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Battle of the Bank Stocks: Which 1 Belongs in Your TFSA?

From investment management firms to insurance companies, from funds to Bay Street bankers, the financials sector of the TSX index offers investors a lot of choice when it comes to defensive dividends.

However, few stocks deliver in terms of defensiveness like the Big Six. Below you will find two tickers vying for a place in your passive-income portfolio. With a bit of growth and some attractively competitive market fundamentals, let’s put these two sturdy Canadian bankers head to head.

Bank of Nova Scotia (TSX:BNS)(NYSE:BNS)

A cornerstone of Canadian investing, Scotiabank saw a one-year past earnings growth of 6.2% that fell just short of the Canadian banking average of 8.9%; it does marginally outperform its five-year average past earnings growth of 5.5%, though.

A PEG of 1.7 times growth shows fairly bad value for money in terms of its outlook, which we will get around to discussing shortly. It’s a healthy stock, though, with an acceptable level of non-loan assets, which is par for the course when it comes to the Big Six.

In terms of value, it’s not far off the TSX index average with a P/E ratio of 10.7. A P/B of 1.4 shows some overvaluation in terms of real-world assets, however. Wrap these up with an acceptable dividend yield of 4.62%, and you have a serviceable stock to pack in your TFSA or RRSP.

So far, so good. In terms of quality, Scotiabank had a last-year ROE of 13%, which is, again, pretty standard for the TSX index, though a last-quarter EPS of $6.89 speaks to a company that knows how to use its shareholders’ funds judiciously. A 6.4% expected annual growth in earnings adds to the quality score, and is given extra weight by the fact that no Big Six bank has outstanding growth ahead of it. In this space, just being positive is the new “high growth.”

Its five-year beta of 1.2 relative to the market is interesting to see and flies in the face of the image of Big Six banks having low volatility. Of course, a beta of 1.2 is not indicative of high volatility compared to other sectors of the TSX index; however, one might expect lower-than-market turbulence from a Bay Street banker.

While we’re nitpicking, that P/E is low for the market, but a shade higher than the Canadian banking average. While it’s not a huge margin — Canadian banking has a P/E of 10.4, for instance — it is a little over the odds.

Bank of Montreal (TSX:BMO)(NYSE:BMO)

Down 0.08% in the last five days, BMO sure is a sluggish ticker — and that’s just what a defensive portfolio needs. Its beta of 1.03 indicates low volatility, which is just right for any investor seeking a stock that moves with the market. With a P/E of 11.9 and P/B of 1.5, you have a nicely valued stock — but let’s be real: that P/B ratio could be a touch lower, and that P/E is a shade higher than Scotiabank’s.

A forward annual dividend yield of 4.11% likewise trails Scotiabank’s, though its outlook is better at 8.4% in expected annual growth of earnings. While the Big Six don’t represent the highest growth on the TSX index, anything over 8% in a bank’s outlook is pretty good; add to this a discounted of 9% in the share price next to the future cash flow value, and you have a moderate buy.

The bottom line

Growth is the key to picking bank stocks, and on this basis alone, BMO looks like the stronger buy right now. Sure, the forward yield for Scotiabank is higher and its multiples lower, but, going forward, BMO appears to be the stronger stock.

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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. Bank of Nova Scotia is a recommendation of Stock Advisor Canada.

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