Quite possibly the most popular basket of stocks in the country, Canadian Banks are set to post earnings next week. As we’ve started to do the past 2-3 quarters, we felt this was a strong time to dive in to what we can expect, especially considering the anticipation in terms of how much dividend growth we’ll see from the major institutions this week.
Before we begin however, we’d like to speak on a few Stocktrades Premium companies that reported earnings this week, along with the new COVID variant that scared the markets.
Calian (TSE:CGY)
Calian posted quarterly results that were largely in line with EBITDA and revenue estimates, but it missed earnings by a wide margin. This isn’t due to any sort of material event however, but primarily due to higher amortization costs and a one off charge.
The company was victim to a wider market selloff due to the new COVID-19 scare, falling 2.5% on earnings. If we look to the company from an annual growth standpoint, it grew revenue by 20%, earnings by 40%, and posted some of its best margins in company history.
I (Dan) own this company, and feel right now prices are quite attractive. However, the volume is relatively low on Calian, and it is going largely unnoticed. I have zero plans of selling, as I feel the company is surpassing its valuations in terms of growth. It also does pay a reasonable dividend, in the high 1% range.
We should have our report of Calian updated early this week.
Alimentation Couche-Tard (TSE:ATD.B)
Couche-Tard also performed relatively inline with expectations, with negligible differences in earnings and revenue when compared to estimates. The company also rewarded shareholders with a 25.7% hike to the dividend.
However, as we’ve witnessed numerous times this quarter, it is not beating expectations that the market is looking for. It is outlook and commentary on supply chains. Couche-Tard relayed some issues it could have in terms of supply and staffing, and the stock took a hit post earnings. It also continued to fall Friday as fears of further lockdowns due to a new COVID variant caused the markets to post one of the larger daily losses in the last year.
Are we worried with Couche-Tard? Not in the slightest. Would the company announce a 25.7% hike to its dividend if it was worried about its forward outlook? Highly unlikely.
New COVID variant
Any sort of projections in terms of market activity when it comes to the new COVID variant that was identified is almost pure speculation.
But, we know lots of members would be seeking commentary on it. As of right now it’s simply noise, and making any decisions on your holdings based off this noise would be, to put it lightly, quite silly.
As long term investors, we buy strong companies and we hold them for the long term. We invest based on the underlying numbers, not the headlines in the media.
Could this COVID-19 variant be more aggressive than the others and cause lockdowns yet again? Yes, it could. But it could also be less severe than expected.
There has been no notable news released over the course of the weekend in terms of its severity. But, be prepared for added volatility to close out 2021 as they discover more.
Moving on, lets take a look at Canada’s big banks
Although Canadians are always laser focused on Canadian bank earnings week, this quarter has a bit more excitement to it. Why?
Well, the banks are finally able to raise the dividend, and many pundits are guessing as to how much. So, we figure we’d line members up with what to expect on the week and how much we think the banks could hike their dividends.
First, lets look at how we can expect earnings to shape up (this chart represents Q4 2020 vs Q4 2021 expectations):
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If we look to the chart above, analysts are expecting some strong year over year growth in terms of earnings from each of the Big 6 banks. In fact, not a single bank is expected to grow earnings by less than double digits on a year over year basis.
The largest expected growth out of any major bank? That would be Dividend Bull List stock Bank of Montreal at 33%. Of note, BMO has also been the best performing bank in the pandemic era in terms of total returns.
However, National Bank is not far behind in terms of overall performance and expected earnings growth, coming in at 32%.
Canadian banks on a Fiscal 2021 basis
Comparing quarter over quarter is a solid indicator of performance. But, as long term investors we are more so looking for how the company grows on an annual basis. When we look to Canadian banks, the growth is expected to be significant.
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Again, two banks stand out here in terms of growth on an annual basis. Bank of Montreal and National Bank.
Thus far, the Bank of Montreal has earnings per share of $7.84 through the first 9 months of 2021. In order to hit annual estimates of $12.83, it would have to match its expected fourth quarter earnings.
