When most people go to the grocery store and see an item they use all the time on sale, they’ll usually stock up.
While most investors seem to understand the same sort of process applies to stocks, often I see people stand on the sidelines whenever great businesses go on sale. These investors are frozen by the fear of doing something wrong, stricken by short-term thoughts that plague market timers and pundits eager to fill a 24-hour news cycle. It’s hard to buy even good businesses when they’re beaten up, especially as market sentiment is practically screaming at you to avoid the company.
But that’s exactly what successful investors do. As Warren Buffett has famously said, you pay a lot for a cheery consensus. Buying a great business is exactly what every investor should aspire to do, providing that they pay a decent price for it. That involves a lot of patience sometimes, but I’m a big believer in waiting for your opportunity.
For Canada’s banks, I believe that opportunity is presenting itself right now. Our banks are selling off on fears of Canada’s housing bubble, exposure to risky oil loans, and the lowering of interest rates. Put these factors together, and we’re seeing bank shares that have declined 20% from recent highs.
Take Toronto-Dominion Bank (TSX:TD)(NYSE:TD) as an example. If you were looking to invest in this business, should short-term factors concern you that much? Sure, the Canadian housing market has the potential to be ugly, but the vast majority of TD’s risky loans are insured by CMHC, which has the backing of the federal government. Oil could already be on its way back up, and low interest rates might decrease interest rate spreads, but they also tend to lead to less defaults, since debt is more affordable.
For the long-term investor, that kind of stuff is nothing but noise. Besides, even with those bearish aspects, there’s still a lot to like about TD right now.
For instance, investors are forgetting about TD’s large exposure to the United States, an economy that is seemingly firing on all cylinders. The company has more than 26,000 employees down south, along with more than 1,300 branches. Approximately 30% of the company’s profits come from the U.S., which really only lacks the oomph of the Canadian operations because of TD’s dominant position in the Canadian mortgage market. Still, the weakness in the Canadian dollar should translate into increased profits from the U.S. operations.
Even if you believe Canada is going to be weak going forward, there’s a case to be made for owning the largest bank in terms of total assets. TD is also Canada’s largest lender, the second largest in total deposits, and made more than $5 billion in profit just from its Canadian operations in the last year. That’s a big behemoth to bet against.
But perhaps the best part of owning TD is the company’s steadily rising dividend. Even after accounting for a few years of dividend freezes during the Great Recession, the company has still raised its quarterly payout by more than 12% annually over the last 20 years. Those are the kind of results that show TD is a great performer through thick and thin.
If the company continues its streak and raises the dividend by 12% in 2015, investors can look forward to a $0.525 quarterly dividend starting in April. That’s good enough for a 4.15% yield on cost based on today’s price, which kills just about every government bond out there. And that’s not even factoring in the almost inevitable annual raise.
TD looks to be a great buy at these levels. But don’t forget about the other banks. If you’re looking at any of them, we’ve got a FREE report that you’ve got to read. Check it out below!
