Friday, October 22, 2010

Stock Analysis: National Bank of Canada (NA.TO)

My first purchase toward my dividend growth strategy involved several considerations, but I ended up deciding on buying shares in National Bank of Canada. The following are the reasons why I decided to buy shares. Information is accurate as of October 21, 2010.

National Bank of Canada has a market capitalization of $10,979,300,000. It is part of the financial sector, meaning its main services offered are personal and business banking, and investment options. It was founded in Quebec City in 1859, and has maintained or increased its dividend per share for 18 years in a row.

Here are some quick facts:

Annual Dividend:  $2.48 per share
Dividend Yield:  3.66%
Dividend Payout Ratio:  43.68
Price/Sales Ratio:  2.54
Price/Earnings Ratio:  11.93
Graham Number:  $73.89
Beta: 0.53

The dividend yield is a good amount, and its higher than that of the S&P Composite Index at 2.58%. The dividend payout ratio is below 50, meaning that the company's earnings should be able to support dividend growth. The price/sales ratio and the price/earnings ratio are both lower than other companies in the same sector, making this stock a more valuable buy than others. The Graham Number (maximum price you should be willing to pay for a stock) is much higher than the current stock price of $66.90, which is a good indicator. A beta value of 0.53 means that the stock is about half as volatile as the overall market.

Another thing to look at is the company's earnings per share (EPS) over the past few years. A good dividend growth stock should have a continually increasing EPS to be able to grow their dividends.

This graph shows EPS from 2007 to 2010.
The EPS is a little all over the place, due mainly to the recession. I wasn't able to find EPS data before 2007. The earnings seem to be at least stable when there isn't as much economic uncertainty. However, the fact that National Bank of Canada couldn't keep earnings stable during the recession is a point against it.

So once I decided that this would make a good start for my dividend growth portfolio, I sold my shares in a dividend exchange-traded fund, and purchased a position in National Bank of Canada (NA.TO).

Disclaimer: I am not a professional investor, nor am I recommending that anyone buy this stock. Due diligence is always required when making a purchase decision.

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