When the economy is great, investors don’t think twice about buying shares of banks such as Toronto-Dominion Bank (TSX:TD)(NYSE:TD). But when there is doubt, investors avoid them like the plague, even if the banks are still a worthwhile investment. The question is whether or not investors should acquire shares of TD.
Let’s look at the company to make that decision.
Strong and growing earnings
TD reported that its adjusted net income was $2.29 billion in the third quarter. That’s a 4% increase year over year, which is quite significant. This can be broken down into Canadian and American segments. Its Canadian business earned $1.6 billion and its American business earned $450 million.
The problem with banks like TD is that finding growth can often be tricky. But now that it has a firm foothold in the United States, it is expected that the company will continue to grow. It may never rival one of the big American banks, but there’s no reason why the company can’t gain larger market share.
On top of that, when interest rates do start to rise, it will see its earnings also rise. The reason for this is because the higher the interest rate, the more margin that TD has to generate profit. And since TD is a retail bank, it’ll be able to generate significant revenue from mortgages and other kinds of small loans.
Finally, TD might make some smart acquisitions. It recently acquired the credit portfolios of Target in 2013 and Nordstrom in May 2015. This is a smart move for the company, and I expect that it will try to acquire other portfolios, so it can generate even more interest. As consumers feel more comfortable about the economy, they are more likely to use credit cards.
Its dividend is lucrative
The bank pays a quarterly dividend of $0.51. Receiving $2.04 a year means that the company pays a 3.95% yield. It is not the highest yield in the bank industry, but because of its retail operations, it is also one of the safest yields.
Further, the company has continued to increase its distribution to investors. For the past five consecutive years, TD has increased its dividend. If this growth does occur, I anticipate that there could be many more years of increased dividends.
Should you buy?
I say yes.
The stock is trading at 12 times its earnings, which is not the cheapest of bank stocks, but it is certainly a solid price. And as its earnings continue to grow, I expect the share price to appreciate. Therefore, I recommend buying shares of TD Bank now.
While bank stocks are not the most exciting investments, we’re looking to make money, and banks are one of the best ways to generate significant cash flow and capital returns.
