If you hold shares of the major U.S. banks, you haven't had much to cheer about this year.
Wells Fargo & Company, Bank of America and Goldman Sachs Group, for example, are all down between 3% and 8% since Jan. 1, while JPMorgan Chase, one of the stronger performers, has gained just 2% -- still well shy of the S&P 500's 6.5% rise.
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But there's one group of bank stocks that's putting these performances to shame, and these solid income investments are located somewhere U.S. investors rarely look: Canada.
That's partly because the Alberta oil sands -- and the hit they've taken from the global oil glut -- dominate most Americans' view of the country. But energy only accounted for 7.2% of Canada's nominal GDP in 2015, and there are other sectors that are ticking along nicely.
Better yet, some parts of the country's economy boast attractive opportunities for investors seeking something that's tough to find these days: stocks with attractive dividend yields, steady payout growth and reasonable valuations.
That brings us back to Canada's banking sector, which is dominated by just five names: Royal Bank of Canada, Toronto-Dominion Bank (TD - Get Report) , Canadian Imperial Bank of Commerce, Bank of Montreal and Bank of Nova Scotia.
All five have turned in strong performances this year, rising between 15% and 32% on the New York Stock Exchange. (Canada's major banks trade in the U.S. as well as on their home Toronto Stock Exchange).
These stocks aren't the screaming bargains they were back in say, February, but they still offer solid value. Take Toronto-Dominion, Canada's second-largest bank by assets, which has a forward price-to-earnings ratio of 11.4. In light of the stock's 14% rise so far this year, that still stacks up well against JPMorgan Chase, the biggest U.S. bank by assets, which has a forward P/E of 10.9, Wells Fargo, at 12, and the S&P 500, at 18.6.
Toronto-Dominion took its current form in 1955, when the Bank of Toronto merged with the Dominion Bank, but it traces its roots 100 years further back, to 1855, the year the Bank of Toronto was founded. (Dominion came on the scene in 1871.)
Each major Canadian bank has a unique strength, and in Toronto-Dominion's case, that is its U.S. expansion, which started when the bank bought Maine-based Banknorth in 2005.
Fast forward to today, and Toronto-Dominion has more branches south of the border than north of it (1,267 vs. 1,152) and owns 42% of the TD Ameritrade online brokerage. Toronto Dominion's U.S. retail bank operations (not including its stake in TD Ameritrade) accounted for about 27% of its net income in its fiscal 2016 third quarter, which ended July 31.
Including the TD Ameritrade business, the U.S. unit had net income of $609 million (U.S. dollars), up 12% from $543 million a year earlier. Toronto-Dominion's wholesale-banking division saw its profits jump 26%. That helped offset a slight decline at the Canadian retail operation, where insurance claims related to wildfires near Fort McMurray, Alberta, pressured profits.
On an adjusted basis, the bank's earnings per share rose 6%, to C$1.27, easily topping the C$1.21 analysts expected. Revenue gained 8.7%, to C$8.7 billion, which was also well ahead of the consensus forecast of C$8.1 billion.
Toronto-Dominion and other Canadian banks have seen more soured loans in the energy sector as the global oil glut drags on. But don't let that keep you away from the stock, because loans to oil and gas companies account for less than 1% of Toronto-Dominion's loan book. And its loan-loss provisions -- or the cash it's setting aside to cover bad loans -- are going in the right direction. In the third quarter, they clocked in at C$556 million, down from C$584 million in the second quarter.
Finally, if you're looking for a sign of the bank's resilience, look no further than the quarterly dividend. Unlike many U.S. banks, Toronto-Dominion held its payout steady through the 2008/2009 meltdown, and it has raised the dividend at a 12.9% annual rate, on average (and in Canadian funds), over the past decade. The stock currently boasts a 3.8% dividend yield.
So don't worry that you'll never find bargain-priced income opportunities in today's overbought market. You just have to look in places other investors ignore. The Canadian banking sector is a great place to start.
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