Recent investors of Toronto-Dominion Bank (TSX:TD) stock may be disappointed with the big Canadian bank’s underperformance in the sector. The stock is down close to 9% over the last 12 months. Even after accounting for dividends, it still had a negative return of north of 4% in the period.
That said, investing is a long-term endeavour, and TD stock has outperformed the sector in the last 10 years. Given its reasonable valuation today, it has a good chance to outperform in the long run.
TD Bank: A top North American bank to own
TD Bank is a top bank in North America — it is the sixth-largest bank by total assets and fifth-largest bank by market cap. Its core focus is in retail banking, which is typically viewed as lower risk than commercial banking. It has about 2,239 retail locations across North America to serve its customers. In the last reported quarter, wealth management and insurance also contributed to 14% of its earnings. The United States also contributes to about a third of the bank’s earnings.
In the last reported quarter, TD had total assets of $1.96 trillion, total deposits of $1.2 trillion, and reported net income of $10.8 billion for the trailing four quarters, ranking second in Canada for all those categories.
It takes a conservative approach to running its business, maintains a strong balance sheet, and is awarded a high S&P credit rating of A-. For example, in the last reported quarter, it had $447 billion in deposits and $552 billion in loans for its Canadian personal and commercial banking business. In comparison, its U.S. retail business had $453 billion in deposits and $255 billion in loans.
Recent results
Toronto-Dominion Bank reported the last quarterly results for fiscal 2023 at the end of November. For the year, it increased its adjusted revenue by 12% to $51.8 billion, while adjusted net income dropped 2% to $15.1 billion. This translated to a drop of 4% in its adjusted earnings per share to $7.99. Adjusted non-interest expenses rose 13% to $27.4 billion, and loan-loss provisions jumped 175% to $2.9 billion, which weighed on earnings.
The adjusted return on equity was still good at 14.4%, although it was down from 2022’s 15.9%. The bank’s capital position remained solid, with a common equity tier-one ratio of 14.4%. In November, TD also increased its quarterly dividend by 6.25%.
Quality earnings and dividend track record
TD Bank persistently grows its earnings per share in the long run. Although its earnings have some sensitivity to the economic cycle, it has maintained a safe dividend. For instance, its adjusted earnings per share dropped 15% in fiscal 2008 during the global financial crisis and 20% in fiscal 2020 during the pandemic when a recession occurred.
However, it has paid a dividend since 1857 and has not cut its dividend for at least the past 50 years, according to the Canadian Dividend All-Star List. For your reference, its three-, five-, and 10-year dividend-growth rates are 7.3%, 8%, and 9%, respectively.
At $80.49 per share at writing, TD stock offers a dividend yield of almost 5.1%, which is higher than its historical levels. It also trades at a discount of about 10-15%. So, the dividend stock is at least a hold.
Assuming an earnings growth rate of 5% and no valuation expansion, we can approximate total returns of about 10% per year when combined with the dividend. It may or may not be a buy for you, depending on how big your position is relative to your portfolio size and how big of a discount you’re looking for. Generally speaking, it’s not a bad buy at current levels.
