Bank of Nova Scotia: Emerging Markets and Dividend Growth Combined

Upwards momentum
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Bank of Nova Scotia (TSX:BNS), otherwise known as “Scotiabank,” is not Canada’s most popular bank stock. It has not grown as much as its peers over the last five years, and that lacklustre business performance has shown up in the stock price. Over the last five years, the stock has fallen a full 17.5%. When factoring in the stock’s very high dividend yield, investors have done little more than break even.

However, that may be set to change. Scotiabank is heavily invested in emerging markets, and such markets are projected to deliver above-average growth in the years ahead. Investments in countries like Mexico are increasing, as the U.S. seeks to diversify its supply chains away from China. Should these regions deliver the growth they’re expected to, BNS stock will likely thrive in the years ahead.

In fact, Scotiabank is already a pretty profitable business. In the last 12 months, it had $8.11 billion in profit on $28.67 billion in revenue for a 28.2% profit margin. That’s very strong. Unfortunately, that profitability hasn’t actually been growing over time, although it may begin to do so in the years ahead.

Emerging markets exposure

One reason to think that Scotiabank has some growth in its future is the fact that it has considerable emerging market exposure. Among other things, its emerging markets business boasts the following distinctions:

  • More than 100 years of continuous operation in Latin America
  • A presence in 27 foreign markets
  • 450 foreign branches
  • Numerous industry awards, including the “Best Emerging Market Bank” award in the Turks and Caicos

Historically, BNS’s foreign operations have delivered lacklustre results. For most of the last five years, the company hasn’t grown, while Canadian banks with U.S. operations have grown by leaps and bounds. It has been a real drag for shareholders. However, economic trends come and go.

The North American economy was very impressive over the last decade, but today, emerging markets offer more growth. For example, Brazil’s gross domestic product grew by 4.6% in 2021, which was slightly better than Canada’s growth rate in the same period (4.5%). Should this trend continue, then Scotiabank’s foreign operations will start to pay dividends.

Dividend growth

One attractive feature of BNS stock is its high dividend yield. At today’s prices, the stock yields 7.4%, which is enough to establish a solid income stream with relatively little invested up front. And the dividend has been growing over time.

Over the last 10 years, Scotiabank has increased its dividend at a 5.75% compound annual growth rate. Should that trend continue, those who invest today will end up with a very high yield on cost — potentially into the double digits! However, Scotiabank’s dividend growth has not been all that well supported by earnings growth, which has resulted in BNS having one of the highest dividend payout ratios of all the Big Six banks.

Long-term results

One negative point about Scotiabank investors should keep in mind is that the bank has underperformed its peers over the long term. Its earnings have not grown at all over the last five years and have compounded at a mere 2.5% over the last 10. Recent history argues for caution on this stock. However, economic trends come and go, and BNS’s foreign operations may perform better in the future compared to the recent past.