Investing in Laurentian Bank Stock

In general, bank stocks can provide investment houses or even individual investors with long-term, stable returns. Even the most experienced and savviest of investors will turn to bank stocks, particularly in the Canadian market, as a viable investment option. This is largely due to the proven resilience and stability of the Canadian banking sector.

For this article, WealthProfessional sets its sights on one Canadian bank’s stocks: Laurentian Bank. So, is Laurentian Bank stock a good buy? Let’s delve into the stock to find out.

Indicators of a viable bank stock for investment

Before considering a bank stock (or any stock for that matter), it’s crucial to consider their key indicators first.

1. Market Capitalization aka market cap: the total value of all a company’s shares. The market cap can inform investors of a company’s growth potential. This key indicator can also provide a glimpse into the company’s standing in its respective industry, as well as how it fares against its rivals.

This number can be computed via this formula:

Market cap = total number of outstanding shares x share price

2. Price to Earnings (P/E) ratio: this is the ratio that determines whether the company’s stock price is higher or lower compared to the company’s revenues. To find this ratio, this is the formula:

P/E ratio = current share price ÷ earnings per share (EPS)

3. Price-to-book or (P/B) value ratio: this ratio compares the current market cap of a company with its accounting value. If a bank or other type of company has a low P/B ratio, this is an indicator of a good stock, as this means investors would be paying less for the actual book value of the stocks.

Here’s how to compute the P/B ratio:

P/B value ratio = company’s stock price per share ÷ book value per share

4. Earnings Per Share (EPS): as the name implies, EPS tells investors how much money a company earns for each share of stock. Experienced Wall Street analysts often refer to the EPS as a reliable measure of a company’s value.

EPS = (net income - company's preferred dividends) ÷ number of outstanding shares

5. Dividend Payout Ratio (DPR): this indicates how much a company pays out to investors in terms of dividends compared to the stock’s earnings. The DPR can be a reliable indicator of a company’s earnings and how well it can cover dividends.   

DPR = annual dividend per share ÷ EPS

6. Dividend yield: this is another financial ratio that tells investors the percentage of a company's share price that it pays out in dividends each year. As an example, let’s say a bank has a share price of $20 and pays a dividend of $1 per year. That would make its dividend yield 5%.

Dividend yield = annual dividend per share ÷ price per share

Laurentian Bank’s key indicators

Now that we know which indicators to look at, how do Laurentian Bank’s stocks perform? Here’s a rundown.

Laurentian Bank P/B Value Ratio: 0.41 (as of April 2024)

The bank’s very low P/B ratio indicates that investing in Laurentian Bank stock now may just be a sound investment decision. Although the price of the stock now clearly costs much less than its actual value, it’s best to look at the other indicators.

Laurentian Bank P/E Ratio: 7.36

The bank’s first quarter financial results beat original expectations, but the Earnings Per Share are a tad lower than estimated. For the first quarter of 2024, Laurentian Bank made more revenues and exceeded estimates by 1.7% but the lower EPS was off expected levels by 12%. Still, this is a healthy indicator by most accounts.

Laurentian Bank Dividend Payout Ratio: 52.96%

At nearly 53%, Laurentian Bank’s dividend payout ratio is within the acceptable range for a bank stock. Its high ratio means that the bank can afford to pay nearly half of its earnings as dividends and that it has a solid position in the industry. This is a good indicator that LB has the funds to sustain its operations and can still pay dividends to shareholders.

Laurentian Bank Market Cap: $1.12 billion

In terms of market cap, Laurentian Bank unfortunately sits near the bottom of the list of Canadian banks. Taken alone, this may not be a good sign of it being a good investment. However, the other indicators show us that Laurentian Bank still has plenty of room for growth.

Laurentian Bank Dividend Yield: 7.3%

Wall Street analysts have seen that the bank’s dividend yield is rather high. While this is a good indication, the downside is that Laurentian Bank’s dividends have been declining and have shown considerable volatility in the past decade.

Unfortunately, Laurentian Bank is also not among Canada’s 2024 dividend aristocrats nor is it part of the list of dividend kings. So, while Laurentian Bank’s dividend yield is a positive indicator, its continuing decline and instability in dividend payouts paints a different picture.

