Investing can be simple. If you need more persuasion to put some of your long-term capital in a solid investment like Toronto-Dominion Bank (TSX:TD), here you have it. First, the big Canadian bank stock has underperformed. Second, it trades at a good valuation. Third, it offers more income than historical levels.
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TD stock has underperformed recently
I don’t believe it! Toronto-Dominion stock has underperformed the Canadian bank sector as well as the Canadian stock market over the last one-, three-, and five-year periods. According to YCharts, over the last five years, TD stock delivered total returns of about 40% (or almost 7% per year). In comparison, the Canadian bank sector returned approximately 51% (or 8.6% annually). And the Canadian stock market returned 61% (or just over 10% per year).
TD, ZEB, and XIU Total Return Level data by YCharts
BMO Equal Weight Banks Index ETF is used as a proxy for the sector. Notably, this exchange traded fund essentially has an equal weight in the Big Six Canadian banks. And the iShares S&P/TSX 60 Index ETF is used as a proxy for the Canadian stock market.
Not all hope is lost, though. Stocks often take turns outperforming. Over the last 10 years, TD stock has outperformed the two ETFs, delivering total returns of 145% (or 9.4% per year) as shown in the graph below. So, TD stock’s recent underperformance could be a good reason to buy for long-term solid returns potential.
TD, ZEB, and XIU Total Return Level data by YCharts
The big Canadian bank stock is at a good valuation
To be sure, I reviewed TD stock’s valuation. At $81.45 per share at writing, the large North American bank stock trades at a price-to-earnings ratio of about 10.2, which is a discount of about 12% from its long-term normal valuation.
One thing that has been pressuring the stock is higher loan loss provisions that have cut earnings. In other words, higher interest rates since 2022 are likely to lead to more bad loans. However, I believe just like past bad economic times, it will come to pass, and the stock will recover. A normalization of its valuation could potentially bring the stock back to the $98 level over the next two years.
Buying stocks at good valuations (i.e., not overpaying for stocks) is one key component that can help drive decent returns for long-term investors. Other than that, earnings growth will also drive stock price appreciation. In the case of TD, it also pays out a safe dividend that provides stable returns through the economic cycle. That is, the TD stock price can go up and down, but we can expect its dividend to be safe and growing over time.
TD offers a high dividend yield
Over the last 20 years or so, TD stock’s dividend yield has seldom gone above 4%. When it offers a relatively high dividend yield versus historical performance, it suggests the stock is potentially a good buy. At the recent price, TD offers a dividend yield of 5%.
Even being super conservative and assuming a long-term 4% earnings growth rate, combined with the 5%, and expecting no valuation expansion, we can still project approximated long-term returns of about 9% per year. That’s a pretty low expectation but would still be a decent return for a blue chip stock.
