In a rising interest rate environment, it’s hard to best the big Canadian banks, which have been an essential foundation for the portfolios of many investors. Every marginal increase in interest rates provides the banks with a top-and bottom-line boost. Moreover, with the recent pickup in volatility, many investors may be looking to bolster their portfolios with lower-beta dividend-payers in order to smooth out the rocky road up ahead.
Toronto-Dominion Bank (TSX: TD)(NYSE: TD) and Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) are two popular, high-quality bank stocks that many investors may be weighing against each other, but which is the better bet at today’s prices?
TD Bank
As Canada’s most American bank, TD Bank is an outstanding outlet for investors who want to obtain exposure to the U.S. economy, which is still red-hot despite the excessive negative sentiment that drove the S&P 500 Composite Index into correction territory for the second time in 2018. Moreover, President Trump’s corporate tax cuts are slated to add $300 million in savings for the bank this year, and as the company increases its presence south of the border, investors stand to be rewarded with what I believe will be a greater magnitude of dividend increases.
TD Bank’s focus on its retail banking business also paves the way for a lower volatility earnings stream. Coupled with the fact that management has one of the most promising risk management strategies of all Canadian banks and you have a bank that deserves every bit of its premium multiple over its peers in the space.
Further, TD Bank’s management team is also extremely committed to embracing technology with its acquisition of artificial intelligence (AI) firm Layer 6 and its recent patent filing for a block chain point-of-sale system. It’s clear that TD Bank is on the cutting edge of technology, which I believe will give the company an upper-hand over its peers as we head deeper into the digital age.
The stock currently down ~7% from its all-time high with a 3.78% dividend yield. At just ~13 times trailing earnings, this premium stock isn’t really trading at a premium price, so investors would be very wise to consider adding a position today.
Bank of Nova Scotia
For those seeking exposure into emerging markets like Latin America in order to supercharge growth in a safe and effective manner, Bank of Nova Scotia may be your stock of choice.
Bank of Nova Scotia has a front-row seat to growth in the Latin American Pacific Alliance trade bloc, which consists of the rapidly growing foreign nations of Chile, Mexico, Colombia and Peru. These markets have “untapped” growth potential, and as the demand for financial services increases, Bank of Nova Scotia will be there to seize the opportunity.
The bank is expected to see its Latin American business contribute nearly a third of its total revenues at some point over the next three years, offering investors higher level growth than what they’d typically see from a domestically overexposed bank.
The stock is down ~8.5% from all-time highs and currently offers a 4.24% dividend yield. At just 11.41 times trailing earnings, Bank of Nova Scotia is one of the cheapest and safest ways to obtain exposure to red-hot emerging markets, which many investors may be lacking.
The better bet?
Both stocks are terrific buys at these levels, as they both trade at very fair prices with the ability to offer very consistent and generous annualized dividend increases, especially in a rising rate environment.
If I had to choose one, however, I’d go with TD Bank because it’s the best Canadian way to obtain exposure to the red-hot U.S. banking scene, which I believe will offer investors explosive growth without too much additional risk. Also, I’m a huge fan of management’s commitment to leveraging cutting-edge tech like AI and block chain.
With that in mind, TD Bank, although more expensive based on traditional valuation metrics, appears to be trading at a far greater discount to its intrinsic value.
Stay hungry. Stay Foolish.
