Regulatory risk is high today at TD Bank. Scotiabank’s turnaround plan and its notably higher yield might be more attractive to investors.
I own shares of Toronto-Dominion Bank (TD -0.75%) and Bank of Nova Scotia (BNS -0.70%), so I’m fond of both companies. However, TD Bank is facing a unique regulatory headwind that might bother more conservative investors. Although Scotiabank has its own problems, it isn’t facing the same regulatory issues and has a higher yield. If you are considering investing in TD Bank, you might actually prefer Scotiabank.
A Canadian bank primer
Both TD Bank and Scotiabank hail from Canada. The Canadian banking sector is highly regulated. There are two key takeaways from this fact, First, Canadian banks tend to operate in a fairly conservative manner. Second, regulators have basically protected the industry’s largest companies from competition, so the biggest banks are largely entrenched. TD Bank and Scotiabank are two of the largest banks in Canada.
Image source: Getty Images.
From an investor perspective, this makes Canadian banks generally more attractive for conservative dividend lovers. Notably, both TD Bank and Scotiabank maintained their dividends though the Great Recession while many of the largest U.S. banks were forced to cut their dividends. Furthermore, TD Bank has paid a dividend every year since 1857, and Scotiabank’s record is even longer, with continuous dividend payments since 1833.
There’s one other similarity here, but it’s not a good one. Both TD Bank and Scotiabank are working through some problems. But only one of the banks is likely to have less of an issue dealing with the headwinds it faces.
TD Bank’s regulatory problems
TD Bank is financially strong, so the challenges it faces today are unlikely to derail the bank. But in 2023, U.S. banking regulators forced the bank to call off a planned merger because of concerns regarding TD Bank’s money laundering controls. The bank recently announced that it was taking a one-time charge of $450 million, with some industry watchers suggesting that the full fine could be as high as $2 billion. And it could be years before TD Bank is allowed to start buying other banks again, thereby slowing the company’s U.S. expansion efforts.
There are still a lot of unknowns here. Still, given TD Bank’s strong balance sheet, it is likely to get through this problem. But it could be hard to own the stock for a little while…and perhaps for a long while. It would be completely understandable if some dividend investors didn’t want to get into the uncertainty facing the stock despite its historically high 5.2% dividend yield.
Scotiabank is working toward better performance
That’s where Scotiabank comes in, offering an even more attractive yield of 6.4%. Scotiabank’s main growth platform has long been in South America, largely shying away from the U.S. market. But this hasn’t worked out as well as hoped, with the bank lagging its peers on key metrics like earnings growth and return on equity, among others. The fix isn’t going to be quick or easy, with the company working to exit less desirable markets (like Columbia) while expanding in more attractive ones (like Mexico).
However, this is a mostly internal effort that doesn’t involve the uncertainty that comes with having run afoul of regulators. In other words, it will be much easier for dividend investors to track Scotiabank’s progress. Unpleasant financial surprises, such as big one-time charges, are also less likely to be an issue. And along the way, investors get to collect an even higher dividend yield. To be fair, the payout ratio is running a bit high today at Scotiabank, but management has stated that it is comfortable with that as it works toward better days.
Easier to stomach
I don’t think TD Bank is a bad bank and investors willing to accept a little uncertainty may want to buy it. However, that probably won’t be all investors. If you have examined TD Bank’s high yield and hesitated because of the regulatory issues it faces, you might want to consider Scotiabank as a higher-yielding alternative. Yes, Scotiabank has its own challenges, but they are likely to be easier for investors to track and — perhaps — even quicker to solve.