If it manages to do this, it would represent 66.5% earnings growth when comparing Fiscal 2021 to Fiscal 2020, the best out of all major banks by a wide margin.
In terms of National Bank, if the company can meet fourth quarter expectations, it will achieve annual targets of $9.01 a year, which would represent nearly 50% growth on a year over year basis.
No matter what bank you own, unless there is a significant upset in terms of overall expectations from all 6 major institutions, you’re going to be reaping the benefits of significant earnings growth.
But, how will we benefit from that earnings growth?
In this situation, probably an increase in the bank’s dividend. Let’s get to our estimations of how big these hikes are going to be exactly.
Bank dividend growth expectations
We’re not ones to speculate on the movement of prices in terms of stocks. That’s why you’ll never see us highlight price targets or entry points.
However, what we can attempt to predict is the estimated dividend growth of Canadian banks. We’ve witnessed a lot of pundits, Stocktrades readers and Canadian investors guessing at the amount of growth we’ll see. But, we’ve decided to put some actual math to work and figure out which banks could come in with the biggest dividend raises.
In the chart below, we’ve taken the bank’s annual expected earnings. From there, we’ll take the company’s historical payout ratios from January 1st 2010 to January 1st 2020, right before the pandemic hit.
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From this chart, you’ll notice that two banks stand out, and those are the two we’ve been speaking on in this piece the most, National Bank and Bank of Montreal. If both banks were to return to their average payout ratios, it would require a dividend boost of more than 34%.
On the flip side, you’ll notice one bank seems to be lagging its peers, and that is the Bank of Nova Scotia. Now keep in mind, it is highly unlikely the Bank of Nova Scotia doesn’t raise its dividend. In fact, we’d say it’s nearly impossible.
This chart is only highlighting what the company’s dividend would be if it were to return to what its typical payout ratio has been.
Going off this methodology, we’d expect the following in terms of biggest to lowest raises in terms of dividend growth from the banks:
- Bank of Montreal
- National Bank
- Royal Bank
- Canadian Imperial Bank of Commerce
- TD Bank
- Bank of Nova Scotia
Are dividend raises baked into prices?
If you’re expecting any sort of price jump because of these dividend raises, you’ll likely be disappointed. This news has been out for quite some time now, and investors have been buying up Canadian banks over the course of 2021 in anticipation of this.
However, if the numbers were to come in higher or lower, we could see some volatility.
It is not a secret that the Bank of Montreal and National Bank are expected to raise in the high 20% range, Royal Bank in the low 20% range, TD Bank and CIBC in the mid 10% range, and Bank of Nova Scotia in the low 10% range.
If the banks end up raising more than they’re expected to, we could see some positive price movement. However, if the banks decide to come in with lower than expected raises, taking a more conservative route, we could see some frustrated investors as well.
We saw much the same with TC Energy over the last while, as the company has stated it will reduce dividend growth in order to fund more growth internally.
Although internal growth in the long run is much better for investors, it is far less guaranteed than a dividend, and income investors may become short-sighted in this regard.
The Liberal bank tax could slow dividend growth
It is also no secret that the Liberals have set out a plan to tax banks more. Although no hard date is set yet, it is expected that banks will be paying a premium on earnings as early as 2022.
For this reason, the banks may take a more conservative route when it comes to dividend growth. Although in the long run the banks will likely find a way to pass on these added expenses to the consumer, in the short term there may be a cautious approach from financial institutions.
For this reason, we would not be surprised if raises came in below targets.
Overall, it’s going to be an exciting week for investors
We’re keeping an eye on our 3 featured banks here at Premium, that being Royal Bank, Bank of Montreal, and TD Bank. But, we’ll be watching all of them closely.
The Bank of Nova Scotia is set to kick off earnings on November 30th, and considering this bank is the one that by our calculations has the least amount of room to grow the dividend, its earnings report could be a strong indication of what is to come from the others.
In terms of earnings dates:
- Bank of Nova Scotia: November 30th
- National Bank: December 1st
- Royal Bank: December 1st
- TD Bank: December 2nd
- CIBC: December 2nd
- Bank of Montreal: December 3rd
