Toronto-Dominion Bank (TSX:TD) and Royal Bank of Canada (TSX:RY) are the heavyweights of Canadian banking. As the nation’s largest companies by market cap, they make up outsized percentages of Canadians’ portfolios. In this article, I will explore the two big banks side by side, so you can decide which is the best fit for your portfolio.
The case for TD Bank
Compared to Royal Bank of Canada, TD Bank has two things going for it:
- Cheapness
- Dividend income
TD Bank stock is far cheaper than Royal Bank stock right now. The stock got beaten down because of a money-laundering scandal in the U.S.; as a result, all of its valuation ratios are quite low. In the table below, you can see TD’s valuation ratios compared to those of Royal Bank. Almost all of TD’s multiples are lower than RY’s.
| TD Bank | Royal Bank of Canada | |
| P/E | 10 | 13 |
| Price/sales | 2.76 | 3.85 |
| Price/book | 1.3 | 1.9 |
| P/E-to-growth (PEG) | 1.81 | 1.67 |
As you can see, the only ratio that Royal Bank wins on is the PEG ratio, but that arguably doesn’t mean much, as TD’s earnings this year were held back by provisions for the money laundering lawsuit. If the fines and settlements don’t go beyond $2 billion, then TD is cheaper than RY going by long-term average earnings.
TD Bank also has a much higher dividend yield than Royal Bank. The stock pays $1.02 in dividends per quarter, which works out to $4.08 per year. At today’s stock price of $79.40, that works out to a 5.13% dividend yield. By contrast, RY stock only yields 3.8%.
The case for Royal Bank
The case for owning Royal Bank over TD Bank comes down to risk management. In general, Royal Bank has been caught up in far fewer scandals and issues over the years than TD has. In addition to the recent money laundering scandal, TD has also been accused of aggressive sales tactics and other misdeeds. There isn’t anywhere near as much of this kind of thing in Royal Bank’s history.
Because of its better ethical track record, Royal Bank has an edge in mergers and acquisitions (M&A) compared to TD Bank. Recently, the bank bought out HSBC’s Canada assets. The deal closed back in March with very little fanfare. TD had a recent deal of its own to buy U.S.-based First Horizon. Unfortunately, that deal was scuttled by regulators because of TD’s inadequate money-laundering safeguards. With that said, TD Bank did manage to buy the U.S. investment bank Cowen last year, just in time for this year’s boom in investment banking fees. So, it is not all bad news in TD’s world.
Foolish takeaway
Taking into account everything — valuation, dividend potential and growth potential — I personally prefer TD Bank to Royal Bank. It has more upside if it can beat the money-laundering allegations, or even if it just pays out a moderate amount of fines and settlements. Royal Bank is quite richly valued by bank standards. At 13 times earnings with little growth, it’s not cheap. It is, however, a very conservative bank that you probably won’t lose your shirt on.
