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November 17, 2020

The 5 Best Canadian Bank Stocks to Buy Now

Disclaimer: The writer of this article may have positions in the securities mentioned in this article. The fact they hold positions in securities has had no impact on the production of this article

By Dan Kent

November 17, 2020

Regardless of your investment philosophy, most Canadian retail investors will have one thing in common when it comes to their portfolios; they include Canadian bank stocks.

Why?

Well, for starters, every one of these banks on this list is a Canadian Dividend Aristocrat, and is also included in the large majority of Canadian index etfs. Newcomers looking to learn how to buy stocks are often drawn to bank stocks, primarily because of their consistent, high-paying dividends.

Charts provided by StockRover. Charts provided by StockRover. Charts provided by StockRover. Charts provided by StockRover.

Are Canadian banks a good buy now?

We're starting to get this question a lot moving forward in 2020, and for good reason. Investors are looking for long term dividend stocks as interest rates fall. Canadian banks provide exactly that. However, low rates and a generally poor outlook on the economy have caused these reliable dividend stocks to lag the TSX Index in terms of recovery.

How badly? Lets take a look

Canada's Big 5 Bank Stocks Vs TSX 2020 Grab Stockrover Here

As you can see from the chart, the only two Canadian bank stocks outperforming the TSX Index are Royal Bank of Canada (TSX:RY) and Canadian Imperial Bank of Commerce (TSX:CM).

So why have the others struggled?

Well, the outlook for the Canadian economy is bleak, especially the oil and gas sector.

Considering the Bank of Montreal (TSX:BMO) has the largest exposure to this sector in terms of loans, there's no question why they've been hit the hardest.

Toronto Dominion Bank (TSX:TD) has the largest exposure out of the Big 5 banks to the U.S. economy, and at the time of writing, the novel Coronavirus is wreaking havoc down south.

The Bank of Nova Scotia (TSX:BNS) was also criticized heavily for not including enough provisions for credit losses in the first quarter of the year, resulting in the company having to designate the most PCLs by a long shot in the second quarter.

Will Canadian bank stocks recover?

It's fairly safe to say yes, they will.

As to when that will happen, who knows. The financial sector here in Canada is under a lot of pressure due to low rates and the fear of loan defaults.

However, these are Canadian stocks that managed to maintain their dividends during the 08 financial crisis while financial institutions around the world were slashing them at a rapid pace. The banking sector in Canada is one of the most heavily regulated industries in the world.

This leaves our banks well capitalized and financially healthy. It's exactly why they're some of the best dividend stocks in the country.

How safe are Canadian bank stocks?

The highly regulated Canadian banking market creates massive barriers to entry. This is very similar to the Canadian telecom sector.

The Big 5 are incredibly important to the economy in Canada, as are some of the smaller regional players such as National Bank of Canada and Canadian Western Bank. A Canadian bank stock can serve as a cornerstone of one’s portfolio, is low-risk, provides growth, and a steady income.

After weathering the financial crisis better than most all world-banks, the banks in Canada were also among the first to re-instate a rising dividend. In fact, the Bank of Montreal has one of the longest consecutive dividend payment streaks in the country at 189 years.

So with that being said, lets get to the best Canadian bank stocks to buy moving forward. If you're looking for an ETF, it may be wise to take a look at some Canadian bank ETFs to make your life easier.

So what are the best Canadian bank stocks to own today?

5. Canadian Imperial Bank of Commerce (TSX:CM)

CIBC Top Dividend Stocks

 

CIBC kicks off our list of the best Canadian bank stocks to be looking at today. Overall, CIBC has been a perennial under-performer, but makes the cut on this list update over the Bank of Nova Scotia.

The Canadian financial giant, along with Royal Bank, are the only 2 Big 5 Canadian bank stocks that are outperforming the TSX Index in 2020. The primary reason for this? Significant earning beats in the third quarter by both companies.

CIBC reported earnings per share of $2.71 in the third quarter, well above the $2.15 expected by analysts. However, its key to note that this number was still well below the $3.10 earned in the same quarter last year. It's clear the pandemic is taking its toll on Canadian Banks.

The one area where CIBC, and most all other banks on this list saw a massive surge in revenue, is the capital markets. Revenue of over $392 million was significantly higher than the $235 million it posted in the third quarter of 2019. The reasoning for this? Investors interest in the stock market after it had crashed in March.

The COVID-19 pandemic brought a ton of new investors to the table, and CIBC benefited immensely. Whether or not this will continue into the future, as the allure of a cheap stock market is wearing off, remains to be seen. But, there is no question it helped the company moving forward.

In terms of valuation, despite the company's strong performance, it is still the second cheapest bank on this list, trading at only 9.14 times forward earnings. This is marginally below its 5 year historical average of 9.7 times forward earnings.

