One of Canada’s Big Six banks, Toronto-Dominion Bank (TSX:TD) had a challenging first half as the U.S. bank crisis faded its efforts to expand in America. TD Bank stock took the biggest hit falling over 56% between February and June because of its U.S. exposure. For a brief period in April, it was the most shorted stock as the bank was in the middle of acquiring U.S.-based First Horizon for $13.4 billion ($25/share).
Things are improving for TD Bank: Is it a buy?
TD Bank is slowly unwinding its situation. It cancelled the First Horizon acquisition by paying a termination fee. This end was better as First Horizon stock has dipped below US$14 since the March crisis. This helped TD Bank stock surge over 10% since June end.
But this is just the beginning of a challenging market environment. The bank has the largest deposits in Canada and a strong exposure to U.S. and Canadian mortgages. The higher interest rate acts as a double-edged sword for the bank. It helps the bank earn a higher net margin but also increases the risk of delinquency. The strengthening Canadian housing market in a high interest rate environment could increase credit risk.
While TD Bank has maintained adequate provisions for credit losses and has higher liquidity to address withdrawals, its profit margins could remain stressed for some time. Its Canadian portfolio could help it withstand a possible recession but could affect the stock price in the short term. In the worst-case scenario, the bank could pause dividend growth.
So, if you already own TD Bank stock, you can continue holding it if you brought it for dividends. But avoid buying the stock at its current price of over $86, as you will only get a 4.46% dividend yield.
A dividend superstar to buy over TD Bank
The current market scenario may not be the best time to buy TD Bank stock. Instead, buy a dividend superstar like BCE (TSX:BCE).
BCE stock has slumped 12.7% since May and is trading at its 52-week low, as the rising interest rate increased its interest expenses. Moreover, the telco accelerated its capital spending between 2020 and 2022 to build the 5G network, which increased its depreciation this year. Higher interest expense and depreciation reduced its net earnings by 15.6% in the first quarter.
But the company maintained its 2023 guidance of a 5.3% dividend growth. These are one-time expenses. The accelerated capital spending is yielding results through rising wireless subscriptions. The first few years of a technology upgrade are expensive. But they bring long-term cash flows. And the 5G opportunity is several times bigger than 4G. While 4G made video calling and live streaming possible, 5G could bring real-time artificial intelligence (AI) to the edge.
Why buy this Dividend King instead of TD Bank?
As BCE stock is trading at its low, now is a good time to buy and lock in a 6.7% dividend yield. In the worst-case scenario, BCE might slow its dividend growth for a few years. But the stock would benefit when interest rates come down. Economists expect the July rate hike by the U.S. Fed to be the last. They expect the interest rates to pause from here and fall in the latter half of 2024.
By buying BCE stock at its low, you can lock in a high yield and a recovery rally. As for TD Bank, it might pause its dividend growth if the U.S. economy falls into a recession. You can buy this stock at a cheap price then.
