Income Portfolio member Toronto-Dominion Bank (TD), a leading Canadian and North American Bank, has about $603 CDN in assets and serves roughly 18 million customers.
TD Bank has been growing strongly, and its mergers and acquisitions record is impressive: today, it is the second largest bank in Canada and the sixth largest in North America by total assets and market cap. While it has made many large acquisitions in the past, CEO Edmund Clark commented in a recent conference call that the bank will be focused on smaller-size acquisitions in the U.S.
These would follow a series of purchases of failed banking institutions in Florida: TD Bank Financial Group acquired the assets and liabilities of Riverside National Bank of Florida, First Federal Bank of North Florida and AmericanFirst Bank from the Federal Deposit Insurance Corporation (FDIC) in April, and in May it followed with purchasing another Florida-based bank from the FDIC for $191 million. With these latest deals, TD bank has obtained a larger branch presence in the United States than it has in Canada.
Somewhat contradicting the CEO’s statement, financial media have been reporting that TD Bank is in talks to buy Chrysler Financial. The acquisition, estimated to be worth $6 billion to $7 billion of an auto loans business, is currently owned by Cerberus Capital Management LP. It would be a shrewd move for TD, as Chrysler Financial would be another way for the bank to diversify its revenue stream. The shares moved higher over the last two days on the reported potential deal. We’ll keep you posted on the potential deal’s progress, but for now we consider the deal as a positive for the Canadian bank.
It’s important to note that both Canadian banks we currently recommend in our Income portfolio, the discussed above TD Bank and Bank of Montreal (BMO) offer relatively high dividends, especially when compared to the low-yielding U.S. banks.
While TD Bank hasn’t moved to increase its dividend when it reported the final results for the year, keeping the payout at 61 cents per share, it’s worth noting that the dividend was never cut during the dire days of financial crisis. Yielding 3.3 percent, TD Bank remains a recommendation.
Similarly, Bank of Montreal has kept its dividend at the pre-crisis level, declaring an unchanged 70 cents per share in the latest quarter. With its payout target being set at 45 to 55 percent of profits, the future of the dividends depends on earning growth. For now, though, we are happy with the 4.5 percent yield and remain buyers.
Unfortunately, another of our Canada-based recommendations, Canadian Oil Sands Trust, has moved to cut its dividend. We were prepared for the move, as the company had signaled that significant dividend cut is imminent due to a change in corporate structure (prompted by a change in Canada’s tax laws). The size of the new dividend was deemed too small by many market participants, and the shares sold off sharply on the news.
The new dividend of 20 cents is a far cry from the 50 cents Canadian Oil Sands is paying today; however, with current yield of 3.2 percent, Canadian Oil Sands remains a legitimate income stock and a recommendation.