Investors with a long-term horizon can look to gain exposure to Canada’s banking sector. Most Canadian banks have strong fundamentals, offer investors a tasty dividend yield, and are much more conservative compared to peers south of the border. Due to robust financials, Canadian banks have easily weathered multiple economic recessions, including the financial crisis of 2008.
Right now, investors are worried about the threat of multiple interest rate hikes, which will impact the borrowing capacity of consumers and corporates. Further, there is a good chance for a recession to hit major economies in the next 12 months, making banking companies a high-risk bet.
Yes, the financial sector is cyclical, but bank stocks on the TSX have delivered outsized gains to investors consistently. The ongoing selloff surrounding equity markets also allows you to buy quality companies at a discount. Let’s take a look at two blue-chip bank stocks trading on the TSX.
Royal Bank of Canada
Royal Bank of Canada (TSX:RY)(NYSE:RY) is the largest company on the TSX in terms of market cap, valued at $180 billion. In the fiscal first quarter of 2022 (ended in January), Royal Bank of Canada reported earnings of $4.1 billion, which was its second-highest earnings on record. Its net income surged by 6% year over year, as the banking giant continues to invest in growth.
Royal Bank stated its pre-tax earnings surged by 10% in Q1 due to client-driven volume growth as well stellar performance in verticals such as investment banking and wealth management. Its return on equity stood at 17.3% and a strong capital ratio allowed the company to deploy capital in an efficient manner to support client-driven growth and shareholder value.
In Q1, Royal Bank distributed $1.7 billion in dividends and repurchased nine million shares. RY stock offers investors a forward yield of 3.8% and is also trading 14% below all-time highs. It’s valued at 11.3 times forward earnings and is forecast to expand earnings at an annual rate of 8% in the next five years.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) enjoys a 21% market share in Canada and is the second-largest bank in the country. TD ended fiscal Q1 with a common equity tier one capital ratio of 15.2%, which is one of the highest in North America. So, TD is well capitalized and is positioned to withstand the uncertainty associated with global economies this year.
TD Bank increased adjusted net income to $3.83 billion, or $2.08 per share in Q1, compared to net income of $3.38 billion, or $1.83 per share, in the year-ago period.
Its expansion in net income allows the company to offer investors a forward yield of 3.9% and TD has increased dividend payouts at an annual rate of 11% since 1995.
TD stock is valued at 11.9 times forward earnings and is forecast to increase earnings at an annual rate of 17.8% in the next five years, making it one of the most undervalued stocks on the TSX.
An investment of $10,000 in each of the two stocks will allow investors to generate $770 in annual dividend payouts.