TD (TSX:TD) and Suncor (TSX:SU) are off their 12-month highs. Contrarian investors with an eye for value are wondering if the latest market correction offers a good opportunity to buy one of these TSX dividend stocks at an undervalued price.
Source: Getty Images
TD
TD is Canada’s second-largest bank with a current market capitalization near $148 billion. The stock trades close to $81 per share right now. That’s not far from the 12-month low around $77 and down from the $93 point the stock hit in February.
The latest downturn in the bank sector is due to recent failures in regional banks in the United States. Investors are increasingly concerned that deposit flight could ramp up, as customers move cash to the largest institutions. A wave of panic selling could put the entire financial system at risk, and that is worrying the markets.
The U.S. government stepped in to settle things down in March and has said it will continue to do so to stabilize the sector. As such, the bouts of volatility should be attractive for contrarian investors seeking deals among the big banks.
TD is getting hit harder than some of its Canadian peers due to its large U.S. presence and the uncertainties surrounding its planed acquisition of First Horizon, a U.S. regional bank with operations in the southeastern part of the country. The US$13.4 billion deal, if completed, would add more than 400 branches to the U.S. business and make TD a top-six bank in the American market. Investors, however, are uncomfortable with the US$25 per share that TD has agreed to pay for First Horizon. At the time of writing, First Horizon stock trades for US$17.60.
Ongoing volatility should be expected in the near term, but TD looks cheap right now trading for 9.8 times trailing 12-month earnings. The bank remains very profitable, and the dividend should continue to grow. At the current share price, investors can get a 4.75% dividend yield.
Suncor
Suncor upset long-term shareholders in the spring of 2020 when it slashed the dividend by 55% to ride out the pandemic. The company had always kept the dividend steady during previous downturns in the energy sector. To make things worse, other large oil sands producers kept their dividends in place, or even raised them, in 2020.
The rebound in the price of oil enabled the board to eventually reverse the cuts, and Suncor has even increased the payout to a new all-time high. Investors, however, are still not giving the stock much love.
In fact, Suncor trades at a lower price today than it did in early 2020 before the pandemic. Its peers are up as much as 100% from their levels at that time.
Suncor did a good job of reducing debt and buying back stock in 2021 and 2022. The balance sheet is now on sound footing again and ongoing non-core assets sales are bringing in more cash as the new chief executive officer aims to streamline operations and make the business more efficient.
Suncor’s integrated structure historically served as a good hedge against falling oil prices. That didn’t work during the pandemic due to the crash in fuel demand, but the return to more normal market conditions should once again make Suncor more attractive than some of the pure-play oil producers. Suncor’s largest operation is its oil sands production division, but the company also owns refineries and has a portfolio of roughly 1,500 Petro-Canada retail locations.
Fuel demand is expected to continue to grow, even if there is a recession. Oil bulls predict that West Texas Intermediate oil will head back to US$100 per barrel later this year and potentially remain in triple digits for an extend run. If they prove correct, Suncor stock looks undervalued.
Investors who buy at the current level can get a 5.1% dividend yield.
Is one more attractive?
TD and Suncor pay good dividends that should continue to grow. At current levels, both appear oversold. I would probably split a new investment between the two stocks right now and look to add to the positions on any further downside.
