Rising interest rates favour banks historically, but that’s not the case in 2023. Instead, the current high interest rate environment is a bane to lenders. They need to sacrifice profits and raise loan-loss provisions in case borrowers default. Canada’s big banks face an acid test again, particularly Toronto-Dominion Bank (TSX:TD).
The $145.15 billion and the country’s second-largest financial institution stood tall during the 2008 financial crisis and would do so again after a tumultuous year. TD is still the stock to buy if you’re looking for steady yearly income and massive dividends
Risk focused
TD has always been risk focused, as evidenced by its limited exposure to the infamous financial crisis 15 years ago. In the fiscal year 2023, earnings fell 38% to $10.78 billion versus fiscal year 2022. The significant blip in the provision for credit losses (PCLs) was the reason for the drop in earnings. In the fourth quarter (Q4) of fiscal 2023, PCLs rose 42% year over year to $617 million.
Still, Bharat Masrani, TD Bank Group’s president and chief executive officer, said, “TD delivered strong revenue growth this quarter, reflecting positive underlying business momentum and the benefits of our diversified business model.” In the three months that ended Oct. 31, 2023, revenue increased 2.7% to $13.1 billion versus Q4 fiscal 2023.
“In a complex operating environment, we continued to adapt, invest in new capabilities and take important steps to deliver efficiencies and drive growth across the bank,” Masrani added.
Dividend safety and stability
Investors in Canadian big banks usually hold the stocks for the long haul, not for trade to earn quick bucks. All the giant lenders, not only TD, are sensitive to the broader macroeconomic environment. There’s pressure on banks and their stocks right now, but only for the short term.
TD trades at $81.06 per share (-3.11% year to date) and pays a 5% dividend. A $40,043.64 investment (494 shares) can transform into $500.55 in quarterly passive income. Dividend safety and stability are non-issues, given this big bank’s 166-year dividend track record and counting.
While TD’s dividend isn’t the highest in the market, the yield is slightly below the 5.1% industry average and higher than the bottom 25% of the dividend payers on the TSX. Also, the board recently approved and declared a 6.3% dividend hike.
The buying opportunity is now
TD is safe as ever, notwithstanding the massive headwinds it’s experiencing today. Savvy investors will buy on the dip, knowing that the stock will eventually recover from its temporary weakness. Moreover, Canada’s big banks will continue to be a key driver of the TSX for years to come.
For TD, Masrani acknowledges the challenges ahead in fiscal 2024. However, he firmly believes the bank will enter the year in a position of strength. Besides the proven resiliency and strong brand, the wide MOAT bank maintains a strong capital position.
As of this writing, institutions and the general public owns 58.3% and 46.1% of TD shares, respectively. Interestingly, the top shareholders include industry peers or their asset management firms. TD will forever be a high-quality investment, producing high-quality earnings. You have an excellent buying opportunity for less than $100 per share.
