Toronto-Dominion: Impressive Quarterly Result
Summary
- Toronto-Dominion handily beat both revenue and EPS expectations for 4Q.
- Also, they raised their dividend by 13% and announced a 50 M share buyback (~$7 B).
- Their balance sheet strength remains at the top of the industry.
- I expect 10-15% increase in share price appreciation along with 3% dividend yield.
JHVEPhoto/iStock Editorial via Getty Images
Investment Thesis
Toronto-Dominion Bank (NYSE:TD) is the largest bank in Canada and top 10 largest in North America. They are considered the safest Bank in North America with $1.1 T deposit and 126% liquidity coverage ratio. Toronto-Dominion has been the example of a steady and profitable company. They have been paying a dividend continuously over 165 years (current yield of 3.3%), and the dividend growth rate has been 11% CAGR over the past 25 years. Toronto-Dominion is an excellent choice for the long-term investor with a strong interest for steady dividend growth because:
1. Toronto-Dominion just had a stellar 4Q that beats revenue and EPS estimate.
2. They have a supreme balance sheet with $1.7 T assets, $1.1 T deposits, 126% liquidity coverage ratio.
3. With the dividend raise restriction lifted, they will be raising the dividend at least annually, and possibly more frequently in the shorter term.
Rock Solid 4Q Results
Toronto-Dominion just had stellar 4Q results. Their EPS was C$2.09 against the consensus estimate of C$1.95, and their revenue was C$10.94 B against the consensus estimate of C$9.9 B. Their Canadian retail segment reported 8% revenue increase YoY, and net income up 19% YoY. The U.S. retail segment also performed well, and the segment reported 8% revenue increase YoY and 66% net income increase. The wholesale segment reported strong earnings of $420 M, although net income was down 14% YoY.
Most importantly, their return on tangible common equity returned to its pre-pandemic level of 21.2%, after dipping to 18.7% during the pandemic. Overall, it was pretty clear that Toronto-Dominion, and more broadly Canadian banks in general, is exiting the pandemic in very strong fashion. Even with the volatility related to the Omicron variant and upcoming inflation, the future outlook is bright for Toronto-Dominion. Q4 results just confirmed it. The summary of 2021 results and Return on Tangible Common Equity table are shown below.
Source: Graph and table from 2021 annual report
Supreme Balance Sheet
Thanks to their proven business model and superior profitability, Toronto-Dominion truly has a supreme balance sheet. They have tons of cash ($428 B), $1.1 T deposits, and $1.7 T total assets. Also, their liquidity coverage ratio is at 126%. The strong balance sheet and liquidity was recognized by Global Finance, and Toronto-Dominion was named as the #1 safest bank in North America (#2 in 2020), which is a reflection of their resilience and stability.
In the press release, publisher and editorial director of Global Finance, Joseph Giarraputo stated that, "The past year demonstrates the resilience of the banking sector, which stood as a bulwark against collapse during the coronavirus pandemic, supplying critical emergency funding as well as, in many cases, emergency equipment and supplies. The safest banks are paragons of stability, and continue to provide necessary support for governments and communities as they seek to recover from pandemic's economic shocks."
The high ranking is no surprise given the stability and profitability of Toronto-Dominion. The future looks bright, with increasing total assets and banking volumes expected in North America. I think it is safe to say that the shareholders of Toronto-Dominion are in good hands. Their business model overview and the rankings of Safest Bank in North America 2021 are shown below.
Source: Slide from investor relations
Source: Global Finance
Strong dividend history and increase expectation
The dividend increase restrictions on Canadian banks lifted in late 2021, and Toronto-Dominion immediately announced a 13% increase of dividend and a 50 M share buyback. Regarding the raised expectations, there were several questions about future dividend increases and their frequency during the last earnings call. The executives mentioned that the current plan is to raise the dividend annually, but they are reviewing the market conditions and company outlook regularly. They certainly left the doors open to more frequent dividend increases, if market condition and company performance allows.
Historically, Toronto-Dominion has been the epitome of a stable dividend growth company. They have steadfastly paid a dividend for 165 years, and the dividend has grown by 11% per year on average for the past 25 years. The current dividend yield is at 3.3%, which is solid. With increasing profitability expected and a bright future outlook, I expect Toronto-Dominion to encounter no problems with dividend payouts in the foreseeable future. The summary of their dividend history is given below.
Source: Slide from investor relations
Fair Value Estimation
Looking at the valuation of Toronto-Dominion, they are trading 8-12% higher than their peers. P/E ratio of Toronto-Dominion is at 12.3x, whereas the sector median is at 11x. Given their superior profitability (net income margin of 33.3% vs. sector median of 29.9%) and long history of stability, the premium is more than justified. Therefore, I believe Toronto-Dominion is fairly valued at this point.
In the near future, the banking sector should trade at higher multiples following the lifting of dividend restriction, and I expect the P/E of Toronto-Dominion to revert to its historic level, which is about 15x. Also, an increase in the dividend (10-15%) later this year will result in stock appreciation as well. Therefore, I believe Toronto-Dominion has at least 10-15% upside from the current level, and possibly more, if the P/E multiple of the Canadian banking sector expands.
Risk
The overall stock market is going through volatility, and often the financial sector gets hit when the market experiences volatility. Therefore, the stock price of Toronto-Dominion may experience some volatility for next couple of months. Also, due to the Federal Reserve's decision to dial back the ultra-easy monetary policy, some may worry that economic growth may slow down later this year. This may have a negative impact on Toronto-Dominion's profitability. However, Toronto-Dominion was just named as the safest bank in the North America due to their strong balance sheet and track-record of excellence in profitability. I have little doubt about Toronto-Dominion's ability to handle some economic adversity.
Conclusion
Toronto-Dominion has been a stellar company known to reliably reward their shareholders for a long time. They have been continuously paying a dividend over 100 years, and they were just named as the safest bank in North America. Their 4Q results easily exceeded market expectations. They are one of those stocks that you can buy and hold forever (and pass to your kids). I expect 10-15% upside from here.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of TD either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (26)
I do not have the same confidence regarding the USA banks . I think the USA Banks are quite conservative regarding dividends
