Better Buy: TD Bank Stock vs. BMO

TD Bank (TSX:TD) and Bank of Montreal (TSX:BMO) are the kings of banking value this summer.

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The Canadian bank stocks have been brutal holds of late, especially if you own the names with considerable exposure south of the border. Indeed, TD Bank (TSX:TD) and Bank of Montreal (TSX:BMO) are two standout Big Six Canadian banks that have grown a great deal in the U.S. market. Though it’s nice to have banking exposure domestically, there just seem to be more opportunities for growth in the States. Undoubtedly, recent consolidation activity in the Canadian banking scene has made it tougher to really crank up growth rates without venturing into international market fronts.

Whether we’re talking about Royal Bank of Canada (TSX:RY) and its acquisition of HSBC’s Canadian assets or the blockbuster deal between number-six bank National Bank of Canada (TSX:NA) and regional banking gem Canadian Western Bank (TSX:CWB), it’s clear that the growth options are starting to dry up just a bit on this side of the border. In any case, I remain a big fan of the bank stocks as a whole as we officially enter the start of the second half of 2024.

When it comes to the big Canadian banks, performance has continued to vary, with top dogs in Royal Bank and National Bank surging to new heights, while TD and BMO continue to tread water. Indeed, TD has arguably been the toughest bank to hold year to date, with the ongoing overhang from the money-laundering crisis, which could entail stiff financial and non-financial penalties, the latter of which could weigh on the bank’s growth prospects in the U.S. markets until American regulators are fine with giving TD the green light again. Perhaps this will only happen long after TD has beefed up its anti-money-laundering practices.

In any case, let’s compare these two battered Canadian bank stocks with U.S. exposure to see how they appear on the valuation front for the year ahead.

TD Bank

TD Bank has been a huge dog in the Big Six, and the rough days seem poised to continue into the second half, with the stock recently plunging below $74 per share to a new multi-year low. Unless you’re a brave value hunter, it’s tough to get behind TD while the money-laundering overhang lingers. Further, until we know the full extent of the damage, it may seem wise to stick with a more certain name in the Big Six banking basket.

With a 5.5% dividend yield, though, I’d argue that income investors have plenty of reasons to brave the tough terrain, even if it means being clobbered with more downside over the near term. At the end of the day, TD will make it past this horrific fiasco. It may take a few quarters or years for the overhang to blow over, but it does have the cash flows to make it through what remains of its idiosyncratic issues.

Bank of Montreal

Bank of Montreal stock looks that much more attractive as TD Bank deals with its money-laundering woes.

Like TD, BMO has solid U.S. assets minus the potential regulatory roadblocks and financial penalties that could be on the horizon. With less risk, though, comes a slightly higher price tag and a slightly lower dividend yield. At writing, BMO stock goes for 13.8 times trailing price-to-earnings, with a 5.4% dividend yield.

It’s slightly more expensive and just a hair less bountiful for passive income investors. However, if TD’s unique woes keep you up at night, BMO stock may be the more cautious way to play a Canadian banking comeback. Between TD and BMO, I’d give BMO the slight edge. That said, I view both banks as looking quite cheap in June.

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 Joey Frenette has positions in Bank of Montreal and 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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