Warren Buffett’s decision to sell shares of Bank of America That Berkshire Hathaway ownership has cast a cloud over the banking sector. The trend view is that if Buffett is selling bank stocks, there may be a good reason.
Although Buffett’s investment views are followed by many, you should not just follow what an investor does in his (or her) own interest. If you do your own homework on banking sector stocks, you’ll find that there are still some interesting opportunities with potential for returns.
There are three examples that we should now look at more closely Toronto Dominion Bank (NYSE:TD), KeyCorp (NYSE: KEY)And Visa (NYSE:V). Here’s what you need to know about these financial stocks as October kicks off.
1. TD Bank pays for a big mistake
Toronto-Dominion Bank, normally just called TD Bank, did not have sufficiently stringent money laundering controls in the United States. Some rogue employees did things they should not have done and the crime was not discovered until it was too late. As a result, TD Bank was forced to call off a planned merger. The country has had to revamp its internal controls and has set aside more than $3 billion to cover the fines and other costs it expects to incur from this event. That’s the bad news, and it has, perhaps rightly, led investors to avoid TD Bank stock.
However, TD Bank is financially strong and its dividend is unlikely to be cut due to this issue. That makes the historically high dividend yield of 4.7% reasonably attractive. The real key here is that TD Bank’s core Canadian business remains very strong, with the bank ranking second in the country based on deposits. This isn’t just a bank that’s about to erupt right now. In fact, it has been paying dividends continuously for over 150 years!
If you think about decades and not days, it seems very likely that TD Bank will muddle through the current problems while continuing to pay investors well for enduring a period when business growth is likely to be very low. In a way, it’s a pretty low-risk story.
2. KeyCorp just got the helping hand it needed
Speaking of turnaround stories, KeyCorp just closed a deal with the Canadian banking giant Bank of Nova Scotia that will generate approximately $2.8 billion. It is selling almost 15% of itself to the Bank of Nova Scotia, which is looking for ways to invest in the US market. It’s a win/win situation for the two banks. Scotiabank, as Bank of Nova Scotia is better known, gets to advance a strategic objective, and KeyCorp gets the money it needs to strengthen its operations.
KeyCorp was certainly not on the verge of bankruptcy, but the list of benefits provided by the deal includes strengthening its capital position, accelerating the bank’s portfolio repositioning plans, the ability to accelerate investments in to expand the business and the expectation of an improvement in operating results. the profit prospects in both 2025 and 2026. Or, as the company itself stated, Scotiabank’s investment “[e]The key to navigating an uncertain environment from a position of strength and taking advantage of market disruptions.”
Is it ideal that KeyCorp had to make a deal with Scotiabank? No, not really. But the deal puts KeyCorp in a better position and with a good partner (the two companies hope to explore mutually beneficial investments in the future). Meanwhile, KeyCorp’s dividend yield today is 5%, which is historically attractive. And while it’s a riskier turnaround story than the one unfolding at industry giant TD Bank, given the influx of cash, it seems likely it will end well.
3. Visa looks kind of cheap right now
The last highlight is a bit of a cheat, as Visa is not a bank. However, it works closely with the banking industry and provides essential payment processing services through its global network. What’s exciting here is that Visa’s price-to-sales ratio is currently around 16.2x, below the five-year average of 17.7x. Its price-to-earnings ratio stands at 29.7 times, compared to a long-term average of 34.2 times. And its price-to-cash flow ratio is 16.6 times, versus a five-year average of 19.6 times. The stock’s dividend yield is at just under 0.75% at the high end of the stock’s historical return range. Overall, Visa seems attractively priced today.
But the real attraction is the dividend growth. Over the past decade, Visa’s dividend has grown by as much as 18% annually. If the country can continue to grow its dividend at double digits, which seems likely given the duopoly it shares in payment processing and the increasing use of credit and debit cards, the current meager yield could easily turn into a very attractive return on the market. the purchase price.
To give you some quick numbers, over the last ten years the dividend has increased by over 300%, from $0.12 per share per quarter to $0.52. Here’s the magic. The stock started the decade trading around $50, meaning your return on the purchase price today would be more than 4%. Not impressed yet? You would also own a stock that is now worth over $275 per share!
If you’re a dividend growth investor looking at the banking sector, this industry provider should also be on your radar. Sure, Visa’s returns today aren’t impressive, but give it enough time, and history shows that there’s a good chance you’ll be impressed with your decision to buy this stock.
Two turnarounds and one dividend growth machine
TD Bank and KeyCorp are similar in that they are turnaround stories. TD Bank’s problems, which are regulatory, are different from KeyCorp’s problems, which are more fundamental to the company. But both seem likely to muddle through as they continue to reward investors with generous dividends.
Visa is a completely different story, as the company’s strong and growing business continues to allow it to increase its dividend at a very rapid pace. It looks like it’s on sale today, which means dividend growth investors will want to try it out.
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Reuben Gregg Brewer holds positions at Bank Of Nova Scotia and Toronto-Dominion Bank. The Motley Fool has and recommends positions in Berkshire Hathaway and Visa. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.
3 Top Banking Stocks to Buy in October was originally published by The Motley Fool
