Canadian banks raising dividends-even more attractive now

The first quarter earnings announcements by Canadian banks for the three¬† months ending January 31st, 2011 saw two of the Big 5, Toronto Dominion (TD-T, TD-N) and Bank of Nova Scotia (BNS-T, BNS-N) raising their dividends by 8.5% and 6.7% respectively, for the first time in almost 3 years. They thus joined the three smaller Canadian banks which had raised their dividends when announcing their earnings for the year ending October 31st, 2010, National Bank (NA-T), Canadian Western Bank (CWB-T) and Laurentian Bank (LB-T), which indicated that the Canadian authorities were comfortable with the levels of tangible equity capital of the banks. This followed the announcement of the Basel III Committee in late 2010 on required levels of capital for banks globally, and it confirmed that the Canadian banks’ had healthy levels of capital compared to US or European financial institutions.

Now that 5 of the 8 Canadian banks have begun raising dividends again, it is only a matter of time before the remaining 3 banks, Royal (RY-T, RY-N), CIBC (CM-T, CM-N) and Bank of Montreal (BMO-T, BMO-N) follow suit. At the moment, all three have payout ratios (dividends as a percentage of net earnings) above their announced range (40-50% for Royal and CIBC, 45-55% for BMO), but the first two should have earned their way into their range by the end of this year for Royal and sometime next year for CIBC. The laggard appears likely to be BMO, which announced the U$4 billion purchase of mid-western bank Marshall and Ilsley at the end of 2010, and will be issuing $400 million worth of new shares to keep its capital ratios up when the deal closes in the middle of this year. BMO aside, however, Canadian banks will be back to their habit of the last decade of raising their dividends 8-9% p.a. by this time next year.

(A somewhat longer version of this comment appeared in The Income Investor March edition)

Comments are closed.