The Canadian bank stocks have been spectacular investments for quite a few years now. With volatility levelling up in recent weeks, thanks to an unravelling of the tech and AI trade, the Big Six banks have held relatively steady, with shares of TD Bank (TSX: TD) wobbling, but finishing the past week of trade quite flat. Indeed, TD stock has been consolidating since July.
And while the latest AI-induced market disturbance may have put TD Bank stock’s breakout moment on hold, especially after a decent quarterly earnings report, my guess is that Canada’s big banks will continue to flex their muscles well into year’s end and going into 2027. The structural tailwinds in play are just too robust, at least in my view, especially as investors consider diversifying away from the fast-falling high-tech trade.
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Are valuations on TD Bank stock just a bit high this November?
Sure, but the same could be said for just about any bank stock these days. At 15.7 times forward price-to-earnings (P/E) and about 2.5 times price-to-book (P/B), there’s a historic premium on the shares. The big discount applied to the name just over two years ago has all but vanished.
Meanwhile, the yield has compressed to 2.6%. That’s close to the lowest I’ve seen when it comes to TD Bank stock. So, why bother considering picking up shares today at a premium and with a yield that’s a fraction of what it once was? Moving ahead, I do think that dividend growth could be more generous as the bank passes on more cash to its shareholders.
To land $5,000 a year in dividends with the yield at these lows, one will need to invest just over $193,000 in TD. For many, that’s just too much to put into a single stock, especially while it’s hovering near all-time highs. Instead of focusing on how much you could receive in dividends, I’d much rather build a position over the next two years with incremental buys every quarter or so.
As the earnings beats keep on coming while the bank enriches shareholders with its share repurchase program, my guess is that management still views the shares as a great deal. Remember, just because the P/E is on the higher end does not necessarily mean you’re looking at an overvalued stock that’s overdue for a bear market moment.
TD Bank looks set for success
As the Bank of Canada looks to increase interest rates further, it’s going to be interesting to see how the net interest margins and loan growth of the Big Six will be affected. Either way, I think TD Bank is on solid footing, as the bank looks to make good on anti-money-laundering efforts while using the powerful tool that is AI to uncover further cost savings.
Indeed, AI automation could be a massive theme in 2027, and the big banks are sure to be very active users of the technology to drive real, tangible financial returns. As the Canadian economy looks to get back in the fast lane, my guess is that TD Bank has more room to rally and certainly wouldn’t dare venture a bet against the name.
While I’d normally encourage waiting for a dip before initiating a position, I do think that the name isn’t a bad buy as shares look to go sideways for a while longer before its next big move. The bank’s in the midst of a generational run and, in my view, the digestion phase could be an opportune time to punch a ticket.
