Toronto-Dominion Bank (TSX:TD)(NYSE:TD) has pretty much been a no-brainer investment in the past few years as the company racked up record earnings and regulary hiked dividend payouts.
Now, with American investors betting against the Candian banks and markets getting nervous about falling oil prices and a potential housing bubble, investors are wondering if they should buy, sell, or hold the stock.
Let’s take a look at the current situation to see if Toronto-Dominion belongs in your portfolio.
Earnings
Toronto-Dominion had solid full-year fiscal 2014 results despite a tough fourth quarter. For the year ended October 31, Toronto-Dominion reported overall earnings growth of 8%. Canada’s second-largest bank by market cap increased its dividend by 14% during the year and finished 2014 with a solid Basel III capital ratio of 9.4%.
For 2015, the company warned that headwinds in the market were likely to cause the company to miss its target of 7% to 10% earnings per share growth in the near to medium term.
Bharat Masrani, the new CEO, said heightened competition for loans and low interest rates are putting pressure on margins.
U.S. banking
Toronto-Dominion has spent nearly $17 billion over the last decade to build an extensive U.S. retail operation that includes more than 1,300 branches from Maine to Florida.
Adjusted earnings from the U.S. division were $US462 million in the fourth quarter of 2014. This translated into $509 million in Canadian funds. The rise of the U.S. dollar against its Canadian counterpart has been extensive. In fact, one U.S. dollar bought about $1.12 Canadian back at the end of October. Today, that same dollar buys $1.24.
The continued weakness of the loonie means Toronto-Dominion’s U.S.-based revenues are going to help increase overall earnings. This is important for investors to keep in mind because the U.S. operations accounted for almost 27% of total earnings in Q4 2014.
Predictions for the USD/CAD exchange rate vary widely, but the two countries are heading in opposite directions with respect to interest rates. Canada is widely expected to cut rates again this year and the U.S. will probably begin to increase rates by the fall. This will put more downward pressure on the loonie and should provide extra support for the U.S. dollar.
Canadian banking
Toronto-Dominion has a great retail franchise in Canada. The company consistently wins customer service awards and is well positioned to ride out any downturn in the housing market.
The crash in the oil sector also has pundits worried that the big banks are going to get burned on their Alberta-based lending. In the Q4 2014 conference call, TD’s chief risk officer, Mark Chauvin, told analysts that he didn’t expect any material loan impairments or losses in an environment where oil dropped to $60 for an extended period of time. During the crash in 2008/2009 Toronto-Dominion didn’t incur any oil-related credit losses.
The drop in oil prices has resulted in much lower gasoline prices. It has also prompted the government to cut interest rates. Both of these events put more cash in the pockets of Canadian families, who could allocate the extra funds to pay mortgages, credit cards, or lines of credit. If people actually do this, it would alleviate some of the debt stresses that have been scaring the markets.
Dividends
Toronto-Dominion has increased its dividend by more than 50% in the past three years. The rate of growth will probably slow down but the dividend shouldn’t be at risk of a cut.
Should you buy?
The stock has rebounded more than 11% in the past month after a five-month slide that took the stock from $58 down to the $50 mark. Toronto-Dominion is the kind of company investors can buy and simply forget for decades. At the moment I would rate it a hold as the market could present a better entry point in the coming months.
