National Bank of Canada: A Dividend Powerhouse with Strategic Capital Allocation

The National Bank of Canada (NA.TO) has long been a pillar of Canadian finance, but its recent moves—bolstered by a robust dividend increase and a disciplined capital strategy—signal a new chapter of shareholder value creation. With a 3.4% dividend hike to $1.18 per share and plans to resume share buybacks in 2026, the bank is positioning itself as a top-tier investment for income-focused investors. Let's dissect its financial health and assess why now is the time to consider this opportunity.

The Dividend Advantage: Growth Amid Uncertainty

National Bank's latest dividend increase to $1.18 per share—a 3.4% rise from its previous payout—reflects confidence in its earnings resilience. This marks the third consecutive year of dividend growth, with the payout ratio remaining disciplined at 40.1% (down from 43.1% in 2024). A lower payout ratio means the bank retains earnings to fuel growth while still rewarding shareholders.

Crucially, the bank's CET1 capital ratio of 13.6% (as of Q1 2025) exceeds regulatory requirements, ensuring it can sustain dividends even during economic volatility. Compare this to peers like Royal Bank of Canada (RY.TO), which reported a CET1 ratio of 12.5%—National Bank's buffer is a clear competitive edge.

Share Buybacks: A Strategic Pause, Not a Retreat

While the bank's current normal course issuer bid (NCIB)—allowing repurchases of up to 2.07% of outstanding shares—remains in place, management has delayed active buybacks until 2026. This pause is strategic, not a sign of weakness.

First, the $6.8 billion acquisition of Canadian Western Bank (CWB) in early 2025 required capital to integrate operations and capitalize on cross-selling opportunities. Second, with global economic uncertainties lingering, management prioritized preserving liquidity. However, this restraint sets the stage for a more aggressive buyback cycle post-2026, when CWB synergies are fully realized.

Financial Health: Strong Metrics Underpin Long-Term Value

National Bank's Q1 2025 results underscore its financial fortitude:
- Net income rose 8% year-over-year to $997 million, driven by wealth management and global markets divisions.
- Adjusted ROE improved to 17.6%, reflecting operational efficiency.
- Liquidity metrics remain robust, with a Liquidity Coverage Ratio (LCR) of 154%, ensuring it can weather short-term shocks.

These metrics are amplified by its $536 billion in assets and a 5% annualized loan growth rate, demonstrating scalability. Even in the Personal and Commercial segment—where provisions for credit losses temporarily dented profitability—management emphasized prudent risk controls, maintaining a conservative loan-to-deposit ratio.

Why Invest Now?

1. Income Stability: The dividend yield of 3.8% (as of May 2025) is among the highest in Canada's banking sector, with a track record of growth.
2. Strategic Flexibility: The delayed buyback program protects capital while positioning the bank to capitalize on opportunistic repurchases once CWB synergies materialize.
3. Market Leadership: National Bank's $483.8 billion in total assets and 362 branches (plus CWB's network) give it a competitive edge in domestic markets.

Risks to Consider

• Economic Downturn: Like all banks, National Bank is exposed to loan defaults in a recession.
• Regulatory Scrutiny: Stricter capital rules could constrain buyback flexibility.

However, the bank's 13.6% CET1 ratio and diversified revenue streams (Wealth Management now contributes 24% of profits) mitigate these risks.

Conclusion: A Rare Blend of Income and Growth

National Bank of Canada offers investors a compelling mix of reliable dividends, strong capital metrics, and strategic growth avenues post-CWB. While the buyback pause is temporary, it underscores management's focus on long-term value. With shares trading at a P/B ratio of 1.4x—below its five-year average—this is a buy signal for those seeking stability and upside.

Invest now, and position yourself to benefit from National Bank's dividend power and future buyback cycle.

Act Now: The combination of income, capital strength, and strategic foresight makes National Bank a standout choice for 2025 and beyond.