CM or TD: Which Canadian Bank Stock is a Better Choice?

With the U.S. stocks witnessing increased volatility, it’s time to take a look at foreign stocks. These companies, basically dependent on local economic growth, can provide a cushion against extreme volatility and offer solid returns.

So, today we are considering the Foreign Banks industry that seems to be attractive from an investment perspective. The industry carries a Zacks Industry Rank #88 (top 34% out of more than 250 Zacks industries). Our back-testing shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than two to one.

Not looking far off, we have picked up Canadian banks stocks that are worth betting on at present. Canada reported robust economic growth of 3.1% in 2017, having weathered the oil price slump of the past two years.

The growth momentum is expected to continue this year, though at a bit slower pace. This slow rate of growth is likely to be attributable to the NAFTA renegotiation uncertainty, housing market stress and high debt levels. Despite these lingering concerns, two interest rate hikes by the Bank of Canada in 2018, lower unemployment rate and stabilizing oil prices support the economic growth.

We are focusing on two major Canadian banks, Canadian Imperial Bank of Commerce CM and The Toronto-Dominion Bank TD.

Canadian Imperial Bank, with a market cap of $39 billion, provides a wide-range of financial products and services to individual, small business, commercial, corporate and institutional clients. On the other hand, Toronto-Dominion offers various retail and commercial banking products and services and has a market cap of $103 billion.

Canadian Imperial Bank sports a Zacks Rank #1 (Strong Buy) and Toronto-Dominion has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Let's take a closer look at how Canadian Imperial Bank and Toronto-Dominion are stacked up against each other in terms of certain key metrics.

Price Performance

Both the companies have outperformed the industry (down 0.9%) over the past six months. While shares of Canadian Imperial Bank have gained 1.4%, Toronto-Dominion has inched up 1.1%. So, Canadian Imperial Bank performs better than Toronto-Dominion.

Dividend Yield

Both the companies have been deploying capital in terms of dividend payments to enhance shareholder value. They are also raising dividends on a quarterly basis.

Canadian Imperial Bank has a current dividend yield of 4.74% while Toronto-Dominion has a dividend yield of 3.42%.

Although both the stocks’ dividend yield is better than the industry’s average of 3.18%, Canadian Imperial Bank has an edge over Toronto-Dominion here as well.

Leverage Ratio

Both Canadian Imperial Bank and Toronto-Dominion have lower debt-to-equity ratio compared with the industry average of 0.87. But Canadian Imperial Bank with a leverage ratio of 0.10 has an edge over Toronto-Dominion with the same of 0.11.

Volatility

To gauge the market risk of a particular stock, investors use beta. Stocks with beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. Canadian Imperial Bank has a beta of 1.13 while Toronto-Dominion’s beta is 0.93. Hence, Toronto-Dominion’s shares are therefore less volatile than that of Canadian Imperial Bank.

Return on Equity (ROE)

ROE is a measure of a company’s efficiency in utilizing shareholder’s funds. ROE for the trailing 12-months for Canadian Imperial Bank and Toronto-Dominion is 17.57% and 15.76%, respectively. While both stocks have scored above the industry’s level of 8.68%, Canadian Imperial Bank holds an edge here.

Earnings Estimate Revisions & Growth Projections

Canadian Imperial Bank has seen the Zacks Consensus Estimate for fiscal 2018 earnings remaining stable, over the last 30 days. On the other hand, the same for Toronto-Dominion has moved marginally upward for fiscal 2018, over the same time frame.

For Canadian Imperial Bank, the consensus estimate for earnings per share is pegged at $9.31 for fiscal 2018, representing year-over-year growth of 4.7%. The stock has a long-term expected earnings per share growth rate of 5.8%.

For Toronto-Dominion, the Zacks Consensus Estimate stands at $4.84 for fiscal 2018, reflecting a year-over-year increase of 14.2%. The stock has a long-term expected earnings per share growth rate of 10.5%.

This round is slightly biased toward Toronto-Dominion.

Sales Growth Projections

For Canadian Imperial Bank, the Zacks Consensus Estimate for sales is $14 billion for fiscal 2018, reflecting 12.1% rise from the prior year.

For Toronto-Dominion, the consensus estimate for sales stands at $28.3 billion, indicating growth of 2.4% year over year.

Therefore, Canadian Imperial Bank has an edge here as well.

Conclusion

Our comparative analysis indicates that Canadian Imperial Bank is poised better than Toronto-Dominion when considering price performance, dividend yield, leverage ratio, ROE and sales growth expectations. Toronto-Dominion wins on earnings growth projections and lower beta.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Toronto Dominion Bank (The) (TD) : Free Stock Analysis Report
 
Canadian Imperial Bank of Commerce (CM) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research