There are hard turnarounds, and then there are easy turnarounds. Most investors should be wary of hard turnarounds, but easy ones can be worth a deep dive even for more conservative investors. This is why investors should forget about New York Community Bancorp(NYSE: NYCB) and, instead, buy Bank of Nova Scotia(NYSE: BNS) and its lofty 6.2% dividend yield.
Here's a quick comparison to help explain why.
New York Community Bancorp falls on its face
New York Community Bancorp's ambition was to become a larger bank. To that end, it bought Flagstar Bank in December 2022. Then there was a series of bank runs and failures in early 2023. New York Community Bancorp sailed through that difficult period without too much trouble and, in fact, tried to take advantage of the market dislocation.
In mid-2023, New York Community Bancorp (through its Flagstar subsidiary) bought parts of Signature Bank, one of the banks that failed. The bank's goal of getting bigger happened pretty quickly, which is where things started to go wrong. Because of its larger size, New York Community Bancorp suddenly found itself facing the prospect of increased regulatory scrutiny for which it was not prepared. Then, in an unfortunate bit of timing, the bank announced that some large loans were in trouble, hinting that it didn't have a good handle on its loan portfolio.
The stock crumbled, the board cut the dividend to a token penny per share per quarter, the board brought in new management, and New York Community Bancorp had to accept a $1 billion bailout. It is now working to improve its internal controls and clean up its loan portfolio. The new management team appears to be making the right moves, but the turnaround effort isn't expected to be done until at least the end of 2026.
There's turnaround potential in this stock for sure, since the $1 billion cash infusion puts the company in reasonably good financial shape, but there's barely any dividend to speak of and there are still a few years to go in the turnaround effort.
If you are looking for something likely to be more rewarding now, you might want to consider Bank of Nova Scotia, more commonly known as Scotiabank.
Bank of Nova Scotia shifts gears
Bank of Nova Scotia's story is spread over a longer period, and it isn't nearly as worrisome. While many of the Canadian bank's peers chose to expand into the U.S. market, Scotiabank chose to expand into Central and South America. The logic was that there was both less competition and more long-term growth opportunities in those regions. The problem is that the markets were also more volatile. Scotiabank has lagged its peers on key financial metrics like earnings growth and return on equity.
The company has decided to shift gears. It is now looking to exit less desirable markets (such as Colombia) and expand in more attractive ones (like Mexico) as it tries to create a giant North American bank. A key part of the plan is to grow its business in the United States, like its peers. To that end, management just agreed to buy nearly 15% of KeyCorp(NYSE: KEY).
That's not something that a financially weak bank could have pulled off, since it really amounts to something of a helping hand to KeyCorp. And that's the big difference: Although Scotiabank is clearly looking to start growing its business in line with peers, it isn't really working from a position of weakness. It is still one of the largest and best-run banks in Canada (where it generates roughly two-thirds of its net income). It really just needs to work on the business outside of Canada.
So the lofty 6.2% dividend yield is a function of negative investor sentiment, but it probably overstates the risk. Notably, Scotiabank has paid a dividend every single year since 1833. And there's no indication that a dividend cut is imminent, though management has paused increases for the time being as it adjusts its business. If you like high-yield stocks, this is a turnaround that would be worth a deep dive, even if you are a conservative investor.
Scotiabank: The clear winner for most investors
To be fair, New York Community Bancorp is highly likely to turn its business around. But at this point, the only appeal here is stock price appreciation, and the turnaround isn't going to be complete until the end of 2026, at the earliest. That assumes everything works out according to plan. Bank of Nova Scotia's "turnaround" will probably take longer, but the bank is starting from a much stronger position. It's also paying you well to stick around, given the huge yield. If you like to sleep well at night, Scotiabank is the winner here.
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Reuben Gregg Brewer has positions in Bank Of Nova Scotia. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.
