Better Buy in February 2024: TD Bank Stock vs. Air Canada Stock

Only risky investors would consider putting their play money in Air Canada stock. Conservative investors would park their money in TD stock.

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Is Toronto-Dominion Bank (TSX:TD) or Air Canada (TSX:AC) a better stock to buy this month? Here’s a quick comparison of the two.

Businesses

At the end of the day, stock investing is about investing in the underlying businesses, unless investors are betting on short-term trading, believing a stock is oversold. It would be a much safer investment to target businesses that are able to produce healthy and predictable earnings.

Between Toronto-Dominion Bank and Air Canada, the former produces healthier and more predictable earnings through an economic cycle. Therefore, it would produce more predictable returns for investors. Even though its earnings dropped around periods of recession, the bank remained highly profitable through those bad economic times. In contrast, Air Canada has operated at losses at times.

This has also resulted in AC stock making a huge comeback when the business turns around with a profit and especially when it sustains higher earnings for some time. That is, if investors have the patience to hold through above-average volatility over the next few years, they could potentially double their money from an investment in AC stock today.

Dividend

Air Canada stock doesn’t pay a dividend. That doesn’t come as a surprise, seeing as its earnings can be quite volatile and unpredictable.

Conservative investors would feel much more comfortable parking their money in Toronto-Dominion Bank stock, which pays a durable dividend. The large North American bank has paid dividends since 1857. And it isn’t going to stop. As an example, over the last 15 years, it raised its dividend by about 8.2% per year. The growing dividends are reassuring for investors.

I’ll have you know that research shows about a third of long-term returns come from dividends. So, it’s a good idea to own a diversified portfolio of dividend stocks, including TD, that you can count on for rising income. You can even target that income to climb faster than inflation in the long run. Today, TD stock starts investors off with a dividend yield of 5.1%, which is pretty good.

Valuation

At the recent price of $79.89, TD stock trades at a price-to-earnings ratio (P/E) of about 10, which is a discount of roughly 14% from its long-term normal valuation. Notably, analysts also estimate the stock is trading at a discount of about 11%.

At $18.34 per share, Air Canada stock trades at a forward P/E of about 5.4, which appears to be cheap. Indeed, analysts think the cyclical stock trades at a discount of approximately 37%. The general rule of thumb is — the riskier a stock is, the bigger a discount you should target for your purchase.

Price momentum

Stock investors generally want their stocks to go up, unless they plan to buy more. No matter what, a stock’s chart can be telling. In the case of TD stock, it has been trading pretty much sideways since mid-2022. Turning to Air Canada stock, it provides a similar picture, but its chart is a tad more negative, as the stock trades meaningfully below its 50-week simple moving average.

Investing takeaway

There’s really no competition between the two stocks. Only risky investors would consider putting their play money in Air Canada stock, perhaps, hoping to double their investment. Conservative investors would instead consider parking their money in TD stock, which offers safe and growing dividend income and long-term price appreciation potential.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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