Toronto-Dominion (TSX:TD) & Royal Bank of Canada (TSX:RY): 2 Dividend-Making Bank Stocks

Summary

• Top Canadian lenders will report their latest quarter earnings this week.
• Analysts expect profits will decline for the second consecutive quarter as banks write-off bad loans and navigate economic depression.
• Canada’s big six banks’ provision for credit losses runs into billions and are expected to put aside more amounts for loan losses.
• We analyze the performances of dividend stocks – Toronto Dominion Bank (TSX:TD) and Royal Bank of Canada (TSX:RY).

This is a big week for Canadian bank stocks with the top five lenders expected to turn in their latest quarterly reports. We focus on the stock performance of Toronto-Dominion Bank and Royal Bank of Canada – the two bellwethers of the country’s banking institutions – in these trying times of pandemic. Analysts expect profits will decline for the second consecutive quarter in a row as these banks write-off bad loans and navigate economic depressions of unseen proportions.

Anticipating a domino effect from economic fallout of COVID and rising business closures, the big six Canadian banks had set aside a record C$ 10.9 billion-loan loss provisions at the beginning of the pandemic. The lenders are likely to continue putting aside massive amounts to mitigate bad loans losses in the upcoming quarters.

READ: Big Six Banks’ Slow-Propelled Recovery in Pandemic-Hit Canadian Economy

The Toronto Dominion Bank (TSX:TD)

Shares of Toronto Dominion have largely been able to field against the market volatility, despite a 14 per cent year-to-date decline in stock prices. The stocks have appreciated by over 10 per cent in a quarter and are trading flat on the monthly scale. TD has a current market cap of C$ 115.4 billion.

Even as companies snip their dividends amid pandemic, TD Bank continued to pay its shareholders, distributing C$ 0.79 per share quarterly dividends. It has a current price-to-earnings (P/E) ratio of C$ 10.90, a price-to-book (P/B) ratio of 1.319 and earnings per share of C$ 5.70. The bank’s current return on equity is 12.83 per cent while return on assets is 0.68 per cent.

TD bank stocks are a key constituent of TSX Canadian dividend aristocrats index and TSX high dividend index. Its current dividend yield stands at an impressive 4.937 per cent, making it an investors’ darling. TD stocks’ three-year dividend yield stands at 8.65 per cent while five-year dividend yield is 8.79 per cent.

In the first quarter of the year, TD Bank’s provisions for credit losses soared to nearly C$ 3.22 billion, up from C$ 633 million during the same period last year. The lender is also likely to see some major year-on-year earnings decline.

These stats in a pandemic economy indicates a safe outlook for TD Bank scrips. Many analysts believe TD Bank stocks, that are currently trading at above C$ 64 per share, is undervalued and will pick steam in future.

TD Bank provides commercial and retail services and products. It also has a wealth management branch.

READ: Embracing Disruption Through Digitalization - Banking Trends for 2020

Royal Bank of Canada (TSX:RY)

After navigating the COVID rollercoaster markets, scrips one of the largest banks of Canada are down 4 per cent this year. In contrast, the S&P/TSX banking index has doffed 14 per cent in the same period.

Shares of Royal Bank of Canada (RBC) has gained 17 per cent in a quarter. On the monthly scale, it yielded 2.3 per cent returns. The company’s current market valuation is C$ 140.8 billion and C$ 7.83 earnings per share.

RBC stocks’ current P/E ratio and P/B ratio is 12.50 per cent and 1.78 per cent, respectively. The bank’s current return on equity is 13.74 per cent while return on assets is 0.70 per cent.

RBC is also a member of TSX Canadian dividend aristocrats index, TSX high dividend index, and TSX dividend index. It paid shareholders C$ 1.08 quarterly dividends and has a current dividend yield of 4.37 per cent. The lender has an impressive 6.64 per cent dividend yield over a three-year period, and 6.65 per cent dividend yield in five years.

Canada’s biggest bank by market cap made credit-loss provisions of C$ 2.83 billion in the second quarter of 2020, up from C$ 426 million in the same quarter last year. Its earnings halved due to this.

RBC is expected to release its third quarter 2020 earnings report on August 26.

READ: Are Dividend Stocks Roaring Back To Life?

Outlook for TD Stock & RBC Stock

The pandemic has weighed heavily on banking and financial institute stocks and their near-term earnings due to credit losses provisions and bad loans. Despite signs of improvement, earnings results for the three months ending 31 July 2020 will likely be lower as compared to the corresponding quarters last year.

Canadian equity markets have rallied off their March lows and banks are slowly recovering the losses.

Both Toronto Dominion Bank and Royal Bank of Canada have proved to be high dividend paying stocks in current economic conditions. The shares may be down in the current pandemic conditions but are likely to do well in the long-term scenarios.