20 November 2006

Bank Analysts Foresee Dividend Boost

  
The Toronto Star, Tara Perkins, 20 November 2006

Most of Canada's big banks will be boosting their dividends, analysts say, after investors flocked to bank stocks when they fled income trusts.

"The banks have considerable capacity to increase dividends," CIBC World Markets analyst Darko Mihelic said in a research note this week.

On average, banks could raise their current dividend by 10 per cent and still sit comfortably within their targeted payout ratios, he wrote.

"With the recent demoralization faced by income trust investors and BMO's move to a higher targeted payout ratio last quarter, we believe it may tempt other banks to push their dividends higher — maybe even their target payout ratios," he added.

In May, the Bank of Montreal announced it was raising its target dividend payout range to 45 to 55 per cent of profits available to shareholders, up from 35 to 45 per cent.

After Ottawa announced on Halloween that it would be curtailing the income trust sector, many investors bought bank stocks, hoping their dividends would replace some of the income trust distributions they would be missing out on in the future.

The S&P/TSX Bank Index rose four per cent in the 10 trading days after Ottawa announced it was curtailing the income trust sector, Genuity Capital Markets analyst Mario Mendonca said in a recent research report.

The bank stocks have enjoyed a strong recovery — from 15 per cent to more than 20 per cent — from their spring lows, due in part to a more favourable interest rate environment, UBS Investment Research analyst Jason Bilodeau said in a note.

The recent increase in the demand for yield should have a marginally positive impact on dividend hikes at the banks, he said. Dividend payout ratios should drift higher through 2007 as the banks accumulate capital and growth slows, he said.

The banks will be releasing their fourth quarter earnings beginning Nov. 28 and going into the second week of December.

Analysts expect the Bank of Montreal, The Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada to announce increases to their quarterly dividends this earnings season.

Both Bilodeau and Mendonca are looking for those four banks to raise their dividends by between three and eight per cent from the previous quarter.

CIBC's Mihelic said the fourth quarter could see "materially better-than-forecast dividend hikes" because the banks are currently paying out less than their targets.

"If each bank simply decided to raise the current dividend up to its own maximum targeted payout ratio (of 2006 earnings), it would result in an average increase of 11 per cent," he wrote.

CIBC World Markets believes the market has not fully priced in the effect of Ottawa's new tax on income trusts.

"As most income trusts continue to suffer over time, we suspect the banks will further benefit," Mihelic wrote. "Valuations have improved dramatically and virtually overnight with the government's actions on income trusts being the catalyst." The bank's valuations would be further supported if they grew dividends per share more quickly than earnings grow, he wrote.
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