3 Bank Stocks to Buy in August

Now that earnings season is coming to a close, what are the best bets in banking?

Matthew Frankel, CFP
Matthew Frankel, CFP, Alex Dumortier, CFA, and Dan Caplinger
Aug 12, 2015 at 8:07AM

Source: Flickr user Mike Mozart

What are the best investments in the banking sector right now? With earnings season mostly on the books, we have a much clearer picture of where each bank stands than we did just a few weeks ago, and we believe there are some strong buying opportunities. With that in mind, we asked three of our banking experts what they're bullish on in August, and here is what they had to say.

Matt Frankel: One bank stock that I love as we head into August is Toronto-Dominion Bank (NYSE:TD), known simply as TD Bank to most people.

There are plenty of reasons to like TD Bank as a long-term investment. For starters, the bank chooses to focus its efforts on retail banking, and strives to be the best at what it does. While other banks are downsizing their branch networks, TD emphasizes customer service. Known as "America's Most Convenient Bank," TD's branches stay open later at night than most of its competitors and are even open on weekends. TD is so good at what it does that it was named "Best Big Bank of 2014" by Money Magazine, beating out all of the major North American institutions.

TD has grown tremendously over the past few decades and continues to do so. The bank's revenue grew 6% over the past year, deposits and loans are growing, and credit quality is steadily improving. In fact, TD is one of the few banks to possess an Aa1 credit rating by Moody's, and was one of the only banks that didn't have to cut its dividend during the financial crisis.

Perhaps the most compelling reason to buy TD Bank now is because it's cheap. Over the past year, shares have dropped by nearly 23% and its price-to-book multiple is at a multi-year low, mainly due to exchange rate issues (the majority of TD's business is in Canadian dollars) and weakness in the energy sector.

TD Chart

TD is a rock-solid banking institution, and now is a good opportunity to buy it on sale.

Dan Caplinger: Many banking-sector investors focus only on retail banks for their portfolios, treasuring their typically high dividend yields and their predictable exposure to the health of the major credit markets in their respective territories. By contrast, investment banks can seem difficult to understand, and that's a big reason why many investors have shied away from Goldman Sachs (NYSE:GS) over the years.

Goldman stock has been on a big run lately, recently hitting levels not seen since before the financial crisis. Although the Wall Street giant took another hit in its most recent quarter from charges related to litigation and regulatory concerns, adjusted earnings of $4.75 per share for the quarter make Goldman look like a value play, with a forward earnings multiple of just above 10.

In addition, Goldman recently announced plans to expand its scope by entering the consumer-lending business. Although the project is still in its early stages, it could involve online or mobile-based lending to borrowers, with typical amounts involving loans of $15,000 to $20,000. By seeking to capture a share of the $850 billion consumer-loan market, Goldman is clearly looking outward to find new profit opportunities.

Many investors stay away from Goldman because of its reputation and its complexity. For those willing to dig deeper, though, the stock looks attractive even after its impressive bull-market run.

Alex Dumortier (Citigroup): I'm not going to argue that Citigroup (NYSE:C) is the best universal/ commercial bank in the U.S. -- it isn't. But it doesn't need to be in order to earn investors a very acceptable return over the next several years. 

At 10.1 times next twelve months' earnings-per-share estimate, the shares look pretty cheap and they do trade at an 11% discount to their peer group, according to Bloomberg; however, the discount is in line with its average value over the past five years (8%). I think Citi's shares are, roughly speaking, fairly valued. In a market that is overvalued, paying fair value to own the shares of a member of a banking oligopoly is not a bad proposition. 

Furthermore, I think Citi's dividend could turn into an ace in the hole. Right now, Citigroup pays a token quarterly dividend of $0.05, for a miserable dividend yield of 0.14%. The bank's capital return policy (dividends and share repurchases) must be approved by the Federal Reserve (as is the case for all of the largest banks); Citi has yet to receive an "all clear" from the Fed on this front. Let's consider what is possible once those conditions normalize. 

Assume Citi earns $6.13 in 2017 – the lowest analyst estimate, according to data from Bloomberg. Now assume that Citi pays out a third of its earnings in dividends, or $2.04. If Citi investors were to accept a dividend yield of 3%, that would imply a share price of $68 ($2.04/.03 = $68). If the stock were to achieve that price midway through 2017, that amounts to nearly an 8% annualized return on today's price of $58.74. That may not sound terribly exciting, but it's nothing to sneeze at in this market. 

And there are other scenarios that are even more attractive: At a dividend yield of 2.5% -- still a half a percentage point premium over the S&P 500's current dividend yield -- the implied stock price is $81.60 and the annualized return rises to 19%.