This is a ‘guest post by request’ on Canadian Dividend candidates for additional research. To my Canadian and US readers who are dividend fans, enjoy.
By Josh Arnold for Sure Dividend.
Canada’s stock markets contain a number of high-quality companies that are available for ownership for investors in the US. While US investors may sometimes overlook companies from outside the US, we believe there are strong opportunities to own companies with bright prospects north of the border.
Note that Canada imposes a 15% dividend withholding tax on US investors, but that it may be waived in certain cases; check with your tax preparer or accountant for more on this issue.
Best Canadian Dividend Stock #3: Vermilion Energy Inc. (VET)
Vermilion Energy was founded in 1994 and today, the company is engaged in the exploration and production of oil and natural gas in Canada, the US, Australia, France, Ireland, Germany, and the Netherlands. The stock has a $3.8 billion market capitalization in the US, but it is also listed in Toronto.
The company reported Q3 earnings on 10/25/18 and results were very strong. Revenue increased 29% from the year-ago period as higher commodity prices and a 19% increase in production helped move the top line significantly higher. The company’s 2018 purchase of Spartan Energy significantly helped drive Q3 results. Fund flows from operations (FFO) increased 99% from the same quarter a year ago as quarterly production reached a new record.
Vermilion’s earnings have fluctuated wildly in recent years, as is expected with an energy producer. However, the company’s growth outlook has improved because of the Spartan acquisition, as well as long-term fundamentals as it relates to production.
This chart shows that the company’s production rates have spiked higher in recent years and that is certainly true for 2018 and 2019 given the acquisition of Spartan. However, Vermilion is beholden to commodity prices given that it extracts resources from the ground and must sell them for the prevailing market price. For this reason, we expect modest 2% earnings growth annually in the coming years, and we don’t believe that growth will be linear.
The stock is cheap at ~6X our funds-from-operations estimate for 2018, which is well below our fair value estimate of 7X. That implies shareholders should enjoy a ~3% tailwind to total returns from a higher valuation over time. However, the real draw for Vermilion is its dividend, which is currently in excess of 8%. Putting all of these together, we see total annual returns of about 13% for Vermilion in the coming years, and therefore rate it a buy.
Best Canadian Dividend Stock #2: Canadian Imperial Bank of Commerce (CM)
Our next stock is the Canadian Imperial Bank of Commerce, a global financial institution that provides banking and other services to individuals, small businesses, larger corporations, and institutional clients. The bank was founded in 1961 and is headquartered in Toronto. The stock is listed in New York and Toronto and has a market capitalization of $38 billion in the US.
CIBC announced Q4 earnings on 11/29/18 and results were fairly strong. Revenue rose 4.2% as net interest margin rose in the bank’s small business division, while the commercial banking segment posted a double-digit increase in volume. Earnings-per-share rose 6.7% year-over-year as the bank was able to boost revenue and improve margins. Credit metrics remain strong and its capital position is more than sufficient.
Source: Q4 investor presentation, page 7
CIBC has grown its earnings-per-share at a low double-digit annual rate in recent years as it has continued to prudently go after growth. The chart above shows how the bank has been able to achieve that growth, and it centers around strong revenue increases and moderate growth in expenses. This allows CIBC not only to achieve a stronger top line, but to boost margins over time as well. We see margin expansion as well as loan volume increases as driving 6% to 7% earnings-per-share growth annually in the years to come.
Shares are trading for 9 times our 2019 earnings-per-share forecast of $9.48, which compares favorably to our fair value estimate of 10.5 times earnings. Should the stock move towards our fair value estimate, it would provide shareholders with a ~3% tailwind to annual total returns.
CIBC’s dividend is an even bigger draw as the stock yields very near 5% today. We expect further dividend growth in the coming years as CIBC’s payout ratio is under half of earnings, so this will be a strong income stock for many years to come.
Putting all of this together, we see ~15% total annual returns for CIBC in the coming years. This makes it very attractive at current prices, and we rate it a buy as a result.
Best Canadian Dividend Stock #1: The Bank of Nova Scotia (BNS)
Our final stock is the Bank of Nova Scotia, also known as Scotiabank. It is the third largest financial institution in Canada and operates in three segments: Canadian Banking, International Banking, and Global Banking & Markets. The stock, like the other two in the list, is cross-listed in Toronto and New York. In the US, the stock’s market capitalization is $69 billion.
The bank reported Q4 earnings on 11/27/18 and results were in-line with prior expectations. Earnings-per-share rose 8% year-over-year as net interest income was up 10% thanks to particular strength from the international segment. The bank’s efficiency ratio was strong again at 54.6% of revenue, which is helping to drive operating leverage. The bank’s credit metrics continued to improve in Q4 as well, and it maintains a strong capital position.
Source: Q4 investor presentation, page 5
We see Scotiabank producing robust 8% earnings-per-share growth in the coming years thanks to a combination of loan volume growth, margin expansion, and acquisitions, as we can see above. The bank recently integrated its MD Financial and BBVA Chile acquisitions, so 2019 growth numbers will reflect these additions. We expect Scotiabank to be able to produce meaningful organic growth and with acquisitions thrown in the mix on a regular basis, high single digit earnings-per-share growth should be attainable.
Shares trade today for 10 times our 2019 earnings-per-share estimate, which compares quite favorably to our fair value estimate of 12 times earnings. This should create a 4% to 5% tailwind for annual total returns for shareholders as the stock’s multiple expands over time.
The stock is also yielding 4.6% today, meaning it remains a very strong income stock pick. We expect dividend growth to keep pace with earnings over time, so Scotiabank is a great choice for income investors.
Overall, we rate Scotiabank a buy as we expect to see total annual returns of 17% to 18%. The bank has a long history of strong operating results, it has a bright growth outlook, a strong yield and an attractive valuation. We believe Scotiabank to be the most appealing Canadian dividend stock in our coverage universe today.
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