The past few years have been, shall we say, rocky for bank stocks. Whether we’re talking about Canadian banks (which held up relatively well, given their size and the makeup of the Canadian financial system) or their global counterparts, plenty of headwinds and shocks continue to be priced into this space. That’s one of the key reasons many top banks have valuations that seem to remain depressed, despite an increasingly bullish economic outlook for this year.
Now, if we’re able to skirt what many have called an incoming recession in 2024, bank stocks could provide great value at current levels. In Canada, there are really only a handful of stocks to consider. In my view, these two are the best options for long-term investors on the basis of size and quality.
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Royal Bank of Canada
Royal Bank of Canada (TSX:RY) is the top Canadian bank, and among the largest financial service companies in the world. Under its personal and commercial banking segment, the company offers chequing and savings accounts, mortgages, credit cards, etc. The company also offers services like private banking, home equity financing, auto financing, indirect lending, mutual funds, and self-directed brokerage services.
Among shareholders, Royal Bank has established itself as a dividend growth stock, with a track record of raising its distributions or keeping them steady for decades. The company’s current payout ratio of 51% is a sign its present earnings easily cover its dividend payouts.
This company’s annual dividend has gone up from $2.52 in 2013 to $5.52 in 2023. This implies a compounded annual growth rate (CAGR) of 8.2%, which is impressive when one considers the volatility we’ve seen over this period of time.
With interest rates set to decline in 2024 (assuming the bond market is correct), an inverted yield curve could bode well for major banks. As a top-tier global banking institution, improved net interest margins and deal flow for its capital markets business should translate into greater earnings in the years to come. It’s my view that this is a stock to continue to buy and hold on dips, and if we see any sort of correction this year, I think those dips will get bought.
Toronto-Dominion Bank
Toronto-Dominion Bank (TSX:TD) is yet another mega-cap Canadian bank I think is worth considering. Like its peer Royal Bank, TD and its subsidiaries provide various financial products and services in Canada, the United States of America, and several other countries. This bank operates through four segments namely, wealth management and insurance, Canadian personal and commercial banking, wholesale banking, and US retail.
At the beginning of 2023, TD stock took a hit, as investors rotated out of banks amid a regional banking crisis in the U.S. Additionally, Toronto Dominion was pursuing its acquisition of First Horizons at the time, one of the regional banks investors were concerned about. That deal fell through, and TD stock rose on the news.
In many respects, investing in TD stock is making a bet on the U.S. banking system. From a retail banking perspective, TD has more branches in the U.S. than it does in Canada. Notably, the company expanded into the U.S. market aggressively following the Financial Crisis, a move that many now view in hindsight as a very smart one.
I think owning TD, in addition to Royal Bank, provides investors with the sort of geographical diversification needed in a portfolio. The higher-growth option of the two, I think TD’s total returns could outpace those of Royal Bank, at least over the next decade.
