The US stock market offers a vast amount of stocks investors can purchase, from a diverse set of industries, spanning all sizes, from micro caps to mega caps. It can still be a good idea to take a look at stock markets from other countries, as they do offer highly attractive stocks from well-performing companies as well.
When it comes to large banking stocks, the US offers a large array of these, including Bank of America (BAC), JPMorgan Chase (JPM) and others. These banks can be attractive for investors as well, but the best Canadian banks, such as Toronto-Dominion Bank (TD) offer some unique advantages.
High-yield Canadian banks widely offer higher dividend yields than their US-based peers, and their recession performance during the last financial crisis was stronger as well – many of them, including Toronto-Dominion, did not have to cut their dividend payouts during those troubled times, unlike most US-based large banks.
Toronto-Dominion offers a combination of relatively safe, above-average yielding dividend payments, while shares are also inexpensive and offer some share price growth potential over the coming years. This makes Toronto-Dominion one of the most attractive large Canadian banking stocks right now.
Business Overview & Growth Outlook
Toronto-Dominion Bank is, by market capitalization, the second largest bank in Canada. Toronto-Dominion was founded more than 150 years ago, in 1855, and has since grown into a global organization that offers all kinds of banking services to its customers. Toronto-Dominion has more than $1.3 trillion in assets, and is currently trading with a market capitalization of $102 billion.
Toronto-Dominion Bank reported its most recent quarterly results, for Q2 of fiscal 2019, on May 23. The company achieved a revenue growth rate of 7.9% year over year, which is relatively attractive, and which was better than what the analyst community had expected.
Source: Toronto-Dominion Bank investor presentation
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Toronto-Dominion’s revenue growth was possible thanks to a combination of a growing loan portfolio and rising interest margins. Toronto-Dominion’s Canadian Retail segment grew its total loans by 5% year over year, combined with a net interest margin that grew to 2.99%, an increase of 8 base points year over year, this allowed for strong net interest income growth. Other segments, such as Toronto-Dominion’s wealth management business, continued to grow as well, with assets under management growing at a highly attractive pace of 21% over the last year.
Revenue growth allows for rising profits, all else equal, but if a company manages to increase its margins, the net profit growth rate can be even higher. This has been the case for Toronto-Dominion, which was able to grow its earnings-per-share by 10% year over year. A slightly lower share count has been a tailwind for earnings-per-share growth as well.
Going forward, it looks like recent trends should remain in place: The bank’s loan portfolio should continue to grow going forward, with Toronto-Dominion’s strong brand in the Canadian and US retail market being key factors that differentiate the company from peers. A large distribution network should also be helpful in assuring further expansion of Toronto-Dominion’s loan book. Combined with some expansion of its net interest margin, some tailwinds from operating leverage that allows for declining expenses, and some share repurchases, Toronto-Dominion looks like it is poised to deliver solid earnings-per-share growth over the coming years. We believe that a 7% annual earnings-per-share growth rate is realistic going forward.
An economic crisis or meaningful downturn in Canada and/or the United States would be a headwind, but it does not look like a recession is on the horizon in either of these markets right now. Credit quality across Toronto-Dominion’s portfolio remains high for now, gross impaired loans made up just 0.2% of Toronto-Dominion’s total loans during the most recent quarter.
Valuation, Dividend, And Total Return Outlook
When it comes to picking attractive investments, investors should look for quality names, but valuation plays a large role as well – overpaying for quality stocks can dampen total returns drastically. In the case of Toronto-Dominion, investors don’t need to worry about this right now. Shares are trading for $55 right now, which equates to 11.7 times our forecast for this year’s earnings-per-share of $4.70. This is not a high valuation in absolute terms, and it also is not a high valuation relative to how Toronto-Dominion’s shares were valued in the past.
We believe that Toronto-Dominion would be fairly valued at 12 times annual net profits, which results in a small forecasted tailwind for Toronto-Dominion’s total returns over the coming five years, at roughly half a percentage point annually.
Toronto-Dominion pays out dividends of CAD$2.96 a year right now, which equates to $2.19. At current prices, this results in a dividend yield of 4.0%. This is not only more than twice the broad market’s dividend yield, it is also a higher dividend yield than what investors can get from any of the US-based mega banks. For income investors, Toronto-Dominion therefore looks like an attractive pick. This is especially true when we factor in the consistent dividend growth track record – Toronto-Dominion has raised its payout by 9% annually over the last decade – and the strong recession performance relative to most other financial corporations. With a payout ratio of ~47%, investors don’t need to worry about a dividend cut from Toronto-Dominion, we believe.
All in all, it looks like Toronto-Dominion should be able to deliver annual total returns of 11%-12% going forward, thanks to a combination of earnings-per-share growth of 7% a year, its dividend yielding 4%, and some multiple expansion, which will, according to our estimates, result in a 0.5% annual tailwind.
Toronto-Dominion is one of the largest banks in Canada, and the company has established a large global presence on top of that. Toronto-Dominion performed well during the most recent quarter, and we believe that the outlook over the coming years is positive as well.
Thanks to its solid recession performance, strong dividend growth track record, and above-average dividend yield, Toronto-Dominion looks like a good pick for risk-averse income investors that seek exposure to the banking industry, but thanks to its compelling total return outlook, Toronto-Dominion could be worthy of consideration for other investors as well.