Laurentian Bank of Canada (TSX:LB) is drawing attention with its high dividend yield of 6.5%, thus making it a tempting option for income-focused investors. While the yield is undoubtedly attractive, recent financial results and challenges suggest there's more to consider before labelling this stock a buy. So let's look at what's going on for investors looking for a stable dividend.

The numbers

Laurentian Bank stock's forward annual dividend of $1.88 translates into a yield well above the market average, a key selling point for those seeking reliable cash flow. The payout ratio, sitting at approximately 52.7%, implies some cushion for maintaining this dividend, even in tough times. However, a deeper dive into Laurentian's performance over the past year raises questions about how sustainable this yield might be, especially given the broader context of the bank's operations and profitability.

In its fourth-quarter results, Laurentian Bank stock reported net income of $40.7 million, up from $30.6 million in the same period the previous year. Earnings per share (EPS) rose to $0.88, exceeding expectations. However, the adjusted EPS of $0.89 was lower than the $1.00 achieved in Q4 2023. Return on equity for the quarter improved to 6.2% from 4.5% a year ago, reflecting some operational improvements. These quarterly results offer a glimmer of hope, but they stand in stark contrast to the bank's full-year performance.

For the fiscal year 2024, Laurentian Bank stock reported a net loss of $5.5 million and a diluted loss per share of $0.41. A significant drop from the previous year's net income of $181.1 million and diluted EPS of $3.89. This sharp decline was primarily driven by restructuring and impairment charges totalling $228.4 million, related to operational realignment and issues in its Personal & Commercial Banking segment.

Balancing the books

Laurentian Bank stock's balance sheet provides a mixed picture. With total cash of $8.3 billion, the bank has a strong liquidity position. However, its total debt of $17.9 billion and ongoing challenges in core business segments highlight the need for effective financial management. The stock's price-to-book ratio of 0.48 suggests it is trading well below its book value. This could indicate an opportunity for value investors. Yet, the operational risks tied to restructuring and market pressures temper the optimism this metric might inspire.

Laurentian Bank stock's recent leadership change adds another layer of complexity. The appointment of Éric Provost as President and CEO in late 2023 signalled a strategic shift. Yet such transitions often take time to yield measurable results. Investors will be watching closely to see whether the bank can implement meaningful changes that drive profitability and enhance shareholder value.

For income investors, the 6.5% dividend yield is undoubtedly appealing, offering a steady return in an otherwise volatile market. However, the sustainability of this yield hinges on Laurentian Bank stock's ability to regain consistent profitability. While the payout ratio provides some comfort, further financial setbacks could strain the bank's capacity to maintain such high payouts.

Bottom line

In weighing all factors, Laurentian Bank stock presents a high-risk, high-reward scenario. The attractive dividend yield and undervaluation metrics may draw in those with a higher risk tolerance. Yet the operational challenges, recent losses, and uncertain recovery path make it a precarious choice. For long-term investors willing to weather volatility and bet on a turnaround, it might be worth the gamble. For others, waiting on the sidelines for clearer signs of stabilization could be the more prudent approach.