Investing in Bank of Nova Scotia stocks

Savvy investors agree that bank stocks can be one of the most stable investments. Apart from their stable nature, bank stocks can provide long-term growth and depending on the bank stock, may also give stable returns. Among the bank stocks you can invest in in Canada, stocks of the Bank of Nova Scotia are of particular interest.

Since Bank of Novia Scotia has consistently counted itself among Canada’s Big Five banks, investing in some of its stock can help individual investors reach their financial goals and diversify their investment portfolios easily.

In this article, Wealth Professional delves into whether Bank of Nova Scotia stocks are worth an investor’s time and funds. We get into important questions for investors and advisors: is Bank of Nova Scotia a good stock to buy? Does Bank of Nova Scotia stock pay dividends? Let’s get into it.

What are the indicators you should look at in a bank stock?

There are a few important indicators that investors should always look at before buying bank stocks. These include:

• Market capitalization (market cap) is the value of all a company’s shares.  A company’s market cap can be a good indicator of its growth potential and can give investors a better picture of a company’s standing relative to its competitors.

market cap = total number of outstanding shares x share price

• Price-to-book or (P/B) value ratio is a ratio that compares the current market cap of a company with its accounting value. A company’s stock is deemed a good investment if it has a low P/B ratio, since this means they are paying less for the actual book value of the stocks.

P/B value ratio = company’s stock price per share ÷ book value per share

• Price to Earnings (P/E) ratio is the ratio that shows whether the company’s stock price is higher or lower compared to the company’s revenues.

P/E ratio = current share price ÷ earnings per share (EPS)

• Earnings Per Share (EPS) can be used as an indicator of how much money a company earns for each share of stock. In many cases, the EPS can be a reliable measure of a company’s value.

EPS = (net income – company's preferred dividends) ÷ number of outstanding shares

• Dividend Payout Ratio (DPR) shows how much a company pays out to investors in dividends compared to the earnings of the stock. The DPR is an indicator of a company’s earnings and how well it can cover dividends.  

DPR = annual dividend per share ÷ EPS

• Dividend yield is the amount that a company pays relative to its stock price. In most cases, companies pay dividends yearly although quarterly dividend payments are not unheard of.

Dividend yield = annual dividend per share ÷ price per share

A look at Scotiabank’s key indicators

Now that we know the indicators, how does Scotia fare? Here's a rundown of its key indicators.

First, let’s look at market cap over the last 4 years:

Whether or not to invest in a bank stock like Scotiabank, it helps to get historical look at the bank’s market cap. It bounced back from a decline in 2022, and its revenue appears to be on the uptrend. Resilience and quick recovery can be an indication of a good bank stock.

Scotiabank P/B Value Ratio: 1.05 (as of March 2024)

With a relatively low P/B ratio, this is another indication that investing in Scotiabank stock now would be a wise investment decision. While the price of the stock now may cost less than its actual value, it’s best to look at the other indicators.

Scotiabank P/E Ratio: According to its latest financial report, Scotiabank’s P/E ratio is at 10.5. The average P/E ratio would be from 20 to 25. Scotiabank’s P/E ratio is rather low, again making it a good indicator for investors.

Scotiabank Dividend Payout Ratio: As of March 2024, the dividend payout ratio for Scotia is 0.63%. Historically, Scotia’s D/P ratio reached a high of 0.67% for a 13-year period. The median was 0.48%.

A higher D/P ratio means that a company is more likely to pay out dividends due to strong earnings. But Scotia may be reinvesting more of its earnings to induce growth.

Scotiabank Dividend Yield: According to Wall Street analysts, Scotiabank’s dividend yield as of April 2024 is at 6.2%, with its dividends per share and dividends growing steadily for the past 10 years.

Other analysts have already listed Scotiabank as one of the Toronto Stock Exchange’s dividend aristocrats for 2024. This should not come as a surprise, since Bank of Nova Scotia dividends have been paid out since 1832.

