The board of The Bank of Nova Scotia (TSE:BNS) has announced that it will be increasing its dividend on the 27th of July to CA$1.03. This takes the annual payment to 4.6% of the current stock price, which is about average for the industry.
Bank of Nova Scotia's Earnings Easily Cover the Distributions
While it is always good to see a solid dividend yield, we should also consider whether the payment is feasible. Prior to this announcement, Bank of Nova Scotia's earnings easily covered the dividend, but free cash flows were negative. Since a dividend means the company is paying out cash to investors, this could prove to be a problem in the future.
Over the next year, EPS is forecast to expand by 3.6%. If the dividend continues on this path, the payout ratio could be 48% by next year, which we think can be pretty sustainable going forward.
Bank of Nova Scotia Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. The first annual payment during the last 10 years was CA$2.08 in 2012, and the most recent fiscal year payment was CA$4.12. This works out to be a compound annual growth rate (CAGR) of approximately 7.1% a year over that time. Dividends have grown at a reasonable rate over this period, and without any major cuts in the payment over time, we think this is an attractive combination as it provides a nice boost to shareholder returns.
The Dividend Has Growth Potential
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Bank of Nova Scotia has impressed us by growing EPS at 5.8% per year over the past five years. While on an earnings basis, this company looks appealing as an income stock, the cash payout ratio still makes us cautious.
Our Thoughts On Bank of Nova Scotia's Dividend
Overall, this is probably not a great income stock, even though the dividend is being raised at the moment. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. This company is not in the top tier of income providing stocks.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 12 analysts we track are forecasting for Bank of Nova Scotia for free with public analyst estimates for the company. Is Bank of Nova Scotia not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
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