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What’s the Safest Banking Stock During a Recession?

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Canadians everywhere are in preparation mode. There have been a number of factors leading to today, but between an inverted yield curve from the United States Federal Reserve and President Donald Trump imposing 25% tariffs on $300 billion of Chinese exports, analysts are fearful that a recession seems imminent.

That makes now the perfect time to go through your portfolio and see what stays and what goes.

With that in mind, it’s important to look at historical performance, and some of the best performers out there after the Great Recession about a decade ago were Canadian banks. Canadian banks performed as some of the best in the world after the recession, making any of the top banks a good way to combat a recession.

But while some will perform well, which one will perform the best? In my opinion, investors should be looking to keep themselves safe in the arms of Toronto-Dominion Bank (TSX:TD)(NYSE:TD).

First off, TD walks away as a swan in a sea of serpents when it comes to second-quarter results. While its peers posted unremarkable results, or just plain poor results, TD posted strong returns. A lot of this was the result of the company’s expansion across the border.

In fact, TD is now among the top 10 most popular banks in the United States, with more banks in the U.S. than it has in Canada. Even as the bank continued to buy up attractive regional banks in the last few quarters, it still managed to see an increase in earnings per share to $1.7, up 13% since last quarter.

The company has further growth plans, including entering the wealth management sector in the United States. It moved forward with an acquisition recently that should help it achieve some seriously high-margin gains in the future, with management estimating an increase of 7-10%.

That’s not to say TD has forgotten about Canada, however. The business still generates most of its revenue and profits from its homeland, but the U.S. offers investors both an opportunity to take advantage of two economies, offsetting any headwinds facing Canadian banks.

In TD’s case, that would mean a mortgage crisis. The bank has a larger residential mortgage portfolio, and should interest rates rise or the Canadian economy tanks, the bank could be in serious trouble. But again, this bank has faced trouble before, so investors need only be patient.

Despite all this positivity, the stock is still trading below fair value, and well below its 12-month estimated share price of $90 per share. This is likely due to those same peers with poor results, and the announcements coming from the U.S. of a potential recession.

That makes now the ideal time to buy up this stellar stock. Investors that have bought up TD while it’s down or fairly value have usually received long-term returns of about 10-12% per year. In fact, an investment of $10,000 even during the last recession would be worth about $25,000 today. Those returns are remarkable for a conservative stock that offers an amazing dividend of 4.01% at the time of writing that is set to continue growing for years to come.

Foolish takeaway

If you’re looking for a place to stash your cash and wait out the storm, it doesn’t get much better than TD. This bank continues to grow even as its peers are losing profits, setting up a stable balance sheet that could see it through any market downturn.

Even if the worst should happen, TD has proven in the past that within a few months, share price will be right back where they left off. That would leave you knowing your funds are safe, and with a nice dividend to keep you happy while you ride out the storm.

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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 Amy Legate-Wolfe has no position in any of the stocks mentioned.

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