Toronto-Dominion Bank (TSX:TD) stock is taking a beating amid the global banking turmoil that’s roiling the markets. Since hitting a high of $93.50 a few weeks ago, TD has fallen to $77.90 – a 16.7% decline. In the same period, the S&P 500 fell only 5.33%. So, TD Bank has underperformed.
It’s interesting that TD Bank is declining so precipitously in price, because it hasn’t reported any materially negative news recently. Many other banks are collapsing right now, of course, but that needn’t have an effect on TD: it doesn’t own them.
There is one bank TD is involved with that might rightly cause some concern: First Horizon (NYSE:FHN). That is a mid-sized regional U.S. bank, the exact type of bank that is causing issues in the United States. TD is currently trying to pay $13.4 billion to buy First Horizon, and isn’t getting regulatory approval. If TD pays the full, agreed on price for FHN, it will be valuing the company at 15 times earnings. That’s an unheard of price for banking stocks right now.
So, if TD goes right ahead with its FHN deal and doesn’t demand a lower price, then it may be overpaying. If it does negotiate a lower price, then the deal will be delayed even further. It’s a tough choice. Nevertheless, when we look at the overall picture, we can clearly see that TD Bank is less risky than the average bank stock right now.
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Hardly any unrealized losses
One thing that makes TD Bank different from the collapsing U.S. regional banks is its amount of unrealized securities losses. TD has only $732 million in unrealized losses, while it has $1.7 trillion in total assets. It has $111.1 billion in total equity. So, TD’s unrealized losses are only 0.06% of equity. In fact, if you subtract unrealized gains from TD’s unrealized losses, you’re all the way down to 0.03% of equity. By contrast, Silicon Valley Bank’s losses equalled 100% of shareholder equity before it collapsed.
Some definitions are perhaps in order here. An “unrealized loss” is a decline in the value of an asset that you haven’t sold yet. “Equity” is assets minus liabilities; it’s like a corporate equivalent of a person’s net worth. When I say that “TD’s unrealized losses are low as a percentage of equity,” I mean that the company is not sitting on a pile of losses that are eating away at its net worth. In other words, it’s in good financial shape.
Strong growth
Another thing TD Bank has going for it right now is pretty strong growth.
Over the last five years, TD has grown at the following compounded annualized rates:
- Revenue, 7%.
- Operating earnings 6.7%.
- Net income: 8.4%.
- Diluted earnings per share (“EPS”): 8.8%.
That’s pretty decent growth for a company that only trades at 9.4 times earnings. TD’s business is growing at least as fast as its stock price is, which suggests that the valuation is not racing ahead of the company. To be sure, TD is far from the cheapest bank on earth right now. But it’s also less at risk of collapsing, compared to the cheaper banks. So I’d say its stock is a reasonably good value right now.
