Canadian Bank Stocks Rock

On the global stage, Canada is a minor player. And going by the numbers, you may not expect much on the economic front: with a population (36 million) less than California, Canada ranks 10th for gross domestic product (GDP); and 32nd for GDP per capita. But numbers alone don’t tell the whole story. The thing is, on several fronts, seemingly polite Canadians don’t hesitate to punch well above their weight.


Incredible Cash Machines

For those with a long term investing horizon (that should be everyone, since investing is a long game), who believe that capitalism is going to stick around awhile, the population will grow owing to domestic baby creation, immigration, and ever increasing life spans, and that consumers and businesses will continue to rely on financial institutions … you can’t go wrong with the big five Canadian banks.

These are hulking, multinational corporations operating in a well-regulated (i.e., government oversight) home environment. These are companies that churn out profits to the tune of 1 to 3 BILLION dollars every three months. And who give back to shareholders in the form of dividend increases and share price growth.

On a stock risk/return measure, there isn’t a much safer bet.

banks-nat-hansen-031517_frame_76


Closer Look

  • Consider Royal Bank of Canada (TSE:RY)(NYSE:RY), Canada’s largest bank with a $137 Billion market value. Though more than half of its revenue is generated from domestic operations, this is expected to change in the near future as RY has significant American based operations, as well as conducting business in 35 other countries.

Adjusted for stock splits, in 1998, RY traded above $22. Today, it’s trading at $92. And while you’re enjoying the stock ride, every quarter the bank pays a healthy dividend to shareholders. During the past 17 years, dividend payments have increased from 13.5 cents per share to 0.87 cents per share. Typically, dividends are increased twice/year, because they make so much money! Currently, the percentage dividend payout is about 3.75%.

  • Next up is Toronto-Dominion Bank (TSE:TD)(TSE:NYSE), nipping at the heels of RY with a $118 Billion market value. TD also maintains a large American presence and is now counted among the top 10 banks in the USA.

Adjusted for stock splits, in 1998, TD traded at above $8. Today, it’s trading at $63. Like RY, dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from 10.5 cents per share to 0.60 cents per share. Currently, the percentage dividend payout is about 3.8%.

  • Bank of Nova Scotia (TSE:BNS)(NYSE:BNS) is the most international of the Canadian banks. With a market value of $92 Billion, BNS operates in 55 countries not including the USA.

Adjusted for stock splits, in 1998, BNS traded at $34. Today, it’s trading at $76. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $1.00 per share to 2.88 per share. Currently, the percentage dividend payout is about 4.0%.

  • Bank of Montreal (TSE:BMO) (NYSE:BMO) sports a market value of $61 Billion and has substantial US operations.

Adjusted for stock splits, in 1998, BMO traded at $32. Today, it’s trading at $93. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $0.25 per share to 0.90 per share. Currently, the percentage dividend payout is about 3.8%.

  • Canadian Imperial Bank of Commerce (TSE:CM)(NYSE:CM), weighs in at $42 Billion market value. Outside of Canada, CM has operations in the USA, Europe, Asia, Australia, Latin America, and the Caribbean.

Adjusted for stock splits, in 1998, CM traded around $36. Today, it’s trading at $106. Dividend payments commonly increase twice per year. During the past 17 years, dividend payments have increased from $0.33 per share to 1.27 per share. Currently, the percentage dividend payout is about 4.8%.


What To Buy and When

You’ll get opinions all over the map on the issue of which bank stocks offer the best investment potential. Although I’m not about to throw my hat in the ring here, I will say that sound arguments may be made for any of the banks listed in this post. And if you can’t decide which one belongs in your shopping cart, then you may want to opt for one of the following exchange traded funds (ETF):

  • ZWB, Covered Call Canadian Banks, issued by Bank of Montreal, currently pays a +5% yield with a 0.72% management fee.
  • XFN, S&P/TSX Capped Financials Index, issued by iShares, currently pays a 3% yield with a 0.55% management fee.

images


The Magic Key: BUY ON SALE!

Whether you buy an individual bank stock or an ETF, your portfolio will greatly benefit from patience.

Currently, bank stocks are trading at about 10% off their 52-week high. This is what I call a middling discount. It’s a decent entry point and you’ll do well in the long run. But you’ll do better if you wait for a deeper discount like what was on offer in January, 2016, when bank stocks were beaten up, so much so that their dividend yields were between 4.5% – 5%, which is a fantastic yield for companies of this quality and size.


If You Can’t Beat ‘Em, Join ‘Em

Sure, there are valid complaints about bank fees and services, and sometimes banks do jump offside, strong arming consumers to pay for unnecessary services. And that’s a topic for another day. For now, from a practical investor perspective, it sure is worth your while to own some of these incredible money making machines.

Think about it: you know those monthly fees you pay out of pocket? Well, wouldn’t it feel better to take from the bank’s pocket, in the form of quarterly bank dividends, to cover the cost of those fees and more? That said, as good as it feels, there are bigger issues at play than taking satisfaction from reaping financial revenge.

