Tax-Free Savings Account (TFSA) investors are sifting through Canada’s top stocks to find companies that might be attractive picks.
Market rally
The market rally off the March low now has the TSX Index up more than 30% — an impressive bounce considering the damage to the economy and the uncertain outlook for a return to normal economic activity.
It’s true that provincial governments are starting to remove lockdown restrictions. The sooner businesses can safely open their doors again and rehire staff, the better it will be for everyone involved.
However, pundits worry that the market might be getting ahead of itself. The TSX Index is down just 17% from its high reached earlier this year. Since then, more than seven million Canadians have applied for emergency income benefits. Thousands of businesses remain closed.
Buying top stocks during a market crash can deliver great returns — that’s well known. The question is whether this crash will be different.
Let’s take a look at one of Canada’s top banks to see if it is attractive today for a TFSA retirement fund.
TD
At the time of writing, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) trades for $57.50. It sat close to $76 before the crash and dipped below $50 in March.
Investors can pick up a 5.5% dividend yield today. That’s pretty good for the bank widely viewed as the safest pick among the large Canadian financial stocks.
The challenge with bank stocks is trying to determine how bad the loan losses will be in the next 6 to 12 months. Deferrals for mortgage holders, leniency on missed payments by businesses, and deferred deadlines for paying the CRA will delay bankruptcy filings until the end of the summer.
If an economic rebound kicks in the way the International Monetary Fund anticipates next year, the damage might not be as bad as some pundits speculate.
However, a prolonged period of high unemployment will be problematic for TD and its peers. Canadians already carried record debt loads heading into the crisis. The impact of the pandemic is new territory for the global economy. We just don’t know how things will go in the next year.
Opportunity
TD entered the downturn with a strong capital position. The bank raised $3 billion in April through a bond issue to add liquidity to help it ride out the recession. A government plan to buy up to $150 billion in mortgages from the banks will provide added liquidity.
TD’s results will likely be ugly for the duration of fiscal 2020. That said, the dividend should be safe.
The stock appears reasonably priced right now if you are of the opinion the global economy will roar back to life in 2021. The fiscal Q2 earnings report will be out May 28. It will be interesting to see how much TD sets aside for credit losses and find out how bad the bank believes the situation could be in the coming months.
In the event the outlook is much worse than analysts expect, the stock could take a hit and potentially retest the 2020 low. On the other hand, guidance that is in line with expectations, or better, might trigger a sustained move to the upside.
Should you buy TD stock today?
Investors with a five-year plan to hold the stock might want to start nibbling at this level and look to add to the position on additional downside. You get paid well to ride out the rough times and should be rewarded with a higher share price in the long run.
