Times have been rough for many of the companies in Canada because they have direct or indirect exposure to oil. And if they have exposure to oil, the significant drop in the price of oil could have a negative impact on the company. The banks, for example, have made many loans to oil companies that are now suffering.
Fortunately for investors, there’s one bank that I believe belongs in your portfolio: Toronto-Dominion Bank (TSX:TD)(NYSE:TD).
There are two ways that a bank is impacted by oil: directly and indirectly.
Only 0.08% of TD’s loans are in the oil and gas sector. Some of the other banks have anywhere from 1-3% of their exposure in oil and gas loans, which could harm them long term. But 0.08% is just a blip on the radar.
The indirect exposure is also relatively harmless. TD has about 10% of its loans in Alberta, which is where the bulk of the oil companies reside. The idea here is that if oil companies start having serious layoffs, the people who have loans might be unable to pay, thus harming TD. But compared with the other banks, this 10% exposure is much smaller.
The reality is, the risks for TD, while there are some, are just not that significant. The company could obviously get hurt if oil prices plummet even more, but long term, I don’t think the company has much to worry about.
Growth is on the horizon
On the other hand, I believe that there are numerous growth opportunities that should help the bank increase its profitability for the months to come.
Because TD has a decent-sized operation in the United States, which earned $450 million in the third quarter, the bank should be rewarded when the U.S. Federal Reserve decides to increase interest rates. This increase in rates will give TD greater margins to work with, thus earning more in interest payments on loans. I anticipate that the Fed will finally start to increase rates in December, which will push the price of TD higher.
It is also expanding its credit card holdings. In 2013, TD bought the entire consumer credit card portfolio of Target Corporation for US$5.7 billion. Further, until the year 2020, TD will be the underwriter and funder of future credit cards for Target. It also agreed to buy Nordstrom Inc.’s credit card portfolio, which is worth about US$2.2 billion, back in May.
A strong U.S. economy, therefore, is what TD needs to grow. And that’s where oil prices come back into the picture. If the price of oil stays low, consumers in the U.S. will have more money to spend, thus increasing the likelihood that they take out a loan or get a credit card.
A strong dividend
All of this leads to what I believe is TD’s greatest benefit: its dividend. The bank has hiked the dividend every year since 2010. Its payout ratio is still less than 50%, which guarantees that the bank will be able to make payments to investors. It pays $0.51 per quarter, which comes out to a 3.81% yield.
While TD may not be the best divided in the banking space, it does have two things going for it: it’s secure from poor oil prices and it has significant growth in the United States. So long as this remains the case, I expect investors to continue reaping the benefits of this consistent bank.
