After a further gap in postings due to the family medical issues I had mentioned, which now happily seem to be resolving themselves, it’s appropriate the first post in a couple of months should be about Canadian banks raising their dividends. It’s a theme that I touched on last year, when five of the Big Six banks raised their payouts, the one exception being my former employer, Bank of Montreal (BMO-T, BMO-N). In 2011, Bank of Nova Scotia (BNS-T, BNS-N) raised its dividend by 6.1%, CIBC (CM-T, CM-N) by 3.4%, National Bank (NA-T) twice by 7.5% and 5.6%, RBC (RY-T, RY-N) by 8% and TD (TD-T,TD-N) by 3%. The principal reason for BMO not raising its dividend was the U$5.7 billion acquisition of Marshall & Ilsley bank in mid 2011, which doubled the size of its US operation but also saw it issuing $4 billion worth of equity. Its dividend was also has one of the highest amongst its peers as a percentage of its earnings (the payout ratio) at 52.2% against payout ratios in the low 40% range for its rivals.
When Canadian banks reported their first quarter earnings for the period ending January 31st, 2012, several of them raised their dividends again. Both RBC and TD increased their payouts by 6%, and Scotiabank by 5.8%. Neither CIBC, which has the highest payout ratio after BMO at 49.5% nor the two smaller banks, Canadian Western (CWB-T) and Laurentian Bank (LB-T) increased their dividends this quarter. The latter pair had however, already raised their dividends twice each over the last year, by 15% and 25% respectively.
This leaves Canada’s Big Six banks, recently ranked amongst the top twenty five most creditworthy in the world by Global Finance magazine, all yielding more than 3.5%. TD has the lowest yield at 3.5%, followed by National at 3.8%, RBC at 4% and Scotiabank at 4.1%. It is noteworthy that the two highest yielding banks, BMO and CIBC,both of which yield 4.8%, are the two which have either not raised their dividend or raised it only once and by the smallest amount.The willingness of bank managements to raise their dividends reflects their confidence in their capital ratios and the outlook for the Canadian housing market, which remains their largest exposure.
The Canadian banks remain the most attractive in the OECD, in terms of outlook and the ability to continue raising their distrbutions to shareholders, which were not reduced during the financial crisis. Their only rivals in this respect are the Australian banks, which are over exposed to an inflated housing market and a slowing commodity sector. Within the Canadian banks, a good rule of thumb has been to purchase the banks which have underperformed over the previous twelve months, as despite different exposures to the various sectors, all of them are primarily influenced by the domestic Canadian market. Therefore, investors selling those which have out-performed and buying those which have lagged have tended to add between 1-2% p.a. to the performance of the sector. This would suggest adding to CIBC and Scotiabank, off 9% and 6.6% over the last year, and reducing TD, down only 1.3% and National, up 6%. Another approach would be to buy the BMO Equal Weight Bank ETF (ZEB-T), which holds the Big Six banks in equal weights, and re-balances its positions periodically to maintain them at equal weights, thus mechanically carrying out the approach suggested above.