Warren Buffett’s move to sell shares of Bank of America that Berkshire Hathaway owns has cast a cloud over the banking sector.The trending view is that, if Buffett is selling bank stocks, maybe there is a good reason.
While Buffett’s investing views are followed by many, you shouldn’t just follow what an investor does in his (or her) own best interests. If you do your own homework on stocks in the banking sector, you’ll find there are still some interesting opportunities with potential for performance.
Three examples to take a closer look at right now are 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 gets underway.
1. TD Bank is paying for a big mistake
Toronto-Dominion Bank, normally just called TD Bank, didn’t have tight enough money laundering controls set up in the United States. Some rogue employees did things they shouldn’t have done and the malfeasance wasn’t caught until it was too late. As a result, TD Bank was forced to call off a planned merger. It has had to revamp its internal controls, and has set aside over $3 billion to deal with the regulatory fines and other costs it expects to come out of this event. That’s the bad news, and it has, perhaps justifiably, caused investors to shun TD Bank’s stock.
However, TD Bank is financially strong and is unlikely to end up cutting its dividend because of this issue. That makes the historically high 4.7% dividend yield fairly attractive. The real key here is that TD Bank’s core Canadian operation remains very strong, with the bank ranking second in the country based on deposits. This is not some fly-by-night bank that is now about to flame out. In fact, it has paid a dividend continuously for over 150 years!
If you think in decades and not days, it seems highly likely that TD Bank will muddle through the current difficulties while continuing to pay investors very well for sticking around through a period that’s likely to see very little business growth. In a way, it is a pretty low-risk turnaround story.
2. KeyCorp just got the helping hand it needed
Speaking of turnaround stories, KeyCorp just inked a deal with Canadian banking giant Bank of Nova Scotia that will net it roughly $2.8 billion. It is selling nearly 15% of itself to Bank of Nova Scotia, which has been looking for ways to invest in the U.S. market. It’s a win/win for the two banks. Scotiabank, as Bank of Nova Scotia is more commonly known, gets to advance a strategic objective, and KeyCorp gets cash that it needs to strengthen its business.
KeyCorp was definitely not on the brink of going out of business, but the list of benefits the deal offers includes fortifying its capital position, accelerating the bank’s portfolio repositioning plans, the ability to increase investment in the business, and the expectation of an improvement to the earnings outlook in both 2025 and 2026. Or, as the company itself stated, Scotiabank’s investment “[e]nables Key to navigate an uncertain environment from a position of strength and take advantage of dislocations in the market.”
Is it ideal that KeyCorp needed to make a deal with Scotiabank? No, not really. But the deal does put 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 is 5% today, which is historically attractive. And while it is a riskier turnaround story than the one playing out at industry giant TD Bank, given the cash infusion, it seems likely that it will turn out well.
3. Visa looks kind of cheap right now
The last highlight is kind of a cheat since Visa isn’t a bank. However, it does work closely with the banking sector, providing vital payment processing services via its global network. What’s exciting here is that Visa’s price-to-sales ratio is around 16.2 times today, below the five-year average of 17.7 times. The price-to-earnings ratio is 29.7 times, compared to a longer-term average of 34.2 times. And the price-to-cash flow ratio is 16.6 times, versus a five-year average of 19.6 times. The stock’s dividend yield, while only a tiny 0.75%, is near the high end of the stock’s historical yield range. Overall, Visa looks like it is attractively priced today.
But the real attraction is the dividend growth. Over the past decade, Visa’s dividend has increased at a huge 18% annualized rate. If it can continue to grow the dividend at a double-digit pace, which seems likely given the duopoly it shares in the payment processing space and the increasing use of credit and debit cards, today’s miserly yield could easily turn into a very attractive yield on the purchase price.
To give you some quick numbers, over the past decade, the dividend grew more than 300%, going from $0.12 per share per quarter to $0.52. Here’s the magic. The stock started the decade trading at around $50, which means your yield on purchase price would be over 4% today. Not impressed yet? You’d also own a stock that’s now worth over $275 per share!
If you are a dividend growth investor looking at the banking sector, this industry provider should be on your radar, too. Sure, Visa’s yield isn’t impressive today, but give it enough time, and history suggests that there is a good chance you’ll end up 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 in nature, are different from KeyCorp’s issues, which are more fundamental to the business. But both seem likely to muddle through while continuing to reward investors with generous dividends.
Visa is a totally different story, as the company’s strong and growing business continues to allow it to increase its dividend at a very rapid clip. It looks like it’s on sale today, which means that dividend growth investors will want to check it out.
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Reuben Gregg Brewer has positions in Bank Of Nova Scotia and Toronto-Dominion Bank. The Motley Fool has positions in and recommends 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
