Tuesday, January 22, 2013

National Bank of Canada

I do not own this stock of National Bank of Canada (TSX-NA, OTC-NTIOF). I have never covered this bank before, but I have heard good things about it. Some analysts are referring to Canada's big 6 banks and include this bank.

The first thing you have to ask yourself is, has this bank made any money for its shareholders. If you look at the past 5 and 10 years to the end of 2012, I find that it has make money for its shareholders and it has done better than the other banks.

The 5 and 10 year total return is 12.44% and 13.46% per year, respectively. The portion of this total return attributable to dividends is 4.32% and 4.35% per year, respectively. Dividends made ups 35% and 32% of the total return over these respective periods. The portion of this total return attributable to capital gain is 8.11 and 9.11% per year, respectively.

Has this bank done well in dividend growth? Dividends have grown at the rate of 6.2% and 12.72% per year over the past 5 and 10 years. This bank also stopped dividend increases from 2008 to 2010. The last dividend increase was for 5.1%. However, in both 2011 and 2012 dividends were increased twice during the year and the total increases were for 10.5% and 12.4%, respectively.

What about the Dividend Payout Ratios? The 5 year median DPR for earnings is 42% and for cash Flow is 38%. These are good DPRs for a bank. (See my site for information on Dividend Payout Ratios). Also, because these DPRs were so close, I decided to take a look at the Accrual Ratio and EPS/CF Ratio.

A caution is that the Accrual Ratio has been over 5% in the past and the EPS/CF Ratio has been over 1.00. Companies with continuously high Accrual Ratios and high EPS/CF Ratios tend not to do as well as companies that do not have these characteristics. This is from work done by Richard Sloan. If you are interested a couple of sites talk about this subject. See Smart Money site and Richard Sloan at Michigan Ross School of Business.

Both the Accrual Ratio and EPS/CF Ratio have been coming down in 2011 and 2012. The Accrual Ratio was good in 2012 at 0.47% and the EPS/CF had improved in 2012 to 0.91. The 5 year median Accrual Ratio is not bad at 3.8%. For this ratio you worry about values over 5%. The 5 year median EPS/CF is still a bit high at 0.91, but it is under 1.00.

If the Accrual ratio is positive and high, it might mean that the company is hiding some problem. It also might mean that the Cash Flow is not as good as it appears. It could also indicate that the company is bulking up its earnings with non-cash items. These ratios being high, just means to be cautious. It really does not tell you anything positively. They are coming down to better levels recently.

The outstanding shares have increased marginally (0.4%) over the past 5 years and decreased a bit (1.2%) over the past 10 years. The shares have increased due to stock options and acquisitions and have decreased due to share buy backs.

Over the past 5 and 10 years revenue has increased by 9.2% and 5.8% per year. Over the past 5 and 10 years revenue per share has increased by 8.7% and 7.1% per year. Earnings per Share have increased by 9% and 10.8% per year. Cash Flow per Share has increased by 8.6% and 7.1% per year.

I had originally reported that the Book Value per Share has not done as well, increasing by 3.6% and 5% per year. However, this is untrue and the BV has increased by 8.3% and 7.3% over the past 5 and 10 years. I have updated my spreadsheet.

The Return on Equity was very good for 2012 coming in at 25.3%. The 5 year median is also quite good at 18%. The ROE on comprehensive income for 2012 was lower by just over 4.9% coming in at 20.4%. You would like to have the ROE on both the net income and comprehensive income quite close and this is not that close.

When the ROE on comprehensive income is close to the ROE on net income, it tends to confirm the quality of the net income. The difference does not tell you a lot, but it is a caution warning.

The Liquidity Ratio and the Debt Ratios are normal for a bank coming in at 1.15 and 1.05 in 2012. However, the Leverage and Debt/Equity Ratios are rather high at 27.55 and 26.27. (You would expect them to be in the 15 to 20 range.) Not good.

This bank has done very well for its shareholders over the past 5 and 10 years. However, I am not putting this bank on my buy list. I like the banks I have presently, which are Bank of Montreal (TSX-BMO), Royal Bank (TSX-RY) and Toronto-Dominion Bank (TSX-TD). I do not need any more bank exposure in my portfolio.

National Bank of Canada provides financial services to consumers, small and medium-sized enterprises, and large corporations & has branches in every province in Canada. It is also represented in the U.S. and Europe through its subsidiaries and alliances. It is also represented in the U.S. and Europe through its subsidiaries and alliances. Its web site is here National Bank. See my spreadsheet at na.htm.

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. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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