Toronto-Dominion Bank (TSX:TD)(NYSE:TD) holds an anchor position in many Canadian portfolios, and long-term investors have been rewarded handsomely with dividend growth and capital appreciation.
New investors, however, are wondering if they should buy as fears grow about a weakening Canadian economy and rising personal debt levels.
Let’s take a look at TD to see if this is the right time to start a position in the stock.
Profit growth
TD reported solid numbers for its third quarter, which wrapped up at the end of July. The company delivered adjusted net income of $2.29 billion, or $1.20 per share. That was good enough for a 4% gain over Q3 2014.
TD’s earnings strength lies in its formidable retail operations.
The personal and commercial banking operations in Canada brought in earnings of $1.6 billion in the third quarter, an 8% increase over the same period last year. TD’s Canadian retail group is often cited as the best among the big banks.
South of the border, TD also has a very large retail operation. That wasn’t always the case, but management spent nearly $17 billion over the past decade to build a franchise that now includes more than 1,300 branches.
The U.S. division earned $450 million in Q3, about equal to its performance a year ago. TD is in the middle of a restructuring program aimed at removing costs and driving more efficiency into its operations. Much of the focus is on the U.S. franchise, and investors should see the results of those efforts in the coming quarters.
TD has a smaller wholesale banking division than its peers. This segment can be very profitable in good times, but earnings tend to be volatile. The wholesale division earned $239 million in the third quarter, up 11% compared with Q3 2014.
Housing and energy