Canadian banks offer boringly, consistent profitability. When financial institutions around the world were melting down in 2007-2009, Canada was held up as the model banking system and its banks as the model banks. Yes, Canadian bank share prices were hammered during this time but that was only because investors predictably panicked (in retrospect, this time period was an extraordinary buying opportunity). The banks themselves were never at risk of harm.

Boring isn’t a problem. In the world of investing, boring is often exactly what you want. You want the unassuming turtle portfolio that grows little by little, year after year. The one that makes you wealthy.


unknown

Enter Buddha

Be patient and wait. Ordinarily, the mind does just the opposite. Grumbling for that which has not happened. Complaining, not grateful. Desiring instead of creating the capacity to receive. Create the capacity to receive and much will happen.

 

Are Banks Evil?

Sure, I know, the title brings up images of smarmy, briefcase carrying men dressed in pin striped suits, black polished shoes, and a smirk who play the system for their benefit, take risky gambles with other people’s money knowing they can rely on a government safety net to bail them out should any bets turn sour, or turn a blind eye to Rocky Mountain size bags of cash deposits the source of which happens to be drug money proceeds

And the image sticks. Not least owing to gobs of money paid annually to self-professed masters of the universe whose respect is reserved for money and power. Is the image well deserved?

Well, the 99% might think so, not least because the American financial industry was exposed in 2008 as a glorified Ponzi scheme that eventually collapsed and sunk Western economies into the deepest recession since the 1930s. Oh, and those gazillion dollar payouts to the bank’s head shmos?  These certainly do nothing but reinforce the perception that bankers are self-absorbed, greedy, icky people.

Talking Numbers

What kind of money are we talking about? Check out a sampling of recent compensation packages bestowed on the head shmos:

  •  JP Morgan Chase. Jamie Dimon. $27 million (2016)
  • Goldman Sachs. Lloyd Blankfein, $22.6 million (2015)
  • Morgan Stanley. James Gorman, $21 million (2015)

Sure, you could say, are you $%#*&! kidding me? But before you do, know that Gorman’s compensation represents a pay cut of $1.5m, and Blankfein lopped $1m off his total compensation as compared to the prior year. Shedding tears, anyone?

Look north to Canada’s biggest banks, as measured by market value, and you’ll see how poor the Canuck commanders are compared to their American neighbors:

  • TD Bank. Bharat Masrani, $9 million (2015)
  • Royal Bank of Canada. David McKay, $11 million (2015)
  • Scotia Bank. Brian Porter, $11 million (2015)

Do Canadians settle for less because they’re too nice (in that Canadian way) to ask for compensation on par with New York’s elite ? When the numbers are this big, do we care? Not really.

How Much is Enough?

Evil Banker Guy: ‘Hey, BuddhaMoney, there’s always two or more sides to a story, you know what I’m saying? Maybe these guys are rewarded for being the best in the world, top notch leaders who treat their employees fairly, grow their business well and, as a result, benefit shareholders with increasing share value and regular dividend increases. You ever think about that before spouting off?’

You may be right on point there, Evil Banker Guy. Still, if you’re bringing home that kind of dough, you’re rich. Stinking rich. So, in an attempt to understand, because we here at BuddhaMoney like to think, reflect, and understand the world that we live in, I have to ask: what drives a person  to want more and more and more money?

To shine some light on the matter, what do you say we invite into the discussion a certain guy named Warren Buffett. Like the bankers (though he’s not a banker), he too is a rich guy. I’m talking … beyond-your-dreams-it-would-take-thirty-six-lifetimes-to-spend-all-this- money-rich.

For about 50 years, Buffett and his partner, Charlie Munger, have been at the helm of an extraordinary company named Berkshire Hathaway (BRK:NYSE). So extraordinary that if you had bought $1,000 worth of BRK way, way back in 1964, it would be worth more than $11 million today. Holy doodles!

And you know what? For the past 25 years, these two dudes, Munger and Buffett, they’ve been taking home a salary of $100,000. For what they do, that’s peanuts. Nah, peanut shells. No question, they could choose to take soooooooo much more money. But they don’t. And to tell you why, here’s Buffett himself speaking in his 2015 annual letter to shareholders, talking about who will eventually replace him as CEO (Buffett is 86 and still going strong):

“[The next CEO] will be plenty wealthy so don’t complain about pay. And don’t be greedy. It’s important that neither ego nor avarice motivate [the next CEO] to reach for pay matching his most lavishly compensated peers, even if his achievements far exceed theirs.”

Is Buffett a finance / investor / all around human being superhero to me? Ah, come on, you already know the answer to that one.

