The pullback in the banking and energy sectors is giving investors a chance to buy top TSX dividend stocks at discounted prices. TD (TSX:TD) and Canadian Natural Resources (TSX:CNQ) now trade well below their 12-month highs. Investors who missed the rallies off the 2020 market crash are wondering if TD stock or CNQ stock is now undervalued and good to buy for a portfolio focused on passive income.
TD
TD recently abandoned its planned US$13.4 billion all-cash takeover of First Horizon, a U.S. regional bank with more than 400 branches mainly located in the southeastern part of the country. The deal would have made TD a top-six bank in the American market, adding to the extensive branch network that already runs from Maine to Florida. TD said regulatory issues forced it to walk away. Investors might be letting out a sigh of relief, given the plunge in the value of U.S. regional bank stocks in 2023.
Projected earnings per share (EPS) growth of 7-10% is off the table due to the cancelled deal, but TD also has a massive capital cushion to ride out any economic turbulence that might be on the way.
Investors could see a nice increase to the base dividend before the end of the year. TD could also decide to pay out a special bonus distribution from the cash hoard. At some point, management will probably look for a new acquisition target. In the current market conditions bank valuations are attractive.
TD remains very profitable, and investors have received an average compound annual growth rate of better than 10% over the past 25 years.
TD stock trades below $81 at the time of writing compared to $93 earlier this year.
Investors who buy the dip can get a 4.75% dividend yield at the current price.
Canadian Natural Resources
CNRL is Canada’s largest oil and natural gas company with a current market capitalization near $80 billion. The company enjoys a strong balance sheet and has a great track record of returning cash to investors, even during challenging times in the energy sector. CNRL raised the dividend in each of the past 23 years with a compound annual growth rate above 20%.
Oil prices are off the 2022 highs. At the time of writing, West Texas Intermediate oil trades near US$72 per barrel compared to more than US$120 at the peak last year. Traders are trying to figure out if a slowing global economy will offset the OPEC+ plan to reduce output and the limited scope or desire from non-OPEC producers to boost supply.
CNRL still generates solid margins at current oil and natural gas prices. Management is using excess cash to reduce debt and buy back stock. As net debt continues to fall, investors will see a higher percentage of free cash flow head their way. As an example, the board paid out a bonus dividend of $1.50 per share in August last year. The current quarterly base dividend is $0.90 per share.
CNQ stock trades near $72 at the time of writing compared to $88 at the high point last year. Investors can now get a 5% annualized yield on the base dividend.
Is one a better pick?
TD and CNRL pay attractive dividends that should continue to grow. At the current share prices, both stocks appear oversold.
Oil bulls might want to make CNQ the first choice right now for the slightly better yield. Otherwise, I would probably split a new investment between the two stocks.
