When I began to write & design the objectives for my Dividend Growth portfolio last summer, my intention was to designate a select, short list of holdings that would represent the “core stocks” of the portfolio. My goal was to initially buy & hold 5-7 of these, out of a maximum of 20 stocks, in order to anchor the portfolio for the years ahead. The intention is to never sell, but simply continue to add to existing positions and use the dividends paid, plus injected savings, to purchase stocks that diversify the portfolio or add cash flow over the time period required.
I’ve finalized my research and acquired such holdings as SC, RY, MFC, SLF & SAP and have now begun to turn my attention to BNS as my next core holding.
I’m a firm believer in both the application & practice that an investor should always consider both the fundamentals and valuation of any stock they purchase. You may recognize that you have the ability to evaluate one better than the other, but considering both should be something you adapt into any stock selection process for a variety of reasons.
Almost 75% of my evaluating techniques revolve around the fundamentals of a company. There are many reasons for this, but for the most part it’s what I’m good at and I feel that fundamentals hold more potential for capital appreciation looking to the future than other factors. Valuation in my opinion is simply looking to ensure that you’re not overpaying for a position in a stock due to unfavourable factors or your own emotion. Although I do wait for the price of a stock to come to me by setting firm entry positions through various approaches of valuation; my main focus has always been looking forward and anticipating where a company may be relative to the market over a specific time period. I don’t look to where the herd is migrating, but instead take the time and practice I’ve developed through my own education & experience to develop a clear understanding of what factors affect the business moving forward.
With reference to BNS, what’s caught my attention:
The company is making strategic, methodical & calculated acquisitions of international assets that are aligned with their overall goal of where they want to go. To date there hasn’t been any urgency, panic, emotional or knee-jerk response to any market or opportunity that may have presented itself to management. They have the vision to become something global and their plan is implemented with patience and poise. They’re not the biggest international bank, but they’re building a foundation for growth in multiple markets and running under the radar of their competition. That’s the simple brilliance of their plan. They know they can’t compete aggressively & directly in the retail or institutional environment of the largest banks to steal substantial market share, so they’ve focused on what’s helped them along so far: concentrating on niche banking. The US market is loaded with financials with efficiencies unmatched by the Canadian group and the acquisitions down south (Ameritrade aside) have been uninspiring to date.
BNS has also adopted a North-South mentality to their product portfolio and global reach. This is a little known secret in marketing that it’s easier to sell a product or service in a new market if you move North-South rather than East-West.
They’ve been aggressively acquiring, training and selecting top prospects from specific markets with competencies to execute tailored strategies for each of the markets they’re involved within. This allows the core business model to match itself with cultural demands, trends & expectations of the market as they expand and gain market share rather than attempting to inject a carbon-copied pattern of operations similar to the North American operations.
The bank currently serves internationally in the Caribbean and Central America, Mexico, Latin America, UK, Egypt and Asia – almost the equivalent of their total customers domestically in Canada. (Domestic: 21,400 employees & 7 million customers vs. International: 27,100 employees & 5 million customers). Their international growth objectives have even been met in the last five years at +/- 5% of forecasts (my +/- 5% Value Rule).
It’s important to also stay objective when looking at foreign investment opportunities for corporations. When someone mentions “South America”, people tend to associate immediately with Hugo Chavez & his Venezuelan empire of oil & hatred for the United States. Yet, these markets are far from Neanderthal Economies. Their workforces are highly educated, their import/export businesses have networks throughout the region and ability to exploit natural resources for both their own use & foreign sales generates revenues that are frequently overlooked. Some of these international markets even encourage foreign investment through very favourable taxation which has shown to have positive results on EPS growth. The benefit to these countries & markets is gaining exposure/experience to more sophisticated business practices to copy, adapt & innovate from for their own distinct advantages. This has the tendency to encourage foreign investment through integration rather than outright purchases. Too often a company has attempted to acquire an international partner, only to see it end in failure. A foreign company will attempt to break into a market by simply purchasing a company & conducting business just as they would in their home market without properly understanding the fundamentals of that new market. Business practices based on cultural importance, ethnic, religious or simple customs may have large impacts on business operations. This is one of the rare opportunities to develop a “competitive advantage” that is often overlooked by outsiders. As an experienced business enters a new market, you have the rare opportunity to acquire new core competencies based on those conditions of the cultural environment. Most often they are achieved through “growing pains”, but are well worth the time & effort. BNS has shown a habit & intent to purchase minority stakes in select businesses & then help to influence their operations through their own core competencies with the intent to secure a majority stake in the future – which they are beginning to initiate as of late.
Another key element to the BNS is diversification – not only among various currencies, but also adapting to new markets. When one market is down, another may be up. The current environment has many economies in sync with one another, but that has rarely been the case on a historical basis and most likely will not persist forever either. I have contemplated this as one of the most undervalued features of BNS’ global vision. In the future, the strategy may provide greater growth & stability even though today the view is one of hesitation due to the high valuation of our dollar and market volatility.
With these factors in mind – I’ve been slowly adding to an initiated position over the past few months to take advantage of the perceived risk of the credit worries south of the border (which I feel BNS has nil) and the concerns over earnings from non-Canadian sources in the upcoming quarterly results (which I expect will exceed expectations).
Great post Brad.
I agree with your thoughts on BNS and that is why I have initiated a position that I will add to over the months and years when I fee it gets cheap, which I’m sure will be rare occassions.
I don’t hold as much of BNS as RY, but I have them in about a 55/45 ratio of weightings. I think as time move on, we’ll look back over the past few weeks/months & wonder how we didn’t buy even more at this valuation. But being young, cash can be tight…so yes – someday more!!!