Royal Bank (TSX:RY) and TD (TSX:TD) have been on a wild ride over the past 12 months. Investors with a buy-and-hold strategy are wondering which Canadian bank stock might be undervalued right now and good to buy for a portfolio focused on dividends and total returns.
Royal Bank
Royal Bank is Canada’s largest bank based on market capitalization with a current value near $186 billion. The stock trades for close to $134.50 per share at the time of writing compared to a 12-month high around $140, so it is holding up better than many of its peers after the latest turbulence in the bank sector.
Part of the strength could be due to investors flocking to the largest banks after recent failures of smaller banks in the United States. People are moving money out of smaller institutions to the giants with the idea that their funds are safer being held at bigger banks.
Royal Bank has a diversified revenue stream based on segment and geography. The company has also focused its recent acquisitions on the U.K. and Canada. Royal Bank acquired a wealth management asset in the United Kingdom in September and is currently working to close its domestic purchase of HSBC Canada.
Avoiding the temptation to win a bidding war for a regional bank in the United States last year is probably another reason why investors are willing to pay more for Royal Bank shares today than they are for its peers. The stock trades for roughly 12.8 times trailing 12-month earnings right now.
Investors who buy Royal Bank at the current level can get a 3.9% dividend yield.
TD
TD is Canada’s second-largest bank with a market capitalization near $152 billion. The stock had been on a nice roll at the beginning of this year. TD fell from $109 per share in early 2022 to around $78 in July before climbing back to $93 in February.
The latest chaos in the American bank sector hit TD hard, and the shares fell back below $80 in March. At the time of writing, TD trades for close to $83.50 and offers a 4.6% dividend yield.
TD has significant operations in the United States with branches running all the way down the east coast from Maine to Florida. The company decided last year to use its war chest of excess cash to make a large U.S. acquisition. TD agreed to buy First Horizon, a regional bank mostly operating in the southeastern part of the United States for US$25 per share, or about US$13.4 billion, when bank stocks were riding high after the post-crash rebound.
Since the deal was announced at the end of February in 2022, bank stocks have trended lower, and First Horizon currently only trades for just above US$18 per share.
Uncertainty around whether the deal will go through is likely keeping TD’s share price under pressure. Management has said the bank is still committed to getting the deal done, but analysts say a reduction in the price will have to be negotiated for that to happen.
In the meantime, investors have a chance to buy TD stock for just 10.1 times trailing 12-month earnings.
Is one a better pick right now?
Royal Bank and TD should both be solid long-term holdings for a retirement portfolio.
That being said, Royal Bank looks a bit expensive right now, considering the overall economic risks. I would probably wait for a pullback to buy the stock.
TD could be more volatile in the near term, but the shares already appear cheap and the uncertainty around the First Horizon deal will likely get sorted out in the next few months. If the deal goes through, TD will probably pay a lower price. In the event TD walks away, the bank will be sitting on a large cash position to deploy as dividends, share buybacks, or on another strategic acquisition.
If you only choose one, I would probably go with TD as the first pick today.
