Royal Bank (TSX:RY) and TD Bank (TSX:TD) are the largest players in the Canadian financial sector. The stocks have delivered very different performances for investors in recent years, with RY being the big winner.
Investors are wondering if TD Bank is now undervalued and good to buy or if Royal Bank remains a better pick for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
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Royal Bank Stock
Royal Bank trades near $176 per share at the time of writing. This is close to the record high of around $180 it reached in early December. The stock is up 33% in the past year and gained 68% over the past five years.
Royal Bank is benefitting from its $13.5 billion purchase last year of HSBC Canada. The deal added 780,000 customers and 4,500 new employees. Management’s focus on a Canadian acquisition sets Royal Bank apart from its peers in the past few years, where deals in the United States have been more common.
Royal Bank delivered a 10% gain in adjusted net income in 2024 to $17.4 billion. Adjusted diluted earnings per share rose 8% compared to fiscal 2023, and adjusted return on equity (ROE) came in unchanged at a solid 15.5%.
Royal Bank finished fiscal 2024 with a common equity tier-one (CET1) ratio of 13.2%. This means the bank still has ample capital on hand to ride out market turbulence or make additional acquisitions.
The bank delivered a strong performance in a year where high interest rates put pressure on businesses and households with too much debt. Royal Bank’s fiscal fourth-quarter (Q4) 2024 provision for credit losses (PCL) rose $120 million, or 17% compared to fiscal Q4 2023.
Rate cuts by the central bank will ease the pressure on variable-rate borrowers, but bond yields remain high, making fixed-rate mortgage renewals more expensive in the current market compared to when homeowners took out the initial mortgages five years ago.
At the current share price, investors can get a dividend yield of 3.3% on RY stock.
TD Bank
TD trades near $82.50 at the time of writing compared to $108 about three years ago. In the past 12 months, the stock price has been relatively unchanged, and investors are up about 13% from where the stock sat five years ago.
The stock’s underperformance is due to issues in the American operations. Regulators fined TD more than $3 billion in 2024 and placed an asset cap on the U.S. business as penalties for not having adequate systems in place to identify and prevent money laundering.
TD spent billions of dollars over the past 20 years buying American regional banks from Maine right down the East Coast to Florida. The bank ranks among the top 10 in the U.S. market and expansion south of the border was a core part of the growth strategy. In fact, TD had to abandon its planned US$13.4 billion takeover of First Horizon due to regulatory challenges.
TD is now in a transition phase. A new chief executive officer will take control next month to work out a new strategy to deliver growth for shareholders. At the current share price, investors can get a dividend yield of 5% from TD stock.
Is one a better pick?
Royal Bank isn’t cheap right now, and the dividend yield is a bit low, but the stock still deserves to be on your radar for a buy-and-hold portfolio focused on total returns.
TD is arguably a contrarian pick right now. Investors will need to be patient, but the shares might be undervalued at this point and you get paid a decent dividend yield to wait for a recovery.
Income investors might want to go with TD as the first choice today. Otherwise, it might be worthwhile to split a new investment between the two stocks.
