With the economic recovery accelerating forward, momentum is picking up among economically sensitive stocks. Canadian banking stocks have been no exception.
Indeed, I have been bullish on Toronto-Dominion Bank (TSX:TD)(NYSE:TD) through the pandemic. The company’s consistent dividend payout in the current market scenario has made it a very profitable play for patient investors. Taking a mid- to high-single-digit yield while one waits for a recovery has turned out to be the right move.
However, I think there’s more upside potential, and TD stock could soar even higher this year. Here’s why.
A potential U.S. acquisition and international growth
One of the reasons I’ve liked TD in relation to its large-cap banking peers is the company’s international presence. Investors may note that TD has a massive presence in the U.S., having made some well-timed acquisitions south of the border following the financial crisis more than a decade ago.
However, apart from small asset acquisitions here and there, TD has not done much to excite investors and analysts since 2014.
That said, analysts expect there might be something huge on the horizon. CEO Mr. Masrani has been vocal about this bank’s U.S. growth potential and his willingness to complete deals south of the border. The latest financials give a better picture of why he’s open to more arrangements.
Simply put, TD has enough excess capital reserves to offset any loan losses. Analysts believe TD has more than $11 billion in balance sheet room to pursue deals in the U.S. with this extra cash. Moreover, it is sitting on a healthy 13.5% stake of the Charles Schwab stock. Selling this stake could allow TD to pursue deals as big as $30 billion.
TD must hold the Schwab stock until June, so a deal may take some time. That said, there is always a possibility for a two-stage sale, like last year when PNC Financial sold Blackrock stake and subsequently bought BBVA USA.
The potential for a major U.S. acquisition could be a very good thing for long-term investors seeking international growth.
Should TD pursue a mega deal, this bank would become a key player in the U.S. market. Via the company’s Ameritrade platform as well as its retail banking exposure in the U.S., the company is well positioned already to take advantage of a post-pandemic recovery.
However, this bank’s willingness to expand further opens some really interesting doors.
There’s speculation that a number of regional banks could be on the watch list for TD. Among those speculated as targets are M&T Bank or Citizens Financial Group to bolster its mid-Atlantic and Northeastern footprint. Or it could go for Regions Financial, which would reinforce its Southeastern presence, instead.
TD is already the big player among the Big Six Canadian banks in the United States. Such a move would bolster its presence south of the border and create a U.S. bank that Canadian investors could benefit from in terms of the dividend tax credit.
This is all speculation, but I’d argue that speculation is part of the investing process. Accordingly, for those seeking growth among Canadian banks, TD remains my top pick right now.
Like this top pick? Here are a few more to consider right now:
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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 Chris MacDonald has no position in any of the stocks mentioned.