4 Rock-Ribbed Canadian Bank Stocks

BOSTON (TheStreet) -- U.S. investors seeking high-yielding stocks of companies with earnings not likely to be decimated by Europe's economic contagion need look no further than our neighbor to the north and Canadian bank stocks, the best of which have 10-year returns double that of the S&P 500.

The structure of the conservatively run Canadian banking system puts a lid on risk, and its largest banks are, in effect, given protected status by the barriers to entry put in place by the government.

As a result, the nation's six largest banks collectively hold almost 90% of that nation's banking assets, giving them significant competitive advantages in the world's 10th largest economy.

So Canadian banks have been able to put up good earnings numbers and increase their dividends, thanks to their nation's relative economic health, in turn thanks to their government's fiscal conservatism.

And that shows up in their long-term returns, as the four stocks summarized below have 10-year annualized returns that range from 13.5% to 16.3%, vs. the S&P 500's 7% for the period.

In contrast, the deregulated U.S. banking sector has been struggling since 2007, dealing with a collapsing real estate market, investment losses and economic leadership that can't figure out which way is up.

Canadian banks have used this disparity and their healthy capital positions to make acquisitions on the cheap and have built their presence in the U.S. financial sector. Although those bets aren't likely to pay off for some time, they bode well for positive long-term results.

Ironically, even as Canadian economic growth is slowing, the nation's banks are likely to be buoyed by actions of U.S. banking regulators. S&P Capital IQ economist Alex Young said in a July 19 research note, that another round of quantitative easing (QE3) by the Federal Reserve "is likely to weigh on the U.S. dollar, boost commodities and hence the raw-material dependent, Canadian economy," via exports, three-quarters of which are U.S.-bound.

Here then are the four highest-rated Canadian bank stocks by S&P Capital IQ, ranked in inverse order of their 10-year annualized return:

4. Canadian Imperial Bank of Commerce ( CM)

Company profile: Canadian Imperial Bank, with a market value of $29 billion, is the nation's fifth-largest bank.

Dividend Yield: 5.02%

Investor takeaway: Its shares are up 0.3% this year, have a three-year, annualized return of 12.6% and a 10-year return of 13.5%. Analysts give its shares one "buy" rating, five "buy/holds," and 12 "holds," according to a survey of analysts by S&P.

Analysts' consensus estimate is that CIBC will earn $7.78 per share this year, (up 6% from last year) and grow earnings by 4%, to $8.13 per share, next year. S&P rates its shares a "buy" with an $80 price target, which is a 12.6% premium to the current price.

3. Bank of Montreal ( BMO)

Company profile: Bank of Montreal, with a market value of $37 billion, is the fourth-largest bank in Canada.

Dividend Yield: 4.8%

Investor takeaway: Its shares are up 7.3% this year, have a three-year, annualized return of 13.6% and a 10-year return of 13.6%. Analysts give its shares three "buy/hold," ratings, 12 "holds," three "weak holds," and one "sell," according to a survey of analysts by S&P.

S&P has it "buy" rated with a $65 price target, which is a 13% premium to the current price. It's expected to earn $5.59 per share this year and $5.93 per share in 2013.

2. The Bank of Nova Scotia ( BNS)

Company profile: "Scotiabank," is the third-largest bank in Canada, with a market value of $58 billion.

Dividend Yield: 4.2%

Investor takeaway: Its shares are up 5.6% this year, have a three-year, average annual return of 14%, and a 10-year return of 15.7%. Analysts give its shares seven "buy" ratings, six "buy/holds," four "holds" and one "weak hold," according to a survey of analysts by S&P.

Analysts' consensus estimate is for earnings of $4.68 per share this year, and grow by 7% to $5.03 per share next year. S&P has its shares "buy" rated with a $60 price target, which is a 20% premium to the current price.

1. Toronto-Dominion Bank ( TD)

Company profile: TD bank, with a market value of $71 billion, is the second-largest Canadian bank. Its second quarter revenue was up 11.5% year-over-year, to an all-time quarterly high.

Dividend Yield: 3.6%

Investor takeaway: Its shares are up 8.5% this year, have a three-year, average annual return of 17% and a 10-year annualized return of 16.3%.

Analysts give its shares six "buy" ratings, nine "buy/holds," two "holds," and one "sell," according to a survey of analysts by S&P.

S&P has it rated "buy," with an $85 price target, which is a 7.5% premium to the current price. It's expected to earn $7.25 per share this year, up 12% from the $6.45 per share of last year.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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