CIBC also boasts the largest dividend of any bank stock on this list at 5.69%. Typically, CIBC has always been the highest yielding stock out of Canada's Big 5 banks. However, with Scotiabanks underperformance, it currently yields higher. Still, investors should be more than happy with this type of yield, especially considering the fact the company has a payout ratio in terms of earnings of only 60%.

Canadian Imperial Bank of Commerce 5 year dividend adjusted performance vs the TSX

TSX:CM 5 year performance vs TSX

Market Cap: $45.82 billion
Forward P/E: 9.14
Yield: 5.69%
Dividend Growth Streak: 9 years
Payout Ratio (Earnings): 60.04%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 5.60%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

4. National Bank (TSX:NA)

National Bank

 

National Bank is the only bank stock on this list that isn't in the Big 5. However, the company is the 6th largest bank in the country, and has quietly become one of the best performing bank stocks of the last decade, making Canadian investors severely regret not looking outside of the major financial institutions.

National Bank is dominating in terms of market share in Quebec, which over 60% of its revenue coming from the Canadian province. The bank also depends heavily on personal and commercial banking, making up over 42% of its total revenue.

A lot of naysayers compare National Bank to a company like Laurentien Bank, who recently had to cut its dividend amidst the pandemic. However, it's important to note that National Bank does have a strong international presence as well. And although it's smaller than that of Canada's major institutions, glass half full investors will realize this is a prime opportunity to grab a growth stock in the banking sector, which is an extremely rare occurrence.

Over the last 5 years, National Bank (dividends account for) has returned 97.3% to investors. The next closest bank? Royal Bank at 56.7%. In fact, National Bank has returned 83% more to Canadian investors than The Bank of Nova Scotia, who missed the cut in this recent update.

In terms of valuation, because of its rapid growth National Bank is the most expensive bank stock on this list, and is the most expensive out of Canada's big 6 banks. Forward price to earnings sit at 11.14, which is actually a 20% premium to its 5 year historical averages. Keep in mind however, you're paying for growth, which the company has achieved.

Speaking of growth, National Bank's dividend is one of the fastest growing on this list as well. In fact, the only bank that is outpacing it right now is our second pick, TD Bank. National Bank recently raised its dividend by 9.20%, has a 10 year dividend growth streak and yields just shy of 4% at the time of writing. It isn't as high yielding as most of Canada's big 5, but this is a fast growing stock with an excellent dividend.

It's important to note however, with National Bank being a more regional bank and focused primarily on an eastern province, it's prone to economic downturns within that province. A prime example of this right now? Canadian Western Bank (TSX:CWB), which relies heavily on Alberta.

National Bank 5 year dividend adjusted performance vs the TSX

TSX:NA Dividend Adjusted Return Vs TSX

Market Cap: $24.34 billion
Forward P/E: 11.14
Yield: 3.90%
Dividend Growth Streak: 10 years
Payout Ratio (Earnings): 46.87%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 9.20%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

3. Bank of Montreal (TSX:BMO)

Bank Of Montreal

 

If you look at our performance chart at the top of the article, you'll see that the Bank of Montreal is one of the worst performing Canadian banks right now. In fact, The Bank of Nova Scotia, which you'll notice missed this list completely, is the only other Canadian bank stock that has put up worse returns.

So why is the Bank of Montreal struggling so much? In our opinion, it's because a significant portion of its loan portfolio, much more than any other bank on this list, is designated to oil and gas companies.

Unless you've been living under a rock, you probably noticed that the price of oil collapsed earlier this year due to the pandemic. As such, a lot of junior and even some major companies were forced to slash their dividend and reduce capital spending. A lot of investors are worried these companies won't be able to satisfy their loan payments. But, there may be too much pessimism priced into BMO's stock price right now.

The Bank of Montreal is the 8th largest bank in North America, and has paid uninterrupted dividends for more than 185 years, the longest streak in the country. Just over 60% of its revenue comes from the Canadian economy, making it one of the more heavily dependent Canadian bank stocks when it comes to its home country.

Yes, BMO does have high exposure to the oil and gas sector. However, its key to note that the company also has the lowest exposure to the Canadian housing market, a market which a lot of investors think is a bubble just waiting to burst.

From a valuation standpoint, BMO is ranked 3rd of 5 in terms of the Big 5 banks with a forward price to earnings ratio of 9.2. This is significantly lower than its 5 year historical average, which sits around 10.9.

In terms of dividend, the company has a 8 year dividend growth streak and has a yield of 5.27%, making it the highest yielding bank stock on this list. With a dividend payout ratio in terms of earnings of around 55%, there's plenty of room for error here.

Bank of Montreal 5 year dividend adjusted performance vs the TSX

TSX:BMO 5 year dividend adjusted returns vs TSX

Market Cap: $51.7 billion
Forward P/E: 9.20
Yield: 5.27%
Dividend Growth Streak: 8 years
Payout Ratio (Earnings): 54.85%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 7.40%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

2. Toronto Dominion Bank (TSX:TD)

TD Bank

 

The Toronto Dominion Bank is lagging the market in terms of returns at the time of writing, however make no mistake about it, this is one of the best bank stocks you can own in Canada today.

In fact, the $114 billion dollar company used to be our consensus number one pick, but it's struggles in the United States due to COVID-19 have caused it to slip into the second position.

TD is a multinational banking and financial services firm which started operations in 1855. TD Bank is one of the largest banks in Canada by total assets and second largest by market capitalization.

The financial giant has operations in both Canada and the United States and was named one of the most convenient banks in the U.S.

TD has a very prominent set of operations in the United States, which make up more than 40% of its overall revenue.

Over the last four years, TD Bank has a compound annual growth rate on earnings of 7.25%. This is highest among any bank stock on this list, and the highest by a wide margin among the Big 5 banks. This is one of the primary reasons TD Bank has been able to grow its dividend at a rapid pace.

However, depending on how the COVID-19 situation goes in the United States, we could see the bank slip up when it comes to growing earnings. There's no question that the United States is suffering drastically as a result of the virus, and TD Bank depending on 40% of its revenue generation down south may not bode well in the short term.

Long term however, we're not worried at all. If we look at TD from a value perspective, the company is trading at just over 9.6 times forward earnings. This is the second most expensive bank in the country, the first being the next stock on this list.

In terms of its dividend, we quite frequently mentioned TD Bank over its Big 5 counterparts because of its dividend growth. Over the last 5 years, its raised the dividend by an average of 9.45%, far outpacing any growth provided by the other main banks here in Canada.

Its payout ratio has spiked to nearly 60%, which is above historical numbers. But once the economy starts rolling again and the world moves on from COVID-19, we expect this to come back down.

TD Bank 5 year dividend adjusted performance vs the TSX

TD Bank dividend adjust return vs TSX 5 year Grab Stockrover Here

Market Cap: $114.2 billion
Forward P/E: 11.46
Yield: 4.99%
Dividend Growth Streak: 9 years
Payout Ratio (Earnings): 59.07%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 10.73%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

1. The Royal Bank of Canada (TSX:RY)

Royal Bank

 

If you're looking for the top Canadian bank stock to buy today, in my opinion the answer is the Royal Bank, bar none.

The company absolutely crushed second quarter results, and it separated itself as the clear bank stock to be buying in Canada right now.

Revenue came in at $12.9 billion and net income at $3.2 billion. These numbers don't tell you much themselves, however it's the year over year changes that are astonishing. Revenue was up 7% year over year and net income down only 1%.

That's right, Royal Bank posted positive revenue growth and flat earnings growth during the height of a global pandemic.

There were so many bears calling for the doom of these banks, it was getting somewhat exhausting. Time and time again, they continue to prove investors wrong.

Provisions for credit losses came in at 40 basis points, which was 125 basis points lower than the previous quarter. The only bank to not lower PCL's in the third quarter was The Bank of Nova Scotia, which we spoke about above. I attribute most of Royal Bank's success to the company's international diversity.

It is one of the most diversified banks in the world, and its global exposure will allow it to provide more stable revenue and earnings as multiple countries are in different phases of economic recovery due to COVID-19.

Don't get me wrong, the bulk of its revenue is still right here in Canada, but the diversity will help it outperform moving forward. In terms of valuation, Royal Bank is definitely the most expensive of the Big 5 banks. This is to be expected with recent performance.

If you look at the chart below, Royal Bank is actually the most expensive bank in terms of price to earnings, by quite a large margin.

Canadian Banks Forward Price To Earnings Chart Grab Stockrover Here

Most investors are looking at bank stocks, particular Canadian bank stocks, for their dividends. Royal Bank has one of the best in the country. The bank currently yields around 4.45% and has a payout ratio of 54.54%. Although this is one of the highest payout ratios in terms of the Big 5, this dividend is by all means safe.

However, we'd temper expectations in terms of dividend raises in the future, as the government has told Canadian banks to hold off on raising dividends.

Overall, Royal Bank is our best bank stock to be buying in Canada today.

Royal Bank 5 year dividend adjusted performance vs the TSX

Dividend Adjusted Return RBC Vs TSX Grab Stockrover Here

Market Cap: $139.03 billion
Forward P/E: 11.65
Yield: 4.45%
Dividend Growth Streak: 9 years
Payout Ratio (Earnings): 54.54%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 8%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only

 

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Dan Kent


An active dividend and growth investor, Dan has been involved with the website since its inception. Dan is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. Dan manages his TFSA, RRSPs and a LIRA at Questrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.

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