Many investors are searching for the ever elusive “one decision” stocks. Those are the stocks that you only have to decide to buy since the planned holding period is forever.
Luckily for Canadian investors, there’s no shortage of choices on the Toronto Stock Exchange. Many of our utility, telecom, and consumer staple stocks are among the best in the world thanks to years of terrific management, well-established brand names, and restrictions on foreign ownership.
The banks are another popular sector with buy-and-hold investors, forming the bedrock for many portfolios. Although there’s an argument to be made for saying every one of Canada’s Big Five Banks is a one-decision stock, I think there’s an even stronger argument to be made for buying Toronto-Dominion Bank (TSX:TD)(NYSE:TD) over all the others. Here are the main three reasons why.
U.S. presence
Canada is a terrific place to live and invest. But we’re also a small nation with limited growth opportunities, especially for large, entrenched banks. TD’s management realized this years ago, expanding into the U.S. with its purchase of Banknorth in 2005.
After making a few more acquisitions south of the border, TD has expanded the size of its U.S. operations to be comparable with its size in Canada. It has more than 1,300 branches in the U.S., with more than $200 billion in deposits and $136 billion in outstanding mortgages. Although it doesn’t command nearly the market share in the U.S. as it does in Canada, the U.S. market offers better growth opportunities because it’s so fragmented.
There are more than 5,000 small banks in the United States, collectively controlling about 50% of the market. Look for the consolidation of this industry to be a major story over the upcoming decades, led by TD and other banks like it.
Canadian strength
Although the U.S. is the growth area, management has done a terrific job with Canadian operations.
TD has quietly become Canada’s largest lender thanks to aggressive in-branch promotions and working with mortgage brokers. It was also ahead of the curve in introducing things like extended branch hours and mobile mortgage specialists to its customers, and staff have consistently shown the ability to cross-sell other products effectively. One in every three Canadians have at least one TD account.
You could make the argument that the company is somewhat weaker than its competitors because of a lack of exposure to capital markets, but that’s by design. Retail banking is more consistently profitable, and is less prone to costly blow-ups. This focus on deposits, mortgages, and credit cards should really shine the next time the world economy struggles.
The great dividend
One of the nice things about picking a mature company like TD is the attractive dividend. Currently, the company has a yield of 3.7%.
Although that’s among the lowest of Canada’s banks, it’s still pretty attractive. Over the past two decades, the dividend has increased from just $0.20 per share to $1.84 annually, even including two dividend freezes during the financial crisis of 2008-09. That’s good enough for a 12% annual raise for investors.
There’s still plenty of room to increase the payout in the future too. The company is paying out less than 50% of its net earnings to shareholders, giving it plenty of retained earnings to invest back in the business or to set aside for future acquisitions.
TD might be offering investors the most compelling growth story out of Canada’s largest banks. If you combine that with its stellar Canadian retail operations and attractive dividend, investors have plenty of reasons to like this stock. Add in the fact that it’s trading at a very reasonable valuation—just 13.3 times trailing earnings—and it’s easy to see why many Canadians are making TD one of their forever stocks. Perhaps you should, too.
