% annually in the last 27 years, enhancing the effective yield significantly.
With $1.29 trillion in total assets, BMO is too big to fail and trades at a forward price-to-earnings ratio of 10.3 times. Comparatively, BMO expects to increase its earnings between 7% and 10% annually in the medium term. The TSX bank stock trades at a discount of 7% to analyst price target estimates.
What is the target price for BNS stock?
In addition to Canada, BNS is gaining traction in emerging markets such as Latin America, which will be a key earnings driver in the upcoming decade. While Latin America’s economy is forecast to grow at a higher pace, the risks associated with these regions are elevated, driving BNS stock lower by 32.4% from all-time highs.
During the recent earnings call, BNS explained Chile and Peru are in the midst of modest economic contractions, forcing central banks in the region to lower interest rates. Moreover, it expects economic growth in the two countries to rebound in late 2024.
BNS also expects Mexico to grow its GDP (gross domestic product) by more than 3% in 2024 and 2025, higher than estimates for Canada and the U.S.
Bank of Nova Scotia has emphasized it needs to shore up its balance sheet, which is weaker compared to its Canadian peers, and recently announced plans to improve its business performance in fiscal 2024 (ending in October).
BNS pays shareholders an annual dividend of $4.24 per share, translating to a forward yield of 6.6%. Priced at 10 times forward earnings, BNS stock is also cheap and trades at a discount of 4% to consensus price target estimates.