(http://buddhamoney.com/financial-freedom-and-balance/is-warren-buffet-buddha/)


unknownEnter Buddha

Greed is one of the three poisons. A dangerous toxin; the source for unquenchable thirst for more and more possessions. Greed is often manifested by stinginess, lack of compassion, hoarding or self-indulgence.  When one suffers from greed, one lives in a state of delusion, having become attached to material things, believing that more is better, and that material possessions will bring happiness.

poisons


So What If Bankers Are Evil?

Do we care if bankers are evil? I don’t ask the question flippantly. And my intention is not to minimize the impact of rich, powerful people who negatively affect the common good. Because ethics matter. Values matter. Right actions matter. For the individual, the community, society at large. We’re all in this game of life together, affecting each other in small and large ways.

But we BuddhaMoney folks aren’t fond of complaining. When a complainer-whiner-why-aren’t-I-getting-my-share person gets going, they kinda suck the energy out of a room, content to grumble rather than take action to change the situation.

BuddhaMoney folks have a constructive attitude. When they’re ticked off about what’s happening in their world, they size up the situation, brainstorm a plan for moving forward, and then do what needs to be done.

What can you, as an investor, as someone who is building your wealth and your financial freedom, DO about bankers driven by ego and greed?

First, put a smile on your face. Smiles are known to bring about Balance, and other juicy feelings. Second, shrug at the knowledge that some bankers earn more in a year than you will in a lifetime. So be it. Third, to better your financial position, consider BUYING BANKS!

Go Shopping for Banks

As an investor looking for steady-eddy-retirees-can-rely-on-this-and-it-pays-a-healthy-dividend kind of stocks, I’m all for banks. Not just any bank though. You should be picky.

You should invest in financial institutions whose business is largely made up of deposit taking and mortgage lending, who pride themselves on solid risk management, returning capital to shareholders, and have a history of efficient, profitable operations.

In other words, companies that engage in good ole’ fashioned boring, boring, boring banking business. The kind of companies who avoid  business activities that make for screaming headlines, have a long history of increasing dividend payouts, and whose share price gradually increases most years.

And when you find a bank like this, be sure to buy ONLY when shares are on sale. So that excludes the present time given the outrageous run-up in share prices of many financial institutions since the US presidential election. Be patient and wait for a pullback in share price, which is only a matter of time.

Check Your List Twice

If buying individual stocks is not for you, and you want to add specific exposure to the financial sector, then look at Exchange Traded Funds (ETF) such as:

  • iShares U.S. Financials (IYF). This ETF holds shares in 286 financial companies listed on U.S. stock exchanges and charges a management fee of 0.44%.

(https://www.ishares.com/us/products/239508/ishares-us-financials-etf)

  • Vanguard Financials ETF (VFH). This ETF holds shares in 402 financial companies listed on U.S. stock exchanges and charges a management fee of 0.10% – Vanguard’s fees are phenomenally low!

https://personal.vanguard.com/us/funds/snapshot?FundId=0957&FundIntExt=INT


For exposure to Canadian financials, review these two ETFs:

  • iShares S&P/TSX Capped Financials Index ETF (XFN).

This ETF holds shares in 27 financial companies listed on Canadian stock exchanges and charges a management fee of 0.55%.

https://www.blackrock.com/ca/individual/en/literature/etf-summary/xfn-summ-doc-en-ca.pdf?nc=true&siteEntryPassthrough=true

  • BMO S&P/TSX Equal Weight Banks Index ETF (ZEB)

This ETF holds shares in only the top 6 Canadian banks, measured by market capitalization, and charges a management fee of 0.62%. Basically, it’s a bet on the Canadian banking system. That said, if history is any guide, it’s a safe bet given the historical performance of Canadian banks. An investment in this ETF near the end of 2009 would have seen you nearly double your money by today.

https://www.bmo.com/gam/ca/advisor/products/etfs#fundUrl=%2FfundProfile%2FZEB%23overview


If you’re comfortable with the volatility of individual bank stocks, and have a long-term investment horizon, then consider these stocks on the New York Stock Exchange:

  • Wells Fargo (WFC:NYSE)
  • US Bancorp (USB:NYSE)
  • Bank of New York Mellon Corp. (BK:NYSE)

The following Canadian banks are dually listed on the Toronto Stock Exchange and the New York Stock Exchange:

  • Bank of Nova Scotia (BNS:TSE) (BNS:NYSE)
  • Royal Bank of Canada (RY:TSE) (RY:NYSE)
  • Toronto-Dominion Bank (TD:TSE) (TD:NYSE)
  • Bank of Montreal (BMO:TSE) (BMO:NYSE)

Solid Foundation

Keep in mind what I mentioned above: financial stocks have had a wild run since November, 2016, and many are now trading near their all time highs.

Sure, you have some talking heads salivating at the prospect that financials will continue to charge ahead, higher and higher. And that may happen. Still, the safer course of action is to be patient and wait for a market correction before bringing banks into your portfolio. You won’t rake in +$10m/year but if history is any guide, as a shareholder, you will reap the trickle down reward: increasing share price and generous dividend payments. The result being a solid asset foundation and income generator for your portfolio.