Why it’s Time to Back Up the Truck on Toronto-Dominion Bank Stock

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a premium business at a non-premium price. Here’s why it’s time to buy before shares soar.

| More on:

When it comes to building the foundation of your portfolio, a Canadian bank is really a must-have if you have intend to beat the TSX over the long-term in a safe and calculated manner.

Of Canada’s big banks, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is a standout player and is often considered Canada’s safest bank because of management’s impeccable risk mitigation strategy and its focus on retail banking, whose earnings are typically subject to a lesser magnitude of volatility. TD Bank is also among the most conservative of lenders, so fewer loan losses and earnings volatility can be expected versus its peers.

Ignore the naysayers: TD Bank remains a top pick

Many short-sellers have been targeting Canada’s big banks, touting the catastrophic implications should a Canadian housing market collapse occur. Shorting the big banks hasn’t been a very profitable endeavour and moving forward, it’s likely that more shorts will continue to be squeezed out of their positions as TD Bank continues to reap the rewards from growth south of the border.

Not only is TD Bank a solid outlet into the U.S. market (~35% of revenues derived from America), but management has been proactively investing on growth initiatives that will produce a huge amount of value for shareholders over the long run.

Sure, TD Bank has paid up for many of its U.S.-based acquisitions, but I believe each acquisition may not ultimately be as expensive as they seem at the time of purchase. You’d be hard-pressed to find a cheap quality U.S. firm to scoop up these days.

Why TD Bank has a lower ROE than many peers do

This focus on acquiring quality at a premium has taken a hit on TD Bank’s return on investment, which isn’t great compared to that of its peers. That’s because TD Bank’s “expensive” investments aren’t as accretive to earnings as they’d be down the road. Adding to the company’s already impressive U.S. foundation is going to require management to loosen its purse strings, but when you consider superior growth versus the domestic market, it’s well worth it if you intend to hang onto shares for decades at a time.

It’s not just overpaying for U.S. firms either. TD Bank has made significant moves in the tech scene in order to protect itself from forward-looking technological disruptors. Layer 6 AI is just one example of TD Bank paying up top dollar for premium talent. This isn’t to say that management doesn’t consider value when it makes investments, but they’re not afraid to pay up for premium sought after assets. As Warren Buffett once said, “It’s far better to buy a wonderful business at a fair price than a fair business at a wonderful price.”

Paying up for quality

Future-proofing investments like AI firms may not be accretive over the short-term, but if financial technology advances and begins to disrupt the old-fashion banking business model, TD Bank will be glad that they paid up to prepare themselves ahead of time instead of waiting for the disruption to happen and then scrambling to adapt.

With this in mind, it’s clear that management has a true long-term time horizon, so if you share this view, then you should strongly consider adding a position to portfolio’s core today. Shares may not be a bargain at 12.1 times forward earnings, but it’s still a fair price to pay for what I believe is a wonderful business.

You’re getting double-digit earnings growth and top-notch capital gains. And if you’re worried about a recession, TD Bank stock will likely be first out of the gate when it’s time for a bounce back.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette owns shares of TORONTO-DOMINION BANK.

More on Dividend Stocks

young people stare at smartphones
Dividend Stocks

GST/HST “Vacation”: Everything Canadians Need to Know

The GST/HST "vacation" is a little treat for the holidays, along with a $250 payment. What should you do with…

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »