Canadian Banks Have a Lot to Offer Investors

Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Investing in big banks is a conversation usually confined to the biggest bulge-bracket banks in the United States. The resurgence of our nation’s financial institutions since the dark days of the recent financial crisis has been well-documented throughout the media. Indeed, there are many American banks that have shown renewed signs of life as the economy in the United States continues its gradual recovery and consumer lending levels begin to rise.

However, if you’re on the lookout for good bank stocks to buy, you needn’t limit your search to those institutions operating within the borders of the United States. As a matter of fact, there are several highly profitable, well-managed banks housed within our neighbor to the north.

Executing in the present, with bright futures as well

While the banks in the United States gradually begin to increase their shareholder payouts, several Canadian financial institutions already provide their shareholders with great yields that handily beat the yield on the broader market.

Banks including Bank of Montreal (NYSE: BMO), The Bank of Nova Scotia (NYSE: BNS), The Royal Bank of Canada (NYSE: RY), and The Canadian Imperial Bank of Commerce (NYSE: CM), all pay dividend yields in excess of 4% annualized, which trounce the roughly 2% yield available on the S&P 500 Index.

Investors can enjoy solid dividends for the present, and also compelling valuations that can provide gains going forward. These banks are not trading expensively, meaning they may provide investors with market-trouncing capital gains going forward.

In particular, Bank of Montreal and Canadian Imperial Bank of Commerce shares trade for less than 10 times trailing earnings and just 9 times forward earnings.  Moreover, Bank of Montreal and Canadian Imperial Bank of Commerce hold 5-year expected price-to-earnings growth ratios, a measure used to assess a company's current valuation within the context of its future earnings growth potential, of 1.0 times.  This means that these two banks are not excessively valued as compared to their future growth expectations.

In addition, Bank of Nova Scotia and Royal Bank of Canada are slightly more richly valued, but not by much, trading for 11 and 12 times trailing earnings, respectively.  While higher than their two competitors, these valuations still compare favorably to the P/E ratio on the S&P 500 which stands in the high teens.

The future looks bright for these two banks as well.  Bank of Nova Scotia and Royal Bank of Canada both hold 5-year expected PEG ratios of 0.98 and 1.11, respectively, meaning new investors are likely scooping up shares for a reasonable price based on their future growth potential.

The Foolish takeaway

These Canadian banks can offer investors high dividend yields, reasonable valuations and the safety of huge operations. Each of these banks holds a market capitalization in excess of $31 billion, with Royal Bank of Canada being the biggest player among the group with a $87 billion market value.

Income investors starved for yield will especially like Bank of Montreal and Canadian Imperial Bank of Commerce, which carry hefty 4.8% dividend yields at recent prices. Bank of Novia Scotia and Royal Bank of Canada are no slouches themselves, paying investors nearly 4% annually.

Investors in the United States may be tempted to overlook Canadian stocks, but that would be a mistake. Specifically, those interested in researching bank stocks who are willing to expand their geographical horizons may be handsomely rewarded by this group of Canadian financial institutions. Each of these stocks carry high dividend yields and reasonable valuations, and as a result, are worthy of further research.

Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends The Bank of Nova Scotia (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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