Canadian bank stocks are on the rise again, and investors are wondering which stock is the most attractive in the current environment.
Let’s take a look at Toronto-Dominion Bank (TSX:TD)(NYSE:TD) to see if it deserves to be in your portfolio.
Earnings strength
TD reported fiscal Q1 2016 adjusted earnings of $2.2 billion, up 6% from the same period last year.
Canadian retail net income came in at $1.5 billion, up 4% year over year as growth in loans, deposits, and fee-based revenue offset higher provisions for credit losses and lower margins.
The company implemented a restructuring program last year that has taken costs out of the Canadian operations. TD’s Canadian branch count dropped from 1,164 in Q1 2015 to 1,157 at the end of the latest quarter. Full-time staff numbers dropped by about 1,300 over the year.
TD has a large U.S.-based retail operation that continues to provide a nice hedge against economic headwinds in the Canadian market. The group generated net income of $642 million in Q1, up 20% from Q1 2015 as a result of the strong move in the American dollar against the loonie. In U.S. dollars, net income rose 3%. The company reported 1,264 U.S. retail locations at the end of Q1 compared to 1,298 a year ago.
The company’s TD Ameritrade group added $109 million in earnings, up 21% compared with the same period last year. In U.S. dollars, the increase was 4%.
TD’s wholesale banking division is smaller than its peers. Net income from the segment in Q1 was $161 million, down 16% from Q1 2015 as a result of a more challenging trading environment.
Overall, TD delivered a strong quarter in a difficult environment.
Housing and oil risks?
TD has $247 billion in Canadian residential mortgages, the most of all the Canadian banks. Insured mortgages represent 55% of the portfolio, and the loan-to-value ratio on the remaining loans is 59%. This means the housing market would have to fall significantly before TD sees any material losses.
Most analysts expect a gradual slowdown in housing in the coming years.
TD’s oil and gas exposure is very low. The company finished Q1 with $6.1 billion in outstanding energy loans, which represents less than 1% of the company’s total gross loans and acceptances.
Dividend safety
TD just raised its quarterly dividend by 8% to $0.55 per share. The new payout offers a yield of 4.1%. The distribution is very safe, and investors should see the substantial increase as a sign that management is confident in the earnings outlook for the medium term.
Should you buy TD?
The stock isn’t as cheap as it was last month, but investors still get a top-quality name with a growing dividend. If you want a reliable company you can simply buy and forget about for decades, TD is a solid choice.
