Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is often touted as the top name in the Canadian financial sector, but economic headwinds and an overheated housing market have some pundits concerned about future growth.
Let’s take a look at the current situation to see if TD deserves to be in your portfolio.
Earnings strength
TD delivered solid results in the latest quarter with adjusted earnings of $1.20 per share, up 4% compared with the same period last year.
The company relies heavily on retail banking to drive the largest part of its earnings and TD’s Canadian retail operation is probably the best in the country. Staff are always on the lookout for opportunities to boost sales through extra lines of credit, new credit cards, or investment products. As a result, this finely tuned machine continues to outperform in tough economic conditions.
The Canadian retail operation earned $1.6 billion in adjusted net income for the third quarter ended July 31, an 8% year-over-year gain.
South of the border, TD is building a powerful presence. The company has invested nearly $17 billion in the past 10 years to acquire and create a retail operation that now has 1,300 branches. CEO Bharat Masrani says the company has the scale it needs to compete in the U.S. and is focusing more on organic growth.
Adjusted net income in the U.S. group came in at $450 million, essentially the same as Q3 2014. TD launched a large restructuring program earlier this year with much of the attention placed on the U.S. segment. As that process comes to completion, investors should start to see better results out of the American retail division.
TD’s wholesale banking operation, as a percentage of overall earnings, is smaller than some of its peers, but the group still delivered net income of $239 million, an 11% year-over-year gain. Revenues in this area can be volatile, and TD’s lower exposure to the wholesale segment is one reason the company is often preferred by investors.
Dividend safety
TD pays a dividend of $2.04 per share that yields 3.9%. The company has a strong history of dividend growth and investors should see that trend continue. The payout ratio is well within the company’s target range and should be very safe.
Valuation
TD trades at just 10.8 times forward earnings, which is slightly higher than some of its peers, but very cheap compared with the stock’s history.
Risks
The company had $241 billion in Canadian residential mortgage exposure as of July 31. Insured loans represented 58% of the portfolio and the loan-to-value ratio on the remaining mortgages was 59%.
The housing market would have to go into a steep decline for TD to be materially impacted.
TD has very little exposure to the oil and gas sector. On the Q3 conference call, Chief Risk Officer Mark Chauvin told analysts that energy loans make up less than 1% of total loans and acceptances.
The company remains very well capitalized with a CET1 ratio of 10.1%.
Should you buy TD?
Management runs a pretty tight ship and TD’s income stream is more conservative than most of its peers, so the company is well positioned to ride out some difficult economic times. If you are a long-term investor looking for stable dividends, TD is a solid bet.
