Don’t look now, but the Canadian bank stocks are finding a way to march higher again. Indeed, the past few years have been quite bleak for Canada’s big banks (the Big Six, as they’re often referred to). As the Big Six look to ricochet off their recent lows, new investors may be wondering if it’s time to get back in before dividend yields have a chance to really compress.
As you may be aware, yields tend to go down as share prices go up. And once economic conditions normalize, it’s not hard to imagine many of Canada’s top banks hiking their payouts by generous amounts again to reward shareholders for their patience.
Canadian bank stocks look primed for a continued recovery
Though we’re nowhere close to being out of the woods yet, I think the big banks are worth consideration right here as they finally gain ground again. I still view the broader basket as undervalued and overdue for a continued upside move.
Indeed, bank stocks will always be at the mercy of the economy. But at this juncture, I think there’s already so much gloom baked in already. That makes me very bullish on the big banks, even if 2024 ends up being another sluggish year for consumers and the economy as a whole.
Right now, I think you can’t go wrong by nibbling away at any of the six Canadian bank stocks. However, my favourites going into year-end have to be TD Bank (TSX:TD) and Bank of Montreal (TSX:BMO).
TD Bank
TD Bank stock is up more than 9% since its late-October lows, thanks in part to the market-wide rally and easing inflation fears. If inflation is tamed sooner rather than later, we may have seen peak rates (or at least something close to peak rates), and that’s more than enough reason to pick up the economically sensitive bank stocks.
It’s hard to tell how much this recent relief rally has to go. At 10.85 times trailing price to earnings, the stock still looks quite cheap. And the 4.59% dividend yield may not last long, especially if shares make a run for the $90 level. I’m not a fan of chasing momentum, but when it comes to banks, I think it’s time to get back in if you threw in the towel at any point over the past year.
TD is one of the best-run banks out there, with a strong enough liquidity position to take potentially scoop up a retail bank south of the border. Indeed, the regional bank runs experienced earlier this year were startling but are now in the rear view. For TD, I expect solid results, even as headwinds take a bit of a hit on earnings.
Bank of Montreal
Bank of Montreal is another Canadian bank that could turn a corner. Shares are up a modest 6.3% since its recent lows. And though the rally has been less pronounced than other Big Six bank stocks, I think BMO stands out as one of the names that could have plenty of room to run once the economy stands up after landing softly in the coming year.
The stock trades at 10.96 times trailing price to earnings, just a tad higher than that of TD Bank stock. With a 5.34% dividend yield, though, shares are more bountiful. The stock is still down around 27% from its highs. Still, I find it encouraging that the stock’s long-term support level in the $100-108 level has held up thus far. Technically and fundamentally speaking, shares look like a timely buy right here and now.
