Ever-Growing Yields from Post-Crisis Winners

Anthony Haddad's picture

Tuesday, October 13, 2009 - 1:36pm

by Anthony Haddad

The financial crisis felled some banks.

Others were left crippled and may never recover. Still others were hardly affected at all.

Those institutions are the ones in the best position to profit going forward.

Investors should look at these stable dividend payers for reliable income and capital appreciation.

Canada's banks, for the second year in a row, were rated the strongest in the world by the World Economic Forum. Canadian lenders once again scored top marks as the most solvent among 133 countries.

The United States, for its part, ranked 108th.

No Canadian bank has gone under for nearly two decades. None of the country's banks has requested or received a government bailout. Canada's banks also ranked 5th for investor protection and 3rd for financial-market sophistication.

Canada has six major domestic banks that account for more than 90% of its bank assets. All but one of them, the National Bank of Canada, trade on the New York Stock Exchange. Royal Bank of Canada (NYSE: RY) is the country's largest lender by assets, followed by Toronto-Dominion (NYSE: TD), Bank of Nova Scotia (NYSE: BNS), Bank of Montreal (NYSE: BMO) and Canadian Imperial Bank of Commerce (NYSE: CM).

Name (Ticker) Forward P/E Yield 10-Year Dividend Growth 3-Year Dividend Growth
Royal Bank (NYSE: RY) 13.4 3.8% +316.7% +38.9%
CIBC (NYSE: CM) 11.5 5.6% +172.7% +24.3%
TD Canada (NYSE: TD) 12.8 3.9% +190.5% +27.1%
Scotia Bank* (NYSE: BNS) 13.5 4.4% +164.9% +25.6%
Bank of Montreal (NYSE: BMO) 13.5 5.5% +197.9% +12.9%
*10 year growth number since June 2002

The forward price-to-earnings ratios of these banks are all reasonable, from 11.5 to 13.5. Each of the banks has grown its dividend during the past several years, and at a healthy rate. Dividends yields range between 3.8% and 5.6%.

The Bank of Montreal, one of the banks with a higher yield, offers investors the long view of Canada's banking strength. The Bank of Montreal was established in 1817 and has paid dividends -- get this -- since 1829.

This $27 billion bank has about 1,000 branches in Canada and a presence in the Midwestern United States through Harris Bank, which now accounts for about 10% of the company's revenue.

The bank's size and position put it in a great position to continue to grow. The company's commercial banking segment, its largest business unit, has grown its revenue about +8% this year on an annualized basis. Deposits are up +14% from 2008. And personal loans have grown from C$25.6 billion in 2008 to C$29.2 billion this year.

For the third quarter of 2009, Bank of Montreal earned C$0.96 a share versus C$0.98 for the same period in 2008. Although this number is slightly lower, it's a big improvement from previous quarters. In the first quarter, it earned C$0.39. And in the second, it earned C$0.76.

All signs point to these numbers continuing to improve as the economy improves, and I think the Bank of Montreal is set for continued market-share growth. With a 5.5% yield and a history of increasing its dividends, this a great play on the strength of Canadian banking.

Anthony Haddad does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.