History of the Bank of Nova Scotia

The Bank of Nova Scotia (TSX: BNS) is among the Big Five banks of Canada. The list includes:

• Royal Bank of Canada (RY)
• Bank of Montreal (BMO)
• Toronto-Dominion Bank (TD)
• Canadian Imperial Bank of Commerce (CM)

When did it all start for Bank of Nova Scotia? Here’s a short history of BNS, Scotiabank or Scotia, as it’s now commonly known.

Scotiabank was founded in Halifax, Nova Scotia, in 1832. Halifax was a British colony at the time, and the bank was established by the Legislative Assembly of Nova Scotia.

The Bank of Nova Scotia was set up to manage trans-Atlantic trade that went on in that period. In 1883, the Bank of Nova Scotia made its first expansion by purchasing the Union Bank of Prince Edward Island. From then on, much of the bank’s expansion consisted of opening new branches, until it opened offices in the American Midwest.

Here are other milestones in Scotiabank’s nearly 200-year history:

2000: Scotiabank expands in Mexico by acquiring a majority in Grupo Financiero Inverlat
2003: completes full acquisition of Grupo Financiero Scotiabank Inverlat and secures a license to deal in Chinese currency, marking a significant international expansion
2007: acquires a 25% stake in Thailand's Thanachart Bank, further expanding its Asian market presence
2014: purchases ING Direct Bank of Canada for $3.13 billion, significantly boosting its Canadian market share
2024: establishes Cedar Leaf Capital, the first Canadian investment dealer owned by Indigenous peoples

A long history of acquisitions, mergers, and bouncing back after turbulent times are indicators of a good bank stock.

Scotiabank also has investments in other capital markets like those in Asia and Latin America, making it a diversified stock. However, investors should not base their investment decisions on a bank’s resilience and diversification alone; there are other factors to consider, as we have seen in the previous sections.

Is Scotiabank stock worth investing in?

Although investors will find Scotiabank among Canada’s Big Five Banks and appears on lists of the best Canadian bank stocks to invest in, the answer is hardly ever a definitive yes or no.

Due to its exposure to other emerging markets and thus offering more diversification, Scotiabank stock appears to be a good investment on paper. But the same can be said of the other bigger banks’ stocks. There are times when the market is up and so are these stocks, and times when they are in decline.

In this video, the presenter believes that Bank of Nova Scotia stocks are a viable investment precisely because of its exposure to emerging markets. He claims that the stock has high potential for growth and is poised to benefit more as the global economy improves. BNS stock earnings are also substantial. Watch the video and see if you agree with his assessment.

Here are a few items to consider when investing in stocks like Scotiabank:

1. Set reasonable expectations. Never fool yourself into thinking that you can build a fortune overnight or within a year with this or other stocks. Accept that building wealth takes time.

2. Think of what you can gain but don’t ignore the risks. Remember: the higher the potential returns on your investment, the higher the risk of loss.

3. Understand your investment. Do not go placing funds blindly into an investment you know nothing about. While you don’t need to know all the ins and outs of an investment, knowing how a company earns and could potentially lose its revenue helps.

4. Always diversify your investments. The old saying “never put all your eggs in one basket” applies to both stocks and investing. Don’t invest exclusively in bank stocks; mix it up with different types. A diversified portfolio can better cushion the blow of other losing stocks.

5. Past performance is never an indication of future performance. Bank stocks may be performing well today, but that is no guarantee they will still do well tomorrow. Conversely, if they are performing badly today, there is no guarantee either that they will still perform badly tomorrow.

In general, Bank of Nova Scotia are a good buy, but that largely depends on the investor’s goals. If you want a bank stock that gives reliable returns with growth potential and you have a long time horizon, then Scotiabank stock may be for you. But before you invest in Scotiabank, consider the stocks of the other Big Five banks of Canada. This way, you avoid losing out on potentially bigger gains.

Would you consider buying Bank of Nova Scotia stocks, or are you considering other banks’ stocks? Let us know in the comments!