Monday, March 23, 2015

Recent Buy

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.

23 comments:

  1. PIP,
    I really like this buy and I also made a tiny purchase with BNS. The reason was because it is part of my Motif (basket of 10 stocks). Thanks for sharing your new purchase .

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    Replies
    1. Mongrel,

      I probably should have bought into some of the Canadian banks earlier but with the FX rate in my favor now I might have to dabble a bit more north of the border. Motif is definitely interesting and a place I'll have to look more into.

      Thanks for stopping by!

      Delete
  2. Nice buy, PIP. BNS sure looks undervalued at this level and I wouldnt mind adding here myself.

    Best
    R2R

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    1. R2R,

      BNS looks really good here, especially since the FX rate should swing back closer to par over the next few years. I don't expect the USD to stay this strong forever, so there will be a bit of artificial dividend growth for US investors once that happens.

      Thanks for stopping by!

      Delete
  3. Hey PIP,

    Great buy. Couldn't agree with you more. My most two recent buys were BNS. Props to you.

    http://www.monsieurdividende.com/2015/03/recent-stock-purchase-bns-groundhog-day.html

    ReplyDelete
    Replies
    1. Monsieur,

      Thanks so much and BNS seems to be a popular pick. I'd like to add more but capital is very tight currently. Hopefully it'll be loosened up over the next month or two.

      Thanks for stopping by!

      Delete
  4. PIP, are you Canadian? I am seeing a lot of interest in Canadian banks right now in the div/div growth blabbersphere...

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    Replies
    1. FV,

      Nope not Canadian. Born, raised, and still in Texas. The Canadian banks are on sale right now but there's still some risks here. The Canadian economy is tied very heavily to real estate and commodities. Commodities have fallen far but real estate in Canada has done well. BNS has great global exposure so I expect them to be able to weather the current economic climate.

      Thanks for stopping by!

      Delete
  5. Great Purchase! Having BNS on my watchlist too!

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    Replies
    1. My Dividends,

      I'll have to check out your blog when I get a bit more free time. Glad to see you looking at BNS as well. It might be a bit volatile over the next 6-12 months but over the long term I expect BNS to do quite nicely.

      Thanks for stopping by!

      Delete
  6. JC,

    Since I just purchased BNS not long ago myself, I'd have to say I agree here. :)

    We should do well over the long haul, but there could be some speed bumps along the way with the Canadian economy so heavily tied to commodities and expensive real estate. More volatility would just be more opportunity, however.

    Best regards!

    ReplyDelete
    Replies
    1. Jason,

      Yeah I expect the next 6-12 months to be tough but I think this is a great long term opportunity. Figured I just couldn't pass up this chance, especially since the USD is so strong right now.

      Thanks for stopping by!

      Delete
  7. PIP, nice purchase! I continue to like BNS as the current levels. My last purchase was right around this same level.

    ReplyDelete
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    1. StockFox,

      BNS looks really good here, especially since over the long term they should easily be able to handle 6% dividend growth. It might slow a bit this year depending on how quickly oil prices increase to help spur the Canadian economy along but over the next 6-18 months I think it'll be back to business as usual.

      Thanks for stopping by!

      Delete
  8. BNS offering a great yield at 4.32%. With the CAD heading down for months now, I'm still eyeballing this one and keep it on the watchlist for an eventual trend reversal to the upside. As a matter of fact, by the end of this week, could trigger my own personal entry signal to build a starter position. Nice mention of this one BTW. I'm always on the lookout for great yielding stocks. Thanks.

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    Replies
    1. Mark,

      I don't know enough about technicals, so whenever I find a company I like at a solid entry level I try to add shares. But hopefully we can be fellow shareholders soon. BNS should do very well over the long term and the FX issue should correct itself and give a boost to the dividends.

      Thanks for stopping by!

      Delete
  9. Nice buy! Great timing too, although NA is still my favorite Canadian Bank in terms of growth potential! ;-)

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    1. DivGuy,

      I'd like to make another foray into the Canadian banks, especially with the FX in our favor right now. A lot of them seem to have been unfairly beat up at least partially due to the FX issues. Eventually that will reverse but I'll take the buying opportunity that I'm given. Guess I'll have to look more into NA to see what makes them tick. Any recent analysis on them?

      Thanks for stopping by!

      Delete
    2. You can have a look at my article here for a glance: http://www.thedividendguyblog.com/2015/01/05/best-canadian-dividend-stocks-2015/ Didn't run a complete analysis since then, but it's still strong! Let me know what you think ;-)

      Delete
  10. Awesome buy PIP. When I pay my taxes next month. I'm gonna load up on Scotiabank. I was up over 20% and now it's just over a 3% gain for me. It's more valuable now than when I bought it in 2013. My wife's favorite bank. I like TD. Keep it up bud. Thank you for the post.

    ReplyDelete
    Replies
    1. Hustler,

      Speaking of taxes, I need to get those done soon. I expect to get a pretty hefty refund which is good and bad. But hey, at least it'll provide some capital for investment or to build up savings quick and allow for me to cash flow my investments. BNS looks like a great value right now and I think it's been unfairly beat up. Fine by me though. I want to add another CAD bank to my portfolio so TD might be in the mix.

      Thanks for stopping by!

      Delete
  11. Good stuff. Canadian banks screen cheap and carry much better yields than US peers. And I like the backdoor way to play an oil rebound. Even if oil is only 3% of their loan book, it hurts the CAD and creates economic uncertainty. Low-risk way to get oil exposure.

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  12. BNS looks like a good buy here -- congratulations and thanks for sharing the details. I'll need to take a look at this one...

    ReplyDelete