Increasing Payout Ratio on Banks

Written by The Dividend Guy on June 5, 2006

There has been some media hype in the last little while in Canada about our banks - which have historically been excellent dividend payers - increasing their payout ratios to offer shareholders with an increased return from dividend payments.

The driving factor is that the banks are now saying that there are limited growth opportunities for the companies, and the next best thing for them to plow their earnings into is a dividend to shareowners as opposed to using the earnings to fund growth.

At first, this sounds like a great thing. As a bank investor (RBC Bank) I will potentially enjoy increased dividend payments, and therefore increased dividend reinvestment into more and more shares as the company pays out more of their earnings. However, I think investors do need to be a bit concerned with the ability of the firms to grow if they do not have the earnings available to fund growth opportunities in the future. I hope each company still proactively looks for other ways add value for shareholders. This growth, combined with dividend payments, is where investors earn nine returns from these companies. One without the other is half as good, in my humble opinion.

To see an article covering this topic, click here.


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2 Comments so far

  1. Jay Walker June 13, 2006 7:00 pm

    Of course, they talked mainly about the BMO, raising its payout ratio. TD looks like it’s retrenching to Canada and retail banking, and CIBC is still recovering from Enron.

    This leaves RBC, and Bank of Nova Scotia. I personally think that the BNS is the only one with an observable growth strategy - their time in Latin America seems to be paying off - they get about 1/4 of their income there, and fully half of their employees are now located outside Canada. I think they have a good platform for future growth, plus real life experience of blending different cultures into their bank.

    As to the Royal, they seem to be producing better earnings, but their growth strategy remains mysterious.

    Finally, BNS stock doesn’t appear expensive relative to the others - it’s in the middle or lower end of the pack. I believe that 10 years out, they’ll have proven to have had the best growth profile.

    Jay Walker
    The Confused Capitalist

  2. Tyler October 11, 2006 2:04 pm

    I also agree with the analysis on BNS. I currently hold a position and am kicking myself for not adding more this past summer.
    I guess those are the breaks.

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