1 Deeply Undervalued Bank I’m Holding for the Next 10 Years

Toronto-Dominion Bank (TSX:TD) is deeply undervalued. I intend on holding it for the next 10 years.

| More on:
dividends grow over time

Source: Getty Images

Banking has been the big theme in the markets over the last week. Between the Silvergate collapse, the SVB implosion, and the recent Credit Suisse stock selloff, there has been a lot of panic in the financial services sector.

Historically speaking, markets like this one have been good ones to go shopping in. When stocks are beaten down and out of favour, as a group, they tend to be good buys. Currently, most bank stocks are down over the last month, both the strong ones and the weak ones. The strong banks that are falling with their struggling cousins are likely to be good buys right now.

In this article, I will explore one Canadian bank stock I bought and intend to hold for the next 10 years.

TD Bank

Toronto-Dominion Bank (TSX:TD) is Canada’s largest bank by assets and the second largest by market capitalization. It is primarily a retail bank that makes money taking deposits and issuing loans in Canada and the United States. To a lesser extent, it’s involved in investment banking, brokerage services, and insurance.

TD Bank’s main claim to fame is being the “most American Canadian bank.” 38% of its earnings came from the U.S. last quarter. After closing the deal to buy out Cowen, that percentage will likely to higher. TD also has a deal to buy out First Horizon, a bank in the U.S. southeast, but that deal might not close. If it did close, it would add another $1 billion in U.S.-sourced earnings, bringing TD’s U.S. earnings to nearly 50% of the total!

A dirt-cheap valuation

One of the reasons I like TD Bank right now is because its shares are cheap. At today’s prices, TD trades at

  • Nine times earnings;
  • Three times sales;
  • 1.35 times book value; and
  • 9.44 times cash flows.

This is a pretty modest valuation. The price-to-earnings ratio, in particular, is quite low if you compare it to competitors like Royal Bank of Canada. Also, TD’s dividend yield is now pushing 5%, so it has some serious income potential.

Decent growth

Despite its cheap valuation, TD Bank has delivered strong growth over the years. Over the last five years, it has grown revenue by 7.1%, earnings by 8.8% and free cash flow by 9.5% — all of these figures on an annualized basis. So, TD is growing. It’s also highly profitable, with a 31% profit margin and a 14.6% return on equity.

Foolish takeaway

Lately, we’ve seen investors panic about bank stocks due to several bank implosions and issues at Credit Suisse. To be sure, many banks in the world are very risky right now. However, a few bad banks don’t mean that the entire sector is about to go belly up.

TD Bank and Canada’s other big banks are generally pretty safe, with lots of capital, growing earnings, and ample support from the government. They are not risk free: Canada’s housing market is pretty pricey, with many Canadians barely able to keep up with their mortgage payments. There could be turbulence ahead. Nevertheless, TD Bank is a highly diversified bank with plenty of cash to ride out a crisis.

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 Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Bank Stocks

stock research, analyze data
Bank Stocks

Canadian Bank Stocks: Buy, Sell, or Hold?

There are opportunities and risks on the horizon for the Canadian banks.

Read more »

data analyze research
Bank Stocks

Where Will TD Stock Be in 5 Years?

Toronto-Dominion Bank (TSX:TD) has taken a beating over the last year. Where will it be in another five?

Read more »

Paper Canadian currency of various denominations
Bank Stocks

1 Magnificent Canadian Dividend Stock Down 28% to Buy and Hold for Decades

This top Canadian dividend stock is underperforming its large peers this year, but a turnaround could be on the horizon.

Read more »

data analyze research
Bank Stocks

Is BMO Stock a Buy for its 4.8% Dividend Yield?

Canadians are looking to cut back, and BMO stock is on board. But it could also be a top stock…

Read more »

Investor reading the newspaper
Bank Stocks

Is Canadian Imperial Bank of Commerce Stock a Good Buy?

CIBC is a TSX bank stock that has delivered marketing-beating gains to shareholders in the last two decades. Is the…

Read more »

Man data analyze
Bank Stocks

Where Will TD Stock Be in 5 Years?

TD stock is a good consideration for a 5.2% dividend on the recent dip. It provides upside potential, too, but…

Read more »

customer uses bank ATM
Bank Stocks

These 3 Canadian Bank Stocks Are Next in Line to Pop

Let's dive into three Canadian bank stocks that look well-positioned to continue to soar over the long term.

Read more »

a person looks out a window into a cityscape
Stocks for Beginners

Bank of Montreal vs. RBC: Which Canadian Bank Stock is the Better Buy?

Earnings season is upon us, and the Canadian banks will be reporting before you know it. So which of these…

Read more »