Toronto-Dominion Bank (TD.TO)

There is downside risk on every single Canadian bank. They are superb value, and have lovely yields, but Americans have got the wind up that there is going to be a collapse in Canada, and real estate is going to kill everybody who isn’t killed by the oil patch, and banks are going to be in deep trouble. That is rubbish as Canadian banks are very well run, but have all given short term Sell signals, not deep catastrophe types of things. This has risk to about $47. At that price, he would be more than happy to buy it.

One of the brighter banks here. About 25% of earnings are coming from the US giving you the FX support. Also, it is a centrally Canadian focused bank. Sees earnings per share growing over the next couple of years at 5.8%. One of the best banks to be buying right now. In order to pick away at this, he would be writing some puts.

Dividend yield of 4.13% which they increased in 2015 x 6%-7%. This year the increase will probably be closer to 4%-5%. They are challenged like other banks by low margins and an energy portfolio. Their energy portfolio is lower because they are primarily Ontario-based, and also the big retail in the US.

Canadian Banks have been a great place to be for many years. The rate of change in the Canadian economy is likely to continue to slow as the impact of energy washes through the country. This bank has done a great job in building US assets, and their US presence is doing very, very well, but a lot of their business is in Canada. If the strong part you want to target is the US, then target a US bank. He would suggest Wells Fargo (WFC-N) which has a significant piece of the US mortgage industry. It has pulled back, but is into some longer term support.

Banking sector looks attractive from a valuation standpoint, but from a go forward economic standpoint, we have to be careful as to whether or not oil prices are going to go down 20-25 etc. That will have a ripple effect on the consumer in Western Canada, and might even move into the real estate market in central Canada. Trading at 10.6X forward earnings with a 4% dividend. He has no trouble with the cash flow and the dividend yield. Will probably grow its dividend by high single digits going forward.

(A Top Pick Jan 13/15. Up 4.09%.) Not great, but pretty good versus the market and some of the other Canadian banks. Banks as a group are quite attractive. Now that Canada is going back into recession, the multiples have contracted quite a bit and they continue to raise dividends in the single digit range. Likes this bank’s US exposure, which is about 25% of their overall business.

Rate Reset Preferred. The yield is taxed as a dividend. It becomes very important what the Bank of Canada Rate is as it comes near a date for reset. That is where the risk is.

Banks with exposure to the US have been a little bit less impacted than others. This bank has built up a very good base in the Northeastern US. His question has always been what is the return on capital, and how long until shareholders really benefit from that. Because of that, he has no exposure to this bank. Prefers others at this time.

Buy for grandchildren and leave it where it is? Based on this phrasing, it is a great idea. Over the long, long run, Canadian banks are great investments. In the near term, not so hot, as there are going to be a lot of headwinds. You can do this with any of the banks.

Stock vs. Stock. TD-T vs. BNS-T. Both are great banks and you can hold both. TD-T is the most expensive of the group right now. BNS-T is at 9.5 times next year’s earnings and he has not seen it this low since the crisis. He would prefer BNS-T, which has sold off because of its commodity exposure in Latin America. However, the economies are doing fine down there.

Likes the growth in the US where they are focusing on retail banking as well as credit card acquisitions. The credit card business offers huge cross-selling opportunities. This has been and will continue to be a continuing boom to them. Also, they are cost-cutting and getting themselves in shape for changes that are coming to the system. Dividend yield of 3.83%.

Calculating the risk and using option pricing to determine the expected return? Let’s say the bank is $54. A $54 Call and a $54 Put. If you add these 2 together, it is about $4.20. Your trading range for the next 3 months is $49.80 up to $58.20. If you are comfortable with that kind of volatility over the next 3 months, this tells you what the expected return is.

Buy a Call. Believes the banks are probably going to lead next year. This one has not had a good year, and thinks this is the best positioned in Canadian banks in terms of their US exposure. Buy a Call option at $54 out to January 2017.

Enbridge (ENB-T) or Toronto Dominion (TD-T)? This is the one that you should buy.

Likes the banking group in general, which has done better overall than the TSX, but generally speaking bank stocks have not done that well on concerns that Canada is going into recession. The valuation is attractive and she likes the US exposure. Rates increasing should benefit financial services companies in the US. Expects this bank will continue to increase the dividend at the same rate that their earnings increase.