TD Bank Strong And Solid In A Wild Sector

Dec. 26, 2019 1:31 AM ETThe Toronto-Dominion Bank (TD)16 Comments31 Likes
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Summary

  • Financial Services is going to be under a lot of pressure in the next quarters.
  • Those who do not have strong solid foundations may find themselves unable to grow like their peers.
  • TD is in a good position in a number of ways we will explain in this article.

As we have outlined in previous articles, the financial sector is going to be looked at very closely. Take a look at this case where Morgan Stanley lost $140 Million USD due to a 'rogue trader' from Yale.

Here's another where New York-based firm BCG is paying $25 Million in fines due to Forex Options Fraud.

The list goes on and on, but this article isn't about the failing financial services, business, it's about one diamond in the rough.

Some companies will rise and others will fall. It's not the type of common supply and demand we're referring to, the financial sector is going through a major paradigm shift, however you want to look at it.

We're going to explain why we like Toronto-Dominion Bank (NYSE:TD) especially ahead of competitors, such as Bank of America (BAC). Let's start with the most compelling story. The online brokerage industry has been going through a major shift. Recently, Charles Schwab and TD Ameritrade announced a $26 Billion merger that's a huge deal not only for these 2 companies but for the industry as a whole:

Charles Schwab and TD Ameritrade made it official: The companies announced plans to merge on Monday, with Schwab buying TD in an all-stock transaction that values TD at $26 billion, confirming reports from last week. TD shareholders would receive 1.0837 Schwab shares for each TD share, a 17% premium over the 30-day average price that the stocks traded at before news of the deal broke on November 20.

What's special about this match made in heaven is not only the combined assets and operations, it's the combined profit centers. Here's the point about TD. We all have been watching how stock brokerages are losing out to firms like Robinhood, that offer commission-free trading. Of course, Robinhood's 'free trading' comes with a price, in line with the economic adage "There's no such thing as a free lunch." Robinhood sells flow data to High-Frequency Trading shops that trade against the flow. Basically, it's legalized front-running. In any event, big brokerage houses including E*TRADE Financial Corp. (ETFC) have announced completely commission-free trading. So how will these firms make money? There are a number of ways, and one of them is through banking. See some of the deal highlights as outlined by Seekingalpha.com editors:

  • Toronto-Dominion Bank (TD -1%) would hold on to a valuable perk in Charles Schwab's proposed takeover of TD Ameritrade, Dow Jones reports, after re-negotiating a sweep agreement that was an important source of low-cost deposits and margin income.
  • TD Bank, which will own 13.4% of the combined entity after the deal closes, will continue to collect fees for maintaining uninvested cash in sweep deposit accounts for Ameritrade's legacy customers until at least 2031.

Sweep accounts are the banking behind the brokerage. It's not the only profit center in the brokerage business, but it's a big one - and it's big for TD. This article is about TD, not about online brokerage. This is a huge win for TD. Not only is the deal profitable by itself, it shows TD's ability to stay ahead of the curve and stay in the game.

Dividends

Another great reason to own TD, it pays dividends, and they seem to be secure compared to peers. This was first outlined right here on Seekingalpha.com in this article.

The point is that there are increasing delinquency rates in Canada and it is impacting banks' abilities to declare dividends. But not TD.

Chart

For a bank stock, this is a nice-looking chart:

ChartData by YCharts

We used the 10-year time frame to show the larger picture. While it has had its downturns it has recovered - a sign of strength. Higher lows and higher highs. Technical analysis alone for securities is not impactful as it may be on currencies or commodities, however, combined with fundamentals it's just another positive sign.

The Numbers

TD's numbers are impressive: Revenue is 9.84B in July, with net income of 3.25B, and net profit margin of 32.99%. The Price to Earnings (P/E) ratio is 12.11 which is also reasonable. There isn't anything negative that stands out as a sign of trouble - all the numbers are showing signs of stability, growth, and sustainability.

Very impressive, especially for a Canadian firm!

Other opinions

Don't take our word for it, there are a number of positive reviews of TD not only right here on Seekingalpha.com but on other sites as well. Author John Lawler says this is his favorite Canadian bank stock:

  • Canada's banking industry is effectively an oligopoly, with a small number of banks controlling the lion's share of the system. The Canadian banking sector is stable, well-developed, highly competitive.
  • Although the macro environment for the Big Five bank stocks does not look as good as it did a year ago, they should still be core holdings for investors' portfolios.
  • My top choice among the Big Five banks is TD Bank, Canada's largest bank by assets, second-largest by market capitalization, and one of the country's most admired companies.

John, we agree. Being primarily in private equity, we are forced to take a long-term view on investing. We're not suggesting that TD is going to rocket higher anytime soon, we're saying that there is little downside risk with TD. Based on available information, it should continue steadily higher. Longevity wins the race.

The reason we have included this in the article, is to state by means of fact that this opinion is not a unique view, there are others in the market with the same view. But our opinion is based on different reasons, which we have articulated in these words you are reading.

Management

The TD management reads like your typical banking management, with extensive experience and proven track records for success. What's important is there isn't any 'Elon Musk' here - these are conservative bankers who aren't going to rock the boat. They keep their heads down and do their job. That's what investors want to see in a bank (in another type of company, perhaps you want an Elon Musk). Their leader, Bharat Masrani, has a credentialed past and serves as a strong captain of the large ship that is TD. Since 2014 he has engaged in cost-cutting (including layoffs) and other operational optimizations that overall have had a positive effect.

Conclusion

We're not claiming that TD is going to soar higher. What's important to note is that we are very conservative analysts. Recently, we've even suggested that due diligence is not strong enough on companies in an article titled "How well do you know your founder?" So if something passes our muster, you can bet that it really is solid. Of course, there can be unknown information that can change our opinion. But unless there is a strange surprise, we like TD and may be long the stock in our long-term portfolios.

We've been critical of many dinosaur financial services firms such as MoneyGram International (MGI) in a negative article on the stock.

We are not cheerleaders and we have no incentive one way or the other - we analyze and tell it like it is. That doesn't mean we are always right. But using analysis gives investors another tool in your toolbox to help grow your portfolio's alpha. After all, aren't we all just Seeking Alpha?

This article was written by

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Pre IPO Swap is a blog that posts content about startups, Private Equity, Pre IPO Unicorns, investing in private markets, and other topics. The blog also features useful tools like lists of updated s1 filings, and other Pre IPO related news. The blog is managed by Crediblock.com a FinTech disruptor. Learn more at www.preiposwap.com
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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