TD Bank (TSX:TD) and Royal Bank (TSX:RY) are giants in Canada’s financial sector. The drop in the share prices of Canadian banks has investors wondering if TD stock or RY stock is oversold right now and good to buy for a portfolio focused on dividends and total returns.
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TD Bank
TD ranks number two in size in the TSX banks group with a current market capitalization near $144 billion. The stock trades for close to $79 per share at the time of writing. That’s down from $93 in February and $108 in early 2022.
TD finished the fiscal second quarter (Q2) 2023 with a common equity tier-one (CET1) capital ratio of 15.3%. The Canadian banks are required to have a CET1 ratio of 11%, so TD is sitting on significant excess cash. TD had planned to buy First Horizon, a U.S. regional bank with more than 400 branches, for US$13.4 billion in an all-cash deal. Regulatory issues forced the two banks to cancel the purchase, so TD now has to decide what it will do with all the extra money.
Investors might have hoped for an announcement of a bonus payout or a big dividend increase when TD reported fiscal Q2 2023 results. Neither materialized, and the stock fell. TD also said it will not meet its earnings-growth guidance of 7-10% as a result of the cancelled takeover of First horizon and deteriorating macroeconomic conditions.
Management will take some time to evaluate options for the war chest of cash. Investors could still see a nice dividend boost or a special payout emerge as a reward for their patience. TD might also take advantage of the downturn in the global banking industry to find a new target.
Near-term volatility should be expected until management outlines the next steps. However, TD stock already appears cheap and now offers a 4.85% dividend yield.
Royal Bank
Royal Bank holds the top spot in the Canadian banking industry with a current market capitalization of about $171 billion. The stock trades near $124 per share at the time of writing. This is down from nearly $140 in February.
Royal Bank used a good chunk of its pandemic cash hoard to make acquisitions in the United Kingdom and Canada. Royal Bank purchased wealth manger Brewin Dolphin for about $2.4 billion last year. The deal makes Royal Bank one of the top three wealth management firms in the U.K. and Ireland.
Royal Bank is also working to complete its $13.5 billion all-cash purchase of HSBC Canada. The deal is expected to close in 2024 and will add about 130 branches and an affluent retail banking and wealth management client base.
The board just raised the quarterly dividend by about 2% to $1.35 per share. That’s good for an annualized yield of about 4.3% at the time of writing.
Is one more attractive right now?
TD appears more oversold and offers a higher dividend yield today, so I would probably make TD the first choice. That being said, TD and Royal Bank both deserve to be anchor picks for a buy-and-hold retirement portfolio focused on dividends and total returns. Buying these stocks on big dips has historically proven to be a profitable move over the long haul.
