Divdend Analysis: Toronto Dominion Bank

During the sub prime crisis, the financials are getting hit hard and this presents an excellent opportunity to add them to your portfolio. Let’s see if Toronto Dominion Bank (TD) is worth adding to our portfolio of superior dividend yielding stocks.

Company Profile:

From Yahoo Finance

The Toronto-Dominion Bank and its subsidiaries provide a range of financial services in North America. The bank operates in four segments: Canadian Personal and Commercial Banking, U.S. Personal and Commercial Banking, Wholesale Banking, and Wealth Management. Canadian Personal and Commercial Banking segment provides various financial products and services to approximately 11 million personal and small business customers through telephone and Internet banking, automated banking machines, and branches located across Canada.

Market capitalization is $46.97B.

Company Fundamentals:

Something that really stands out about this bank is the fact that in 2002, TD Bank actually had negative earnings per share. Not sure that I have seen that in any of our blue chip financials. So of course, that makes the analysis a tad bit tougher.

From a return on invested capital point of view, management has delivered 9.5% over the last 5 years. And last year’s ROIC was better than that at 16.25%.

Return on equity was quite consistent over the 10 year period (if you exclude the -1.51% in 2002) in the mid teens. The 10 year average ROE is 13.61% and the 5 year average is 12.75%. Once again, that decreasing ROE is due to the negative ROE in 2002. Otherwise, the ROE has been increasing. Last year’s ROE was 15.61%.

The equity growth rate has been fairly turbulent with highs of 33% and lows of -5.54%. Not the kind of consistency that I like to see in my solid dividend payer. However, the averages show an up trend with the 9 year rate being 7.53% and staying steady at 7.33% over 5 years. But it increases nicely to 14.97% over the last 3 years and last year’s equity growth rate was 20.11%.

Now, that negative EPS in 2002 really throws the EPS growth rates out of whack. So unfortunately we don’t have much to go on there.

Sales growth rates have been consistent in the 8% range.

So far, I am fairly disappointed with this stock.

Dividend Fundamentals:

The current dividend yield is 3.23%. That is higher than the dividend yield on the TSX Composite Index. But it is lower than the other Canadian banks: Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, National Bank of Canada.

TD has delivered excellent dividend growth rates over the last 10 years. The 9 year average rate is 13.17%. The 5 year rate is 10.97%. And last year’s dividend growth rate was 12.66%. Excellent dividend growth rates.

The dividend payout ratio has been increasing from the low of 31.64% to its current 42.58%. This is consistent with the rest of the Canadian banks.

Cash flow growth rates have been fairly erratic with highs of 136% and lows of -66%. Averaged over the 10 year period, the 9 year average is 9.23%. The 5 year rate is 10.23%.

Valuation Models:

Let’s check and see how Mr. Market has currently valued TD Bank using my 3 methods for valuing dividend yielding stocks.

Looking at the average high dividend yields over the last 5 years, I can see that investors have demanded a yield of 3.72%. My model price at this yield is $57.02. At the current price of $65.56, Mr. Market has this stock selling at a premium of 14.98% even after the market correction.

And Mr. Benjamin Graham would agree. The Graham number is $52.93 which means a premium of 23.87%.

Using my discounted present value method, I used the following inputs:

future EPS growth rate of 7.33% (although analysts have forecast 11%, I used my more conservative estimate from the 5 year equity growth rate)

future P/E of 13.98 (the 5 year average P/E which is lower than the current P/E of 14.10)

dividend yield of 3.72% (5 year average high dividend yield)

future dividend growth rate of 10.97%

With this information, my model price works out to $56.84. That is a premium of 15.34%.

See my TD calculations.

Here is the 1 year stock price chart:
Click to enlarge

As you can see, TD has been hit with the recent stock price slump.

Conclusion:

I definitely got results that I did not expect to find in one of the Big Five banks in Canada. The company fundamentals were not as impressive as many of the other banks. And our valuation methods consistently showed that even at the current price, TD seems over valued by approximately 15%.

Although I have no doubt that this is a solid dividend payer, I think the other Canadian banks would be better in your portfolio of superior dividend yielding stocks.

Full Disclosure: I do not own any shares in TD.