How Does the Charles Schwab Acquisition Impact TD Bank (TSX:TD) Investors?

Toronto-Dominion Bank’s (TSX:TD)(NYSE:TD) shareholders should be relieved that the acquisition saves their American subsidiary from intense price competition.

| More on:

The Charles Schwab Corporation, a brokerage firm based in San Francisco, is expected to announce a deal to acquire Toronto-Dominion Bank’s (TSX:TD)(NYSE:TD) American brokerage subsidiary TD Ameritrade.

The deal could be worth as much as US$26 billion (C$34.6 billion), making it one of the largest and most consequential acquisitions in the financial industry this year. This unexpected union consolidates the U.S. brokerage sector further. But what impact would this have on Canadian investors holding TD stock? Here’s a closer look. 

Growth driver

TD Bank has been one of Canada’s best performing banks for a while. The stock has more than doubled while the dividends have expanded at an annual rate of 10% for the past 10 years. 

Much of the company’s superior performance was driven by growth in its American operations. TD Bank holds 42% of TD Ameritrade – the ninth largest financial service provider and one of the biggest brokerage firms in the U.S. Ameritrade’s 3% dividend yield and 223% stock price appreciation since the global financial crisis boosted TD Bank’s returns immensely. 

Exposure to the American market insulated TD from the domestic economy and gave investors hope of continued expansion for the foreseeable future. However, a paradigm shift in the American brokerage industry this year caused the stock to lose nearly a third of its value. 

Great timing

In October, Charles Schwab, one of the largest brokerage firms in the world, said it would eliminate its $4.95-per-trade commission for stock traders on its platform.

Zero-fee trades were expected to be devastating for competitors like Ameritrade, and investors fled the stock. Commissions and brokerage fees on stock trades contributed the majority of Ameritrade’s revenue. Within a week of Schwab’s announcement, Ameritrade had lost 28% of its market value. 

Schwab’s acquisition saves the company and unlocks value for TD Bank just as the competition is heating up. 

At the time of writing, the company is worth US$22.41 billion, which means the acquisition is at a 6.1% premium to the market price. If the deal is sealed by next year, TD Bank could unlock US$10.9 billion (C$14.5 billion) in cash. 

Not only does the deal allow the Canadian bank to avoid losses on its American brokerage business due to zero-fee trading, but it also boosts the company’s cash hoard for other acquisitions and future expansions. The cash could also be handed back to shareholders in the form of dividend, boosting the stock’s already impressive dividend yield of 3.8%

However, I wouldn’t expect the deal to move the needle much. TD Bank already holds $393 billion in cash and cash equivalents on its books. A further $14.5 billion would have marginal impact on the company’s expansion and growth strategy overall. 

That may be the reason why TD’s stock didn’t seem to react to the news today – the stock price is flat. 

Bottom line

TD Bank shareholders should be relieved that Schwab’s acquisition saves their American subsidiary from intense price competition. Meanwhile, the deal could unlock billions in cash to fuel future expansions or further dividends.

I expect the company to either offer a boosted dividend or deploy the cash in an acquisition of its own. TD still needs to diversify its business and grow beyond the domestic market.

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 Vishesh Raisinghani has no position in any of the stocks mentioned. 

More on Bank Stocks

dividends can compound over time
Bank Stocks

Is TD Bank Stock a Buy for Its 5.2% Dividend Yield?

TD Bank stock offers a rare 5.2% dividend yield—can it rebound from challenges and reward contrarian investors? Here's what to…

Read more »

analyze data
Bank Stocks

Is BMO Stock a Buy for its 4.7% Dividend Yield?

Bank of Montreal is up 20% since late August. Are more gains on the way?

Read more »

calculate and analyze stock
Bank Stocks

4% Dividend Yield? I Keep Buying This Dividend Stock in Bulk!

If you find the perfect dividend stock, you never have to worry about investing again. And that's what you get…

Read more »

Investor reading the newspaper
Bank Stocks

Is Canadian Imperial Bank of Commerce Stock a Good Buy?

Let's dive into whether Canadian Imperial Bank of Commerce (TSX:CM) is a top buy, sell, or hold right now.

Read more »

Man data analyze
Bank Stocks

Where Will BNS Stock Be in 3 Years?

Bank of Nova Scotia is primed for growth with a bold U.S. expansion, steady dividends, and a value focus that…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Stocks for Beginners

TFSA 101: Earn $1,596.60 per Year Tax-Free!

Investors don't have to buy some risky stock if they want tax-free high income. Instead, buy this top stock instead.

Read more »

data analyze research
Bank Stocks

TD Bank: Buy, Hold, or Sell Now?

TD is underperforming its large Canadian peers this year. Is a rebound on the way?

Read more »

data analyze research
Bank Stocks

A Dividend Bank Stock I’d Buy Over TD Stock Right Now

TD stock has long been a strong dividend and growth provider. However, recent issues could cause investors to think twice.

Read more »