It’s understandable that the banking shakeup that’s occurring right now can be concerning for Canadian investors. Banking systems are interrelated internationally. Moreover, the Canadian economy is closely tied to the U.S. economy, seeing as the U.S. is Canada’s largest trading partner. Approximately 70% of Canada’s exports go to our neighbour in the south! So, any banking system problems the U.S. may be having could be a blow for our system as well.
The latest news from CNBC indicates that the banking crisis is more of a “sentiment contagion” than problems with the “fundamentals.” Indeed, Silicon Valley Bank would likely have not failed if there wasn’t a run on the bank, which was driven by depositor worries. Thankfully, First Citizens came to the rescue by agreeing to buy a big chunk of Silicon Valley Bank’s assets on Monday. This news immediately halted the selloff of the Canadian bank stocks — at least for now.
In fact, Toronto-Dominion Bank (TSX:TD) stock has bounced the most of about 3.4%, among its Big Six Canadian bank peers, because of the news. To be fair, it has also declined the most in the original selloff. This is why it makes TD stock the main Canadian bank stock that I’m buying during this highly uncertain time.
TD Bank stock rarely goes on sale
TD Bank is a top-notch bank in North America with a quality AA- S&P credit rating. Additionally, it has a wide economic moat from its leading position in Canadian banking, which it operates favourably in an oligopoly structure.
Furthermore, the Financial Stability Board categorized TD Bank as one of about 28 Global Systematically Important Banks (G-SIBs), using a methodology developed by the Basel Committee on Banking Supervision. G-SIBs are essentially too big, complex, or interconnected with the global banking system to fail. So, they have greater capital buffers and supervisory scrutiny.
As a result, the bank stock rarely goes on sale. Typically, the dividend stock would trade at a discount during recessions in North America or when there’s a banking crisis. Our economy may be impacted by both of these scenarios this year.
At $80.34 per share at writing, TD stock trades at about 9.4 times adjusted earnings. This is a meaningful discount of approximately 20% from its long-term normal valuation. Buyers today can also get a boosted dividend yield of about 4.8%. To compare, under normal economic conditions, it would be a “deal” to grab the stock for an initial yield of 4.1%.
Can TD stock fall further this year? If the banking shakeup or the economy worsens, the stock could get cheaper. So, it’s important for investors to have a long-term view when taking a position in the bank stock.
Investor takeaway
Investors often view TD Bank as a core holding in their diversified investment portfolios. Personally, I’m building my position in undervalued TD stock steadily this year. And I welcome its higher initial dividend yield than normal market conditions. I believe it’s a great time to accumulate shares now during the banking crisis for long-term investors.
On a normalization of the stock valuation fueled by improved economic conditions, the blue-chip stock has the prospects to deliver total returns of north of 14% annually over the next five years. For illustration purposes, that would turn an initial $10,000 investment into more than $19,254.
