TD Bank: My Top Canadian Stock to Buy in July

TD Bank (TSX:TD)(NYSE:TD) is a top Canadian dividend stock that investors should look to load up on this July season while it’s still cheap.

| More on:
edit Four girl friends withdrawing money from credit card at ATM

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Shares of Canadian banking behemoth TD Bank (TSX:TD)(NYSE:TD) have historically traded at a nice premium to its peer group in the Big Six. This all changed when the COVID-19 crisis struck shortly after some weakness in Canadian credit.

Suddenly, U.S. banking exposure went from sought after to no longer being worthy of a premium price tag. With the Canadian bank stocks now well above and beyond their early 2020 highs, TD Bank stock now looks to be the “best bank for your buck” with a price-to-earnings (P/E) multiples that’s no longer higher than most of its peers — it’s well lower. What’s behind the discount in TD Bank stock versus the broader Big Six basket? And is it warranted?

I’d argue the relative discount in shares of TD Bank is nothing more than a pricing mistake made by an inefficient Mr. Market. Little has changed with the fundamentals, which remain as solid as ever. At the time of writing, TD stock trades at 11.2 times trailing earnings and 1.77 times book value. That’s a really low price of admission, even given the epic past-year rally.

TD Bank stock sheds its premium for a discount

With TD at the intersection between near-term momentum and value, should investors look to add their way into a position just as shares are cooling off? The Big Six have flatlined this summer, but given modest valuations and the ever-improving macro backdrop, I’d argue that the next move is likely to be higher. And if I were to place a bet, I’d wager that TD Bank stock will lead the next upward charge. Why?

TD Bank is still worth the premium in my books. It not only has impressive growth prospects, but it’s able to rake in a higher quality of earnings. Retail banking makes TD stock a steady ship. Combined with the prudence of management, it becomes more apparent that TD is a bank that ought to be head and shoulders above its peers from a valuation perspective. As to why the premium has been replaced with a discount is anybody’s guess. Regardless, I don’t think it’s sustainable over the long term, especially once the bank’s earnings start to really pick up traction.

What are some other catalysts?

TD Bank is a high-quality bank whose less-volatile earnings stream may be discounted now. But in due time, I think TD stock will re-command its 13-14 P/E multiple. There are a few intermediate term catalysts that could spark such a re-valuation to the upside.

First, management has made it clear that it’s hungry for an acquisition, likely in the U.S. market. Given the prudence of management, I think the next deal will be one where the potential for synergies heavily outweighs integration risks — making such a deal value creative for shareholders.

Second, TD Bank looks more sensitive to interest rates than many of its peers. With rates likely to rise over the next few years, the bank stock likely has the most room to run, as it looks to expand upon its margins. If you’re at all jittery about the Bank of Canada and looming rate hikes, TD stock may very well be the ultimate hedge against high rates, which will surely leave a dent in other places in your portfolio.

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. The Motley Fool has no position in any of the stocks mentioned.

More on Bank Stocks

Bank sign on traditional europe building facade
Bank Stocks

Beginners: The Top Bank Stock to Buy Before it Rockets Higher

TD Bank (TSX:TD)(NYSE:TD) is making big moves in the M&A department following the recent slide in the financial scene.

Read more »

A plant grows from coins.
Dividend Stocks

4 Stocks That Could Turn $100,000 Into $500,000 by the Time You Retire

Building retirement wealth is a long process, but it’s possible for $100,000 to grow to half-a-million dollars over time.

Read more »

edit Colleagues chat over ketchup chips
Bank Stocks

My Favourite Bank Stock is a Top Buy in This Bear Market

Bank of Montreal (TSX:BMO)(NYSE:BMO) is a great Canadian bank stock that's becoming far cheaper than the pack.

Read more »

Businessperson's Hand Putting Coin In Piggybank
Bank Stocks

Own a TFSA for Better or for Worse

The TFSA is a financial partner for life, and users aren’t missing out, even if they’re unable to contribute or…

Read more »

You Should Know This
Bank Stocks

How to Prepare for Another Supersized Rate Hike

Another 100-basis-point rate hike could be coming, but don't worry! Use value stocks to fight off inflation and interest rates.

Read more »

Glass piggy bank
Bank Stocks

Passive Income: 3 Dividend Stocks That Put the Strong U.S. Dollar to Work!

TSX stocks like the Canadian National Railway offer considerable exposure to the strong U.S. dollar.

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Bank Stocks

1 Cheap TSX Dividend Stock to Buy for Passive Income and Total Returns

Retirement investors can buy great dividend stocks at cheap prices right now for TFSA portfolios focused on passive income and…

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Energy Stocks

Got $2,000? Here Are 3 Smart TSX Stocks to Buy Now

If you're a new investor with just $2,000 you're willing to invest, then these should be the top three TSX…

Read more »