A look back at Laurentian Bank’s history

The Laurentian Bank of Canada (TSX ticker code: LB) was founded in 1846 by Monsignor Ignace Bourget, the second Bishop of Montreal and at least 15 other prominent businessmen. As the bank was established in French-speaking Quebec, its original name was Banque d'Épargne de la Cité et du District de Montréal, or Montreal City and District Savings Bank.

Significant milestones in the bank's history include:

• 1846: achieved a customer base of 11,000 and $3 million in deposits within 25 years, transitioning to a share capital limited company with a federal charter. The headquarters were established at 262 Rue Saint-Jacques, Montreal
• 1921: celebrated its 75th anniversary, amassing assets of $49 million
• 1939: became the first to incorporate a trust company, establishing the Montreal City and District Trustees, later Laurentian Trust
• 1965: listed its stocks on the Montreal Stock Exchange
• 1974-1976: introduced the Bancaide ATM system and reached over $1 billion in assets
• 1983: debuted stocks on the Toronto Stock Exchange
• 2000: expanded its services by acquiring Sun Life Trust Company, forming B2B Bank
• 2016: consolidated its Montreal offices to a new location at 1360 Rene Levesque Boulevard West

While its history alone and present standing as Canada’s ninth largest bank may be impressive, these should not be taken as the only signs that Laurentian Bank stock is a good buy. Other key indicators must be considered to determine if investing in this stock is viable.

Is Laurentian Bank worth investing in?

The most important question is if Laurentian Bank is worth an investor’s time and money. So, is Laurentian stock a good buy? At first glance, its fundamentals appear to be solid, although some investors will point out that Laurentian Bank is not among Canada’s Big Five banks, and barely makes it in the top ten.

Investors who still have some Laurentian Bank stock may consider selling them in the next increase of their stock prices. Those who are considering buying Laurentian Bank stock may want to hold off unless they are willing to take the risk. Holding off can mean not losing out on buying another more profitable bank stock.

Over a year ago, two of Canada’s Big Five, Toronto-Dominion and Scotiabank, were considering buying Laurentian. Both big banks pulled out of the bidding after a strategic review made by Laurentian Bank itself revealed that buying it may not be a good move.

Here’s a video speaking about the strategic review that sent its bidders running for the hills. The presenters noted that over a year ago, Scotiabank was looking to expand its footprint in Quebec and TD was awash with extra cash.

After the failed sale, Laurentian Bank announced CEO Rania Llewellyn’s resignation, further plunging Laurentian Bank stock. Laurentian has since hired three independent directors to focus on improving on the bank’s performance.

What to consider before you invest in Laurentian Bank stocks

Before buying Laurentian Bank stock or any other investment for that matter, here are a few things to keep in mind:

1. Think of the gains without ignoring the risks

In Laurentian Bank stocks’ case, it is an undervalued stock that is also underperforming. While it may pay off big if the stock is bought at a low price, then sold later at a profit, consider the risks involved. Other banks are not keen on buying Laurentian Bank and there is no guarantee that they will soon.

2. Understand your investment

Never blindly put money into an investment you know absolutely nothing about. While you don’t have to be an expert on it to invest, having some knowledge of it does not hurt either. Get as much information as you can about an investment before investing in it.

3. Always diversify your investment

Do not limit your investments or your portfolio to one bank stock or one type of stock alone. Mix it up with energy stocks, tech stocks, and diversify your investment portfolio with other asset classes like ETFs, mutual funds, REITs, etc.

Diversification can protect against the effects of inflation and make up for any losing or underperforming investments.

So, while Laurentian Bank stocks have some good indicators on paper, its dividends and management seem to be problematic. The recent bids of TD and Scotiabank not pushing through are a huge red flag, and Laurentian stock appears to still be reeling from the discontinued sale.

Investors should delve deeper into investing in Laurentian Bank stock without disregarding their financial goals, risk appetite, and time horizon. It’s up to the individual investor to buy or sell Laurentian Bank stock. Savvy investors and advisors may prefer to invest in other Canadian bank stocks with better growth and returns. 

Would you consider investing in Laurentian Bank stocks? Why or why not? Let us know in the comments!