The Canadian banks had an incredible run last year, but have since started to fall out of favour with the general public thanks to short-term news reports which really won’t make a major impact on the long-term fundamentals of high-quality banks such as Toronto-Dominion Bank (TSX:TD)(NYSE:TD).
It all started with a CBC news report about tellers that were guilty of up-selling customers. Then the public shunned bank stocks following the downfall of the alternative lender Home Capital Group Inc., which was attacked by the infamous short-seller Marc Cohodes.
These are two issues that would induce fear in any investor, but did Toronto-Dominion Bank really deserve to take such a big hit on the chin when it has a lot of tailwinds that will propel it higher over the long term? I don’t think so. The up-selling issue was not unique to Toronto-Dominion Bank; this is a common practice across many different banks.
Unfortunately, there was a breakdown in communication, and the unrealistic expectations caused some employees to breach the company’s code of conduct. Toronto-Dominion Bank has been taking an active approach to ensure the problem doesn’t happen again, so this issue should be in the rear-view mirror.
The Home Capital Group turmoil sent shock waves throughout the Canadian financial industry, but investors have to ask themselves if there’s any real systematic risk that could spread to a high-quality name like Toronto-Dominion Bank. It’s not likely.
Toronto-Dominion Bank has an extraordinary management team that knows how to manage risk like no other Canadian bank. Even if the frothy Canadian housing markets were to crash tomorrow, Toronto-Dominion Bank wouldn’t be hit nearly as hard as its peers in the Big Five.
Great tailwinds, great valuation
Because of Toronto-Dominion Bank’s large U.S. exposure, I believe the company is worth a huge premium over its peers in the Big Five. The U.S. economy is going to strengthen under President Trump’s agenda, and it’s likely that the U.S. Federal Reserve will continue to raise rates at a faster rate. For Canadian investors, I think the U.S. exposure offered by Toronto-Dominion Bank makes the stock a must-own for those with a long-term horizon.
Going forward, Toronto-Dominion Bank is going to continue to beef up its U.S. business, and it’s likely that the U.S. segment will become a powerhouse over the next few years. Given the tailwinds and the company’s great risk-management strategy, I believe Toronto-Dominion Bank is undervalued with a 12.85 price-to-earnings multiple.
The 3.7% dividend may not be the largest of its peers, but I think it’s going to grow by the largest amount over the next five years.
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