## Tuesday, January 31, 2017

### 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. My Spreadsheet is here.

In this entry I am only talking about the big 6 Canadian Banks of Bank of Montreal, Bank of Nova Scotia, CIBC, Royal Bank, National Bank, and TD Bank. I try to get the right information, but I cannot guarantee anything.

The method I like best to check for a good stock price is dividend yield and this against the historical median dividend yield. What you are looking for is a current dividend yield higher than the historical dividend yield. Of the big banks that I follow, the Canadian Imperial Bank of Commerce comes off well in this test.

For CIBC the current dividend yield is 4.38% and this historical one is 4.25% a value 3% lower. The only other bank to have a higher current yield than the historical one is National Bank with a current dividend yield of 3.96% and a historical dividend yield of 3.94%.

My next favourite test is using the Graham Price. Of the big banks I follow, the CIBC is relatively lower with the current Price/Graham Price Ratio some 5% below its historical median P/GP Ratio. None of the other banks have a lower P/GP Ratios that the 10 year median. The Royal Bank is close being only 0.4% above.

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 I follow. Basically what this chart tells you is that investors are willing to pay relatively more money for TD Bank shares per dollar of earnings than for other banks.

Bank Symbol Low P/E Median P/E High P/E
Bank of Montreal BMO 10.05 11.33 12.61
Bank of Nova Scotia BNS 10.29 11.32 12.50
CIBC CM 9.00 9.89 10.78
Royal Bank RY 9.98 11.33 12.46
National Bank NA 9.04 10.62 12.21
TD Bank TD 11.40 12.63 13.69

So what is the relatively cheapest bank today? Currently CIBC has the lower P/E. In the last column I am comparing the Historical Median P/E with the Current P/E. This shows that TD Bank has dropped the least from its median. It is off the median by less than 1%

Bank Symbol Price 2017 EPS Est. Curr P/E M/C Bank of Montreal BMO \$100.66 \$7.58 13.28 17.21% Bank of Nova Scotia BNS \$78.61 \$6.31 12.46 10.05% CIBC CM \$113.16 \$10.30 10.99 11.09% Royal Bank RY \$94.47 \$6.99 13.52 19.29% National Bank NA \$56.54 \$5.05 11.20 5.42% TD Bank TD \$68.35 \$5.40 12.66 0.22%
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.

Last year, except for BNS and CIBC, all the 10 year P/B Ratios for these banks were higher. On a relative basis, investors were still willing to pay a relatively higher price of the Royal Bank shares and Bank of Montreal was still the best deal with it come to Book Value per Share.

Bank Symbol Price 2017 EPS Est. Curr P/E M/C
Bank of Montreal BMO \$100.66 \$7.58 13.28 17.21%
Bank of Nova Scotia BNS \$78.61 \$6.31 12.46 10.05%
CIBC CM \$113.16 \$10.30 10.99 11.09%
Royal Bank RY \$94.47 \$6.99 13.52 19.29%
National Bank NA \$56.54 \$5.05 11.20 5.42%
TD Bank TD \$68.35 \$5.40 12.66 0.22%

Of the banks I follow, BMO has the lowest P/B Ratio and the BNS is the lowest relative to its 10 year P/B Ratio as its current P/B Ratio is some 7.5% lower than the 10 year P/B Ratio.

Bank Symbol Price BVPS Current P/B M/C
Bank of Montreal BMO \$100.66 \$60.49 1.66 8.76%
Bank of Nova Scotia BNS \$78.61 \$43.59 1.80 -7.53%
CIBC CM \$113.16 \$56.59 2.00 -1.50%
Royal Bank RY \$94.47 \$43.32 2.18 5.85%
National Bank NA \$56.54 \$28.52 1.98 13.93%
TD Bank TD \$68.35 \$36.69 1.86 15.57%

For dividend paying stocks, the Dividend Payout Ratios are important. For the DPRs, lower ratios are better ratios. For Banks the DPR for EPS is the most important one. When looking at these ratios, it would appear that TD Bank has the best one, which is the lowest one. The National Bank is above the 40 to 55% level you would expect from a bank. However, I think this is just temporary.

The problem with cash flow is that for banks they tend to be volatile and often negative. A lot of analysts ignore the Cash Flow of banks.

Bank Symbol DPR for EPS DPR for CFPS
Bank of Montreal BMO 48.55% -81.94%
Bank of Nova Scotia BNS 49.91% 84.87%
CIBC CM 44.39% 18.47%
Royal Bank RY 47.20% 17.69%
National Bank NA 65.35% 13.37%
TD Bank TD 46.25% 9.09%

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 the value column, I am putting in the value of the stock options at the end of the calendar year.

In 2016 CIBC has one of the lowest percentages of their shares issued for stock options purposes. However, it was the second lowest when it came to the cost of these stock options. For 2016 BNS has the highest percentage of their shares issued for stock purposes and also the highest cost. All the banks issued more shares and a higher percentage of their shares in 2016 compared to 2015.

Bank Symbol Shares % of Shares Value 2016
Bank of Montreal BMO 2.103 0.33% \$179M
Bank of Nova Scotia BNS 4.228 0.35% \$304M
CIBC CM 0.816 0.21% \$89M
Royal Bank RY 4.981 0.34% \$417M
National Bank NA 1.123 0.33% \$54M
TD Bank TD 4.900 0.26% \$298M

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 BMO has a relatively lower stock price.

Bank Symbol Low Median High
Bank of Montreal BMO 0.73 0.87 0.99
Bank of Nova Scotia BNS 0.86 0.93 1.13
CIBC CM 0.88 1.04 1.16
Royal Bank RY 0.95 1.14 1.32
National Bank NA 0.77 0.88 1.03
TD Bank TD 0.86 0.98 1.08

So on a relative basis what stock is cheaper? BMO, CIBC and National are tied with the lowest P/GP Ratio for the stocks that I follow. The CIBC has relatively the lowest P/GP Ratio compared to the 10 year median value being some 5% lower.

Bank Symbol Price Graham Price P/GP Ratio M/C
Bank of Montreal BMO \$100.66 \$101.57 0.99 13.91%
Bank of Nova Scotia BNS \$78.61 \$64.37 1.22 31.31%
CIBC CM \$113.16 \$114.52 0.99 -4.99%
Royal Bank RY \$94.47 \$82.55 1.14 0.39%
National Bank NA \$56.54 \$56.93 0.99 12.86%
TD Bank TD \$68.35 \$64.12 1.07 8.77%

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.

Bank Symbol 5 Year Hist. Ave Hist. Med
Bank of Montreal BMO 4.29% 5.30% 4.29%
Bank of Nova Scotia BNS 4.12% 5.15% 3.92%
CIBC CM 4.67% 4.64% 4.25%
Royal Bank RY 3.95% 4.38% 3.92%
National Bank NA 4.16% 6.04% 3.94%
TD Bank TD 3.75% 3.26% 3.34%

The best test of whether or not a stock is cheap or expensive is to compare the current dividend yield to the Historical Median Dividend yield. Except for CIBC and National bank, all the banks I follow have lower dividend yields than the historical median. What you want is for a good stock price is for the current years to be higher than the historical median.

The higher the dividends yield the better and in this category, the winner is the CIBC at 4.38%. Also CIBC is also the one which is the highest compared to the historical median. It is some 3% higher than the historical median dividend yield. All this data is going back to 1988.

Bank Symbol Price Dividend Yield M/C
Bank of Montreal BMO \$100.66 \$3.52 3.50% -18.49%
Bank of Nova Scotia BNS \$78.61 \$2.96 3.77% -3.94%
CIBC CM \$113.16 \$4.96 4.38% 3.13%
Royal Bank RY \$94.47 \$3.32 3.51% -10.35%
National Bank NA \$56.54 \$2.24 3.96% 0.55%
TD Bank TD \$68.35 \$2.20 3.22% -3.63%