Wednesday, February 11, 2015

Banks and Ratios

The reason to look at company ratios is that the stock price for a company tells you very little. The price of a stock certainly does not tell you if the stock is cheap or expensive. For example a stock price of \$10 on one stock could be an expensive price, but a stock price of \$20 on another stock could be a cheap price. It is like all stocks have their own currency and you will need a common frame of reference in order to tell how cheap or expensive a stock is.

In this entry I am just looking at Canadian Banks and just the Canadian Banks that I follow. Of course it is not complete without CIBC, but I really have no motivations to start to follow this bank. I have 3 bank stocks already of BMO, RY and TD. My son owns BNS. I thought it might be fun to look at a small Canadian bank, so I have Nation Bank. I do not think I would ever buy CIBC or Canadian Imperial Bank of Commerce (TSX-CM, NYSE-CM). I also do not know of a site that gives similar data.

One of the most common ratios to look at is the P/E Ratio. When dealing with P/E Ratios, the lower the P/E ratio the better the relatively price is. Below is the 5 year low, median and high median P/E Ratios for each bank. Basically what this chart tells you is that investors are willing to pay relatively more money for Royal Bank and TD Bank shares than for other banks.

Bank Symbol Low Median High
Bank of Montreal BMO 10.51 11.34 12.10
Bank of Nova Scotia BNS 10.64 11.88 13.11
Royal Bank RY 11.34 12.60 13.85
National Bank NA 9.26 10.28 11.30
TD Bank TD 11.40 12.63 13.84

The next most common ratio is the Price/Book Value per Share Ratio. For Price/Book Value per Share Ratio, the lower the P/B Ratio is, the more book value you get for your money. Theoretically, the book value is the difference between assets and liabilities and therefore is the potential value a company is worth or the breakup value of the stock for the shareholders.

When valuing a stock, the lower the P/B Ratio is, the better the stock price is on a relative basis. The 10 year median P/B Ratios for our banks are below. From this it is obvious that historically, investors were willing to pay a relatively higher price for Royal Bank shares than other shares. It could also say that the Bank of Montreal offers the best deal when it comes to Book Value per Share.

Bank Symbol P/B Ratio
Bank of Montreal BMO 1.59
Bank of Nova Scotia BNS 2.16
Royal Bank RY 2.25
National Bank NA 1.79
TD Bank TD 1.72

For dividend paying stocks, the Dividend Payout Ratios are important. For the DPRs, lower ratios are better ratios. When looking at these ratios, it would appear that National Bank has the best ones. The problem with cash flow is that for banks they tend to be volatile and often negative. However Royal Bank is ahead as far as cash flow goes as it had one of highest levels of cash flow ever in 2014.

Bank Symbol DPR for EPS DPR for CFPS
Bank of Montreal BMO 47% 37%
Bank of Nova Scotia BNS 45% 36%
Royal Bank RY 52% 25%
National Bank NA 39% 32%
TD Bank TD 44% 31%

When Shares are issued for Stock Options, you want a company that issues around the same relative number of shares for its industry. Of course, the lower the number of shares issued for stock options, the less money comes out of the earnings for shareholders.

In 2014 Royal Bank has one of the lowest percentages of their shares issued for stock options purposes. However, it was only the third lowest when it came to the cost of these stock options.

Bank Symbol Shares % of o/s Shares Value 2014
Bank of Montreal BMO 2.133 0.33% \$173.187M
Bank of Nova Scotia BNS 3.493 0.29% \$241.121M
Royal Bank RY 2.723 0.19% \$217.867M
National Bank NA 2.945 0.89% \$155.117M
TD Bank TD 5.000 0.27% \$277.350M

For the 10 year Price/Graham Price Ratios, the lower the ratio the lower the relative price of the underlying shares. Here again, this chart shows that investors are willing to pay a relatively higher price for Royal Bank stock than for other bank stocks. It also shows that generally the National Bank has a relatively lower stock price.

Bank Symbol Low Median High
Bank of Montreal BMO 0.82 0.93 1.12
Bank of Nova Scotia BNS 0.97 1.09 1.24
Royal Bank RY 1.03 1.21 1.41
National Bank NA 0.80 0.89 1.05
TD Bank TD 0.88 1.00 1.11

For dividend yields, the higher the dividend yields the better the relative price of a stock is. Here is the 5 year median and historical average and historical median dividend yields based on my spreadsheets for our banks. The BMO seems to be giving the best dividend yields.

Bank Symbol 5 Year Hist. Ave Hist. Med
Bank of Montreal BMO 4.69% 5.30% 4.62%
Bank of Nova Scotia BNS 3.92% 4.18% 3.81%
Royal Bank RY 3.91% 4.23% 3.92%
National Bank NA 4.06% 4.77% 3.84%
TD Bank TD 3.52% 3.49% 3.40%

The problem with the above chart is that I have different years of data for different banks. Here is the 5 year median, historical average and historical median dividend yields going back to 1988 for all banks. From this chart you can see that the TD Bank pays out relatively a lower dividend yield that the other banks. The historical median dividend yield is probably the best measure, and it is clear that the Bank of Montreal pays out the best yield.

Bank Symbol 5 Year Hist. Ave Hist. Med
Bank of Montreal BMO 4.69% 5.13% 4.46%
Bank of Nova Scotia BNS 3.92% 4.18% 3.81%
Royal Bank RY 3.91% 4.05% 3.65%
National Bank NA 4.06% 4.77% 3.84%
TD Bank TD 3.52% 3.40% 3.33%

On my other blog I am today writing about Canadian National Railway (TSX-CNR, NYSE-CNI) ... continue...

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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