Are Canadian Bank Stocks a Good Long-Term Income Play?

canadian-bank-stocksCanadian bank stocks such as Bank of Montreal (NYSE: BMO), The Bank of Nova Scotia (NYSE: BNS), Royal Bank of Canada (NYSE: RY) and Toronto-Dominion Bank (NYSE: TD) did comparatively well during the Great Recession, escaping the carnage that ravaged Citigroup (NYSE: C), Bank of America (NYSE: BAC) and others in the United States.

There is every reason to expect that these financial institutions will hold up well with energy prices falling, too. Just as during the Great Recession, investors should take advantage of the current downturn to build up positions for the long term at a discount.

There are a myriad of factors for Canadian bank stocks performing admirably during the Great Recession.

Loan standards and down payments were stricter in Canada than in the United States for mortgages. That kept speculation in real estate down a great deal.

There was also an emphasis, from the prime minister’s office on down, to keep debt levels low. This mitigated the impact of being overleveraged, which destroyed many institutions in the United States.

Oil and natural gas prices were also high well into 2008, which pumped up the Canadian economy, and thus its banks.

But this is not 2008, and energy prices have been falling since the middle of last year.

As the chart below shows, falling energy prices have exerted downward pressure on the share prices of Toronto-Dominion Bank, The Bank of Nova Scotia, Royal Bank of Canada and Bank of Montreal. This does not appear to be stopping anytime soon. The chart also lays out how attractive these Canadian banks are, both in financial indicators and the dividend yield, when compared with Bank of America, which is a major Berkshire Hathaway (NYSE: BRK-B) holding.

Stock Price Performance for 2014 Profit Margin Earnings per Share Growth Projected for Next 5 Years Dividend Yield
Bank of America -14.13% 7.40% 8.5% 1.31%
Royal Bank of Canada -12.80% 40.50% 10.00% 4.10%
Bank of Montreal -15% 32.00% 10.00% 4.20%
The Bank of Nova Scotia -12.40% 34.70% 7.90% 4.30%
Toronto-Dominion Bank -10.85% 31.30% 12.00% 3.80%
Source: Finviz

For the long-term investor, there are several compelling features. The earnings per share growth of these Canadian bank stocks are all higher than that projected for JP Morgan (NYSE: JPM) and Wells Fargo (NYSE: WFC), both considered to be excellent American banks. In addition, Wells Fargo is another significant Berkshire Hathaway position.

Augmenting the total return is a robust dividend yield for each Canadian bank.

The dividend yield for JP Morgan is just under 3%. For Wells Fargo, it is around 2.60%. Not only is the yield higher for the Canadian bank stocks, but each has the profit margin and cash flow to increase it in the future, thus increasing the appeal of each as a long-term holding for income investors.

It appears that low oil and natural gas prices will be around for a long time, according to many reports.

That should reduce the value of the Canadian dollar, which makes assets priced in that currency trade at a discount to those stronger, such as the U.S. dollar. This also makes Canadian bank stocks more luring.

Even without the currency considerations, which should not be a factor for long-term investors, there are many compelling features for Bank of Montreal, Royal Bank of Canada, Toronto-Dominion Bank and The Bank of Nova Scotia. The combination of high profit margins, high expected growth and high dividend yields that should increase makes each Canadian bank appealing for long-term income investors.

Jonathan Yates does not have a position in any of the stocks mentioned in this article.

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