Tuesday, March 13, 2012

Lets look at Bank of Nova Scotia (B.N.S.) trades on both the TSX and NYSE.
For discussion and to determine the entry and exit points.
By using the historical P/E ratio one can determine what the entry and exit positions should be.
B.N.S. for the past 16 years has had an average P/E trading range of 14.39 (high) and 9.48 (low) after removing a couple of year due to non company earnings.
B.N.S. also had some wild swings in the past, P/E value for example in 2008 B.N.S. had a high P/E ratio of 20.55 and a really low P/E ratio of 5.8 in 2009.
B.N.S. has over that time have had an average annual Earnings growth of 21.1% . Knowing or at least estimating future earnings you can estimate the share price. In this case B.N.S. should earn about $5.09 in 2012 and using the average P/E the estimated trading range should be 73.22 (high) and 48.26 (low).
If your wondering about dividend growth? Yes B.N.S. has had growth in that area as well.
For the past 16 years (16 years average) B.N.S. has increased its dividend per share by more then 4 fold in the past decade.
There is no indication that B.N.S. won’t continue to paying out more dividends going forward. In fact it is expected that B.N.S. will increase its dividend between 4 and 6% in 2012 to an estimated amount of 2.15 per share.
For Dividends you can look at the average rate per share (P/D)as well to determine the future share price. For the past 17years B.N.S. had a P/D of 3.51 (high) and 5.4 (low) with a current P/D of 4.09% is a little below the average mean.
At todays price of $53.85 makes it look like a hold/ low buy ! I am looking for a pull back in the share price as we head into the summer.
Now on to how to trade, as I’m looking to purchase more shares of B.N.S. as my current average is $52 per share.
I’ll be writing a put at my price estimates in this case I’m looking to write a spread which is both the Call at $60 and a Put Option at $45 on the CBOE, www.cboe.com. In this case I’m looking to sell in around the quarterly mark. So I’m looking to sell 10 June 2012 Put at $45 contracts for .85 per share and sell 20 Call at $60 contracts for September 2012 and collect the premium of .60 per share
 
If your wondering on what the return would be? For the time period on this option trade works out to be Puts = $850 plus Calls $1200 for a total of $2050 and both expire in June. Before commish.
Plus dividends $1040 and growth up to the $60 mark.