Written by Andrew Walker at The Motley Fool Canada
Royal Bank (TSX:RY) and TD (TSX:TD) are Canada’s largest banks. Recent turmoil in the global banking sector has investors wondering which top TSX bank stocks might be undervalued today and good to buy for a self-directed portfolio focused on passive income and total returns.
Royal Bank has a current market capitalization of $179 billion. This makes it the largest publicly traded company on the TSX and puts Royal Bank among the top 10 banks globally, based on this metric.
At the time of writing, RY stock trades near $129 per share. That’s above the 12-month closing low around $118 it hit in October last year but down from nearly $140 in February.
Despite the initial pandemic hit and the latest volatility caused by failures of regional banks in the United States, Royal Bank investors are still up nearly 30% over the past five years.
Royal Bank remains very profitable. The business generated an adjusted return on equity (ROE) of nearly 17% in the fiscal first quarter (Q1) of 2023. Adjusted profits for the quarter came in at $4.3 billion, up about 4% from the same period in fiscal 2022. The steady performance is likely the reason investors are willing to pay a higher multiple for Royal Bank stock. RY shares trade for about 12.3 times trailing 12-month earnings.
The company is spending a good chunk of its excess cash to purchase HSBC Canada for roughly $13.5 billion. This deal adds 130 branches and an affluent client base. Last year, Royal Bank also spent about $2.4 billion to acquire Brewin Dolphin, a large wealth management business in the U.K. and Ireland. The purchases should help drive revenue and profit growth in the coming years.
Royal Bank’s dividend currently offers a 4% yield.
TD has a market capitalization of about $149 billion. The stock trades near $81.50 per share compared to $93 in February and $109 in early 2022.
TD’s share price is up about 10% over the past five years. The company has a large American presence with a branch network that runs from Maine down the east coast to Florida.
TD just abandoned its planned US$13.4 billion takeover of First Horizon, a U.S. regional bank with operations in the southeastern part of the United States. The deal would have made TD a top-six bank in the country, but investors should be relieved that TD didn’t close the deal on the initial terms. First Horizon trades for less than US$10 per share right now compared to the US$25 TD was going to pay to buy the bank.
Uncertainty around the deal in the past two months is one reason TD stock has pulled back so dramatically. Ongoing concerns regarding the stability of the U.S. banking sector could keep pressure on the share price.
Contrarian investors might want to take advantage of any additional weakness to add TD stock to their portfolios. TD is sitting on significant excess capital that it can now deploy as share buybacks, dividend increases, or for another acquisition. At less than 10 times trailing 12-month earnings TD stock appears cheap, and investors can pick up a 4.7% dividend yield.
Is one a better pick?
Royal Bank and TD are top TSX dividend stocks that have good track records of delivering solid long-term total returns and both deserve to be anchor picks for a retirement portfolio. If you only choose one, I would probably make TD the first choice right now.
The post Better Buy: Royal Bank of Canada Stock or TD Bank Stock? appeared first on The Motley Fool Canada.
Before you consider Royal Bank of Canada, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in April 2023... and Royal Bank of Canada wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 21 percentage points. And right now, they think there are 5 stocks that are better buys.
See the 5 Stocks * Returns as of 4/18/23
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.