As bank stocks are cyclical, investors are wary about investing in these companies amid an economic downturn. In recent months, interest rate hikes, banking failures in the U.S., and the threat of a recession have dragged TSX bank stocks lower.
Shares of Toronto-Dominion Bank (TSX:TD) are down 25% below all-time highs, valuing the Canadian heavyweight at a market cap of almost $150 billion. But the drawdown also allows you to buy a quality stock at a lower multiple and enjoy a tasty dividend yield of 4.8%.
So, let’s see if you should buy TD Bank stock right now.
The bull case for TD Bank stock
TD Bank is among the 10 largest banks in North America. It is the sixth-largest bank in the continent in terms of total assets and the fifth largest by market cap. TD Bank has four primary business segments that include Canadian Personal & Commercial Banking, U.S. Retail, Wealth Management & Insurance, and Wholesale Banking, providing it with a wide economic moat and multiple revenue streams.
Its proven business model has allowed the company to deliver consistent earnings growth and support consistent dividend hikes.
Canada’s banking sector is heavily regulated, which allows TD Bank and its peers to withstand economic downturns with ease. For instance, unlike its counterparts in the U.S., TD Bank could maintain dividend payouts and a sound liquidity position amid the financial crisis in 2008-09.
With a network of 1,060 branches in Canada, TD Bank ranks consistently among the top two players for most retail products in terms of market share.
In the U.S., it has a network of 1,164 stores with operations in four of the top 10 metropolitan regions. Its total deposits in the U.S. are over $6 trillion, and TD now aims to expand its wholesale business in the world’s largest economy.
TD Bank ended fiscal second quarter (Q2) with $1.92 trillion in assets and $1.19 trillion in total deposits. It reported an adjusted net income of $15.8 billion in the last four quarters, indicating a trailing price-to-earnings multiple of less than 10, which is really cheap.
TD Bank is well diversified
TD’s Canadian personal and commercial banking segment accounts for 43% of earnings, followed by U.S. retail at 31%. A diversified revenue base lowers overall risk allowing TD Bank to increase dividends by 10% annually in the last two decades.
Since June 2003, TD Bank stock has returned 769% to shareholders after adjusting for dividends. Comparatively, the TSX index has gained 404% in this period.
In the fiscal Q2 of 2023 (ended in April), TD Bank reported revenue of $12.36 billion, an increase of 10% year over year, driven by margin growth in the personal finance and commercial banking businesses. However, its provisions for credit losses increased by $572 million in the quarter, which dragged its adjusted earnings per share lower by 4% to $1.94 per share.
But the fundamentals of the Canadian banking giant remain strong. It’s capital tier-one ratio is 15.3% which is among the highest in North America. Its leverage ratio stands at 4.6 times, while the liquidity coverage ratio is also robust at 144%.
Analysts trading TD Bank stock remain bullish and expect its shares to rise by 15% in the next 12 months. After adjusting for dividends, total returns will be closer to 20%.
