Whenever I make a new purchase for my portfolio I feel it's only fair to get a post written giving all of the juicy details. I want to be as transparent as possible with my journey to reach financial independence through dividend growth investing. Being open about the moves I make allows for better discussion with all of you and helps spread ideas around as well as letting me create my own "investing journal" to chronicle why I purchased a company in the first place and that way I can revisit if something changes and make the decision on whether to continue owning the company or not.
Purchases for my FI Portfolio should slow down over the next month or two, although I still currently have enough capital for one larger purchase or two smaller ones. Of course there's also future dividend payments coming in each month which will help to build up my capital and allow me to make regular purchases. The great thing about having a fairly sizable portfolio already is that I can expect it to churn out over $1,300 per quarter in cold, hard cash. I get to use that dividend stream for whatever needs I have, whether that's build up savings or capital for future investments. I'm always on the lookout for opportunities to purchase high quality companies at solid long term valuations and have a few other companies in mind for potential candidates to add to my portfolio.
On March 16th I initiated a new position in Bank of Nova Scotia (BNS). I purchased 25 shares for $49.97 per share. After commission my per share cost basis came to $50.29. Based on the current quarterly dividend $0.5406 per share this lot will provide $54.06 in annual dividends and carry a YOC of 4.32%. The current quarterly dividend announced by BNS is set at $0.68 CAD. Based on the CAD to USD exchange rate of $0.80 CAD to $1 USD the quarterly dividend would be $0.5406.
BNS weathered the financial crisis quite well but that's not to say that there won't be an issue in the future. The Canadian economy is tied very heavily to the oil and gas sector which has been hit very hard over the last 6-8 months as the price per barrel of oil has declined. However, it's important to keep in mind that the loan portfolio of BNS is limited in exposure to the oil and gas sector as loans there only account for 3% of their portfolio. Even if BNS is not directly effected by the oil and gas sector through loans there could be fallout from the decline in the sector that leads to higher unemployment and possibly issues across the other segments of BNS' operations.
The reason I chose Bank of Nova Scotia for my first foray into the Canadian banks is because of their broad international exposure as they serve over 21 million customer in 55 countries. Over half of BNS' net income in 2014 came from Canada with 7% from operations in the US and 37% from other international sources. Bank of Nova Scotia has exposure to both Central and South America among their international ranks which offer some great long term prospects for banks as the population is generally under-banked with an increasingly educated workforce and a growing middle class. With population and economic tailwinds, Central and South America should help propel BNS over the next several decades.
The 10 year revenue growth rate is 8.93% with net income increasing at a 9.21% rate. The payout ratio has been very steady over the last 10 years between 41% and 50% except for in FY 2008 and 2009 when the payout ratio jumped to 63% and 59% respectively. The TTM P/B ratio sits at 1.7 which is less than the five year average of 2.1. The current dividend yield is also well above the five year average of 3.9%. Return on equity has decreased over the last 10 years from 21.1% down to 16.2%, but has been fairly stable over the last 2 years.
I also like to value companies with a Gordon Growth Model calculation. Based on the current quarterly dividend of $0.54 with an 10% discount rate and my purchase price of $50.29 BNS would need to provide 5.47% annualized dividend growth. Rearranging the GGM and solving for the fair value with a 6.5% growth rate yields a fair value of $65.73. My purchase price is well below the fair value price provided by the Gordon Growth Model and the required growth rate is over 1% lower than the 5 year dividend growth rate of 6.62%.
Another thing working in Bank of Nova Scotia's favor is that the Canadian dollar has slipped versus the US dollar. Currently the CAD is about 0.80 USD whereas over the last 5 years it has generally been between 0.95 to 1.05. Assuming an exchange rate of 0.90, which is still less than historical rates, with a 10% discount rate and 6.5% annual growth gives a value of $74.55. As the exchange rate normalizes the dividends received from BNS will grow as well less of the dividends are "lost" in the exchange.
My forward 12-month dividends are up to $5,554.79 excluding shares of my company's stock that I receive through the ESPP program at work. Total taxable accounts', Loyal3 and FI Portfolio, forward dividends are at $5,585.67.
I've updated my Portfolio page to reflect this addition.