If you missed your shot at catching Royal Canadian Bank (TSX:RY)(NYSE:RY) or Toronto-Dominion Bank (TSX:TD)(NYSE:TD) stock on the late December dip, you might have a second chance to pick up one of the Big Two banks continue to retreat.
Both banks sport dividend yields of 4%, but which if any is the better buy this spring? Let’s have a closer look at each name to see which, if any, is worthy of your TFSA investment dollars.
The largest bank in Canada delivered a decent Q1 2019 earnings report that was overshadowed by weakness in the capital markets division. The weakness in the capital markets wasn’t unique to Royal Bank, however, and as the banks gradually recover from this near-term bout of harsh macro conditions, I do believe Royal Bank is one of the best-positioned names to return to its former glory.
Common to all banks, earnings growth tapered off as credit expenses popped. What sets Royal Bank apart from the batch is the fact that the bank was able to keep its ROE, currently at 17.5%, up despite all the headwinds.
Moving forward, further investments in the U.S. should allow the bank to keeps its margins propped up, but in the meantime, like its peers, Royal Bank will need to ride out those rough industry-wide waves.
At the time of writing, Royal Bank trades at a 11.3 forward P/E, and a 2.0 P/B, both of which are slightly lower than the five-year historical average multiples of 12.6, and 2.1, respectively. The dividend yield at 4% is also slightly higher than where it normally is at 3.7%.
For those looking for a proven leader that continues to solidify its long-term growth story, you can’t go wrong with Royal Bank at these levels, even if the stock isn’t at levels where you’d consider it to be a steal.
TD Bank is Canada’s second-largest bank and a likely challenger of Royal Bank for the title of Canada’s largest company over the next five years.
For the first quarter, TD Bank faced the same capital markets pressures as Royal Bank. To add even more salt in the wound for the quarter, the Wholesale banking division dragged experienced higher-than-expected expenses together with lower trading margins, a one-two punch that sent TD Bank stock down.
While the quarter was indeed weak, it wasn’t bad news across the board as the Canadian retail segment posted industry-leading adjusted net income growth of 6%. The U.S. retail business also experienced 21% in net income growth for the quarter, which, while impressive, wasn’t enough to save the quarter that was a rare miss for a bank that always meets or exceeds analyst expectations.
The stock currently trades at a 10.9 forward P/E, and a 1.7 P/B, both of which are lower than the five-year historical average multiples of 13.4, and 1.9, respectively. Like Royal Bank, you’re getting a 4% yield that’s slightly higher than where it is typically together with a slight discount based on traditional valuation metrics to account for the headwinds experienced in the broader banking scene.
And the better buy is…
TD Bank looks like the slightly better bet after posting one of the weakest quarters in a while. Although Royal Bank’s first quarter was nothing to write home about, TD Bank’s wholesale banking division tainted the entire quarter that had a few positives that the general public was quick to dismiss.
I think the pessimism at TD Bank is overblown, and as we get through the temporary bout of industry-wide pressure, TD Bank stock looks to have more room to run.
Stay hungry. Stay Foolish.
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 Joey Frenette owns shares of TORONTO-DOMINION BANK.