Yahoo Finance Better Buy: TD Bank Stock or Royal Bank Stock?
Written by Andrew Button at The Motley Fool Canada
Toronto-Dominion Bank (TSX:TD) and Royal Bank of Canada (TSX:RY) are two contenders for the title of “Canada’s biggest bank.” The former is the biggest by assets; the latter is the biggest by market cap. Each bank has its own things going for it. TD Bank is growing relatively quickly, while Royal Bank faces fewer regulatory risks. In this article, I will explore TD and Royal Bank side by side, so you can decide which stock better suits your needs.
Growth
TD Bank has had better growth than Royal Bank over the last five years. In that period, TD Bank has grown its revenue by 7% CAGR and its earnings by 8.8% CAGR. In the same period, Royal Bank has grown its revenue by 4.3% CAGR and its earnings by 6.7% CAGR. “CAGR” means compound annual growth rate; it basically means percentage growth per year over a given period. TD’s growth rates have indisputably been better than RY’s over the last five years, using this metric.
Valuation
In addition to having better growth than Royal Bank, TD also has a cheaper valuation than Royal Bank has. Using the last 12 months’ earnings and Friday’s closing stock price, Royal Bank trades at
11.4 times earnings;
3.6 times sales;
1.8 times book value; and
5.8 times operating cash flow.
TD for its part trades at
9.8 times earnings;
3.14 times sales;
1.43 times book value; and
9.98 times operating cash flow.
Royal Bank only has one metric that’s lower than TD’s comparable multiple. However, operating cash flow isn’t a metric people often look at when evaluating banks, because banks often make large outflows of cash in order to issue loans. That’s a good thing, not a bad thing, so low operating cash flow can sometimes be good for a bank.
Now, stocks don’t usually get cheap or expensive for no reason. Clearly, there is something happening at Royal Bank that makes investors think it’s better than TD Bank — or vice versa. In the next section, I’ll reveal what that factor might be.
Deal-making ability
One factor that arguably favours Royal Bank over TD Bank is its reputation and ability to make deals. TD is currently under suspicion for abusive sales practices in the United States; as a result, its biggest recent deal got cancelled. Royal Bank, however, is buying HSBC Canada and appears to be encountering no regulatory resistance. Reputation goes a long way, and RY seems to have a somewhat better one than TD.
Verdict: TD with a slight win
My final verdict on the comparison of TD and Royal Bank is that TD Bank looks like a somewhat better buy today. The stock is cheaper, and the company is growing faster than Royal Bank, though profitability metrics look for similar for both companies. Going off fundamentals, TD is the better buy.
Royal Bank does have that one soft factor going for it: its deal-making ability. It’s having a much easier time getting deals approved than TD is, but TD’s Cowen deal closed without a hitch, so maybe TD can still get investment banking deals done. I like TD stock better overall.
The post Better Buy: TD Bank Stock or Royal Bank Stock? appeared first on The Motley Fool Canada.
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Fool contributor Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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