Is Toronto-Dominion Bank or Royal Bank of Canada a Better Investment for 2016?

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Royal Bank of Canada (TSX:RY)(NYSE:RY) are both top picks, but one might be a safer bet.

| More on:
The Motley Fool

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) and Royal Bank of Canada (TSX:RY)(NYSE:RY) are perennial top picks and hold anchor positions in many Canadian portfolios.

Let’s take a look at both companies to see if one is a better choice heading into 2016.

Earnings

TD reported adjusted net income of $8.754 billion or $4.61 per share for fiscal 2015. The results were 8% higher than last year. The company relies heavily on its personal and commercial banking activities with large operations in both Canada and the United States. The strong U.S. dollar pushed adjusted earnings from the U.S. operations up by 21%.

Royal Bank had 2015 adjusted net income of $9.918 billion, or $6.66 per share, up 9% compared with 2014. The company gets 52% of its income from personal and commercial banking activities. Capital markets activities bring in about 24% of profits, with the rest coming from wealth management, insurance, and investor and treasury services.

Energy exposure

A big concern for bank investors is the level of exposure the financial institutions have to the struggling energy patch.

In its fiscal Q4 2015 earnings statement, TD said it had $3.8 billion in drawn exposure to energy companies, which is less than 1% of its total loan book.

Royal Bank said its Q4 2015 drawn exposure in the oil and gas sector was $7.7 billion, or 1.6% of total loans.

Housing exposure

TD has $246 billion in Canadian residential mortgages. Uninsured mortgages represent 44% of the portfolio and those loans have an average loan-to-value ratio of 61%.

Royal Bank finished Q4 with $205 billion in Canadian residential mortgages. Uninsured loans represent 62% of the portfolio and the loan-to-value ratio is 55% on that component.

Capitalization

TD finished Q4 with a CET1 ratio of 9.9%. Royal Bank finished fiscal 2015 with a CET1 ratio of 10.6%.

Dividends

TD pays a quarterly dividend of $0.51 per share that yields 3.7%. The company increased the dividend by 9% in 2015.

Royal Bank’s dividend is $0.79 per share and yields 4.2%. The dividend was increased twice in 2015 for a total gain of 8% over 2014.

Which bank is a better bet?

Both TD and Royal Bank are great companies with long histories of providing shareholders with fantastic returns, and investors should be comfortable holding either name.

Right now, TD has lower oil and gas exposure and a larger part of its mortgage portfolio is insured, so a total meltdown in Canada would probably hit Royal Bank a bit harder. Royal Bank also gets a significant part of its earnings from capital markets activities, which can be more volatile than the other segments. On the positive side, Royal’s capitalization is better and the stock offers a slightly higher dividend yield.

TD is probably the way to go if you want to make the safer bet. If the highest yield is your main objective, and you are willing to take on a bit more risk, go with Royal Bank.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stocks mentioned.

More on Bank Stocks

Question marks in a pile
Bank Stocks

Should You Buy Canadian Western Bank for its 4.8% Dividend Yield?

Down 35% from all-time highs, Canadian Western Bank offers a tasty dividend yield of 4.8%. Is the TSX bank stock…

Read more »

analyze data
Bank Stocks

The Average Canadian Stock Investor Owns This 1 Stock: Do You?

This Canadian stock has about 49% ownership by the public, and with growth and dividends to consider, it's a top…

Read more »

falling red arrow and lifting
Stocks for Beginners

1 Dividend Stock Down 18% to Buy Right Now

CIBC (TSX:CM) is a strong dividend stock investors should certainly consider not just for passive income, but future growth as…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Tech Stocks

Forget TD Stock: 2 Tech Stocks to Buy Instead

TD remains a solid income stock but two outperforming tech stocks are better buys for their strong growth and upside…

Read more »

Question marks in a pile
Bank Stocks

Where Will Royal Bank of Canada Stock Be in 5 Years?

Royal Bank's continued focus on a strong capital position plus its acquisition of HSBC will likely ensure prosperous times ahead.

Read more »

Payday ringed on a calendar
Bank Stocks

How to Build a Bulletproof Monthly Passive-Income Portfolio With Just $10,000 and TD Stock

TD (TSX:TD) stock has been a poor performer over the last few years, but could be a big passive-income winner…

Read more »

Man considering whether to sell or buy
Bank Stocks

Is RBC Stock a Buy, Sell, or Hold?

Shares of Royal Bank of Canada have delivered game-changing returns to shareholders in the last two decades. Is RBC stock…

Read more »

Dice engraved with the words buy and sell
Bank Stocks

Is Scotiabank (BNS) Stock a Buy, Sell, or Hold?

Let's dive into whether the Bank of Nova Scotia (TSX:BNS) remains a solid buy or if it's more of a…

Read more »