Canadian bank stocks are starting to look pretty intriguing as we head into the summer season. Undoubtedly, there has been mostly bad news surrounding Canada’s top banks (the so-called Big Six) in recent years. Provisioning, a challenged economic outlook, and other headwinds have weighed on sentiment. Indeed, such headwinds are enough to have any investor on pause.
Still, interest rates seem to be on their way down, and while the immediate impact on the Canadian economy is hazy, I think that the days of above-average dividend yields in the big banks may just be coming to a close. Of course, it could take a few more quarters before the broader basket of big bank stocks enjoys its breakout moment.
National Bank of Canada
National Bank of Canada (TSX:NA) is one of the high-momentum bank stock that is just shy of making new highs, even if it’s been rallying without much help from the big-bank cohort. Either way, I continue to view the smallest member of the Big Six as more than buyable.
Indeed, the big banks are not out of the woods quite yet as Canada’s turbulent economy looks to enter the second half of the year. At this pace, it looks like normal inflation levels could be met at some over the coming months. Indeed, it would be nice if inflation were to fall a bit below 2% by year’s end.
At 12.15 times trailing price to earnings (P/E), the stock still looks quite cheap. And if its coming earnings (due later this month) impress, I’d not be surprised if NA stock leaves the Big Six behind as it looks to power past the $120 mark.
TD Bank
It’s hard to remember the last time TD Bank (TSX:TD) stock was this unloved. Not only is there a great deal of uncertainty surrounding the Canadian bank heading into earnings, but there’s also a giant elephant in the room in the money-laundering ordeal. The big question is whether the elephant will bring forth harsher-than-expected financial penalties. The more we speculate about just how bad things can get, the tougher it is to justify hanging onto TD stock versus its peers.
With the Canadian banking regulator ordering TD to overhaul risk controls, it seems like TD is still a ways off from getting past its own slate of headwinds. Should shares be on a round trip back to their $75 and change depths, though, it may make sense to step in for the dividend alone.
The opportunity to snag TD stock with a yield above 5.5% does not come around very often. When it comes, there’s likely to be an aura of fear surrounding the name. It’s never easy to jump in when fear’s in the air, but if you seek deeper value, it can literally pay dividends to act as others freeze.
It’s hard to tell when the bad news will blow over. Regardless, I think that buying could prove wise from a longer-term perspective, especially if the financial consequences aren’t as bad as feared. As the Canadian economy looks to gain ground, I think it’s just a matter of time before investors focus on growth again. Whether TD stock has hit rock bottom, though, remains the big question.
