Warren Buffett Is Loading Up on American Banks: Here’s a TSX Index Stock That Mirrors His Moves

If you want to copy Warren Buffett’s bank plays but stay on the TSX, the Toronto-Dominion Bank (TSX:TD)(NYSE:TD) may be your best bet.

| More on:

Warren Buffett is betting big on American banks. According to a May fool.com article, the Oracle of Omaha had $94 billion (or roughly half of his portfolio) in banks at that time.

Holding a particularly large position in Bank of America (NYSE: BAC), Buffett is a huge bull on American financial institutions.

As a Canadian investor, you face a certain amount of foreign exchange risk when buying U.S. banks directly — but that doesn’t mean you can’t copy Buffett’s bank plays.

As it turns out, there’s a Canadian bank with a lot of U.S. exposure that resembles Buffett’s favourite financial institutions.

The name of that bank?

The Toronto-Dominion Bank

The Toronto-Dominion Bank (TSX: TD)(NYSE: TD) is Canada’s fastest-growing big bank. Although some small banks are growing earnings faster, TD is by far the biggest growth star out of the Big Six.

Thanks to its historical outperformance, TD is slightly more expensive than its peers, but it has the earnings and dividend history to justify its steep valuation.

“The most American of Canadian banks”

What makes TD Bank a “Buffett-like” play is its large and expanding U.S. Retail business. With over 30% of its total earnings coming from the U.S., TD is by far the most American of Canadian banks, and in some ways similar to the U.S. banks that Buffett is buying.

TD’s U.S. Retail business grew at 29% year over year in its most recent quarter. This is actually better than Bank of America’s growth in the same period–it grew 13% year-over-year.

Granted, I’m comparing TD’s U.S. business to Bank of America’s entire business; BoA is growing slightly faster than TD overall. However, TD’s U.S. retail division is easily among the fastest-growing banks in the U.S., an impressive feat in itself.

Stricter lending rules than many of its U.S. counterparts

One major point in favour of TD is its conservative lending rules. The bank emphasizes achieving risk-adjusted returns, which means that management focuses on the soundness of its loans as much as potential income.

This is in contrast to many U.S. banks, which have fairly lax lending rules. According to The Lenders Network, the average down payment on a U.S. home in 2016 was just 6%.

This is a small percentage, historically speaking, and may put the banks issuing the mortgages at risk. TD’s conservative practices, however, insulate it from these risks.

Foolish takeaway

TD Bank is a well-rounded financial institution, with a rock-solid combination of growth, geographic diversification and financial conservatism. Although Warren Buffett hasn’t bought shares in TD, the bank resembles his U.S. banking plays in many ways.

If you’re looking for a quality Canadian financial services play with a solid combination of growth and dividend income, TD may be one to consider.

Just remember that TD’s overall growth is somewhat more tepid than pure-play U.S. banks and that it’s a little more expensive than other Canadian banks.

Fool contributor Andrew Button owns shares of TORONTO-DOMINION BANK.

More on Dividend Stocks

man touches brain to show a good idea
Dividend Stocks

2 High-Yield Dividend Stocks: Here’s My Take on Whether They’re Actually Good

SmartCentres REIT and Gibson Energy, for example, are two Canadian companies that offer relatively high dividend yields.

Read more »

woman looks out at horizon
Dividend Stocks

This Dividend Stock Just Dropped +9%: Is Now the Time to Buy?

Empire has a roughly 30-year track record of raising dividends. Its dividend remains healthy and growing. And it starts investors…

Read more »

diversification is an important part of building a stable portfolio
Dividend Stocks

The Canadian Dividend Stock I’d Trust for the Next 20 Years

The Canadian dividend stock from the banking sector is known for paying and increasing its dividend year after year.

Read more »

staying calm in uncertain times and volatility
Dividend Stocks

Forget the Big Banks: 2 Dividend Stocks to Buy While RBC and TD Take a Breather

Royal Bank and TD Bank stocks are trading at all time valuations. Here are two stocks I'd rather buy despite…

Read more »

ETF is short for exchange traded fund, a popular investment choice for Canadians
Dividend Stocks

Create a Set-and-Forget Portfolio With Just 2 ETFs

Consider Vanguard S&P 500 Index ETF (TSX:VFV) and another top ETF to buy and hold forever.

Read more »

arrows hit bullseye on target
Dividend Stocks

Buy the Dip: This Dividend Giant Might Be Oversold

This company has increased its dividend in each of the past 26 years.

Read more »

Dividend Stocks

Why This Unglamorous Stock Has Paid Investors for Decades

Canada’s first Dividend Knight that has paid investors for decades is anything but unglamorous.

Read more »

doctor uses telehealth
Dividend Stocks

Vital Infrastructure Is a Savvy TFSA Stock Paying 7% and the Price is Right

Vital Infrastructure Property is a defensive TFSA stock that gives investors high-yield income and predictable returns.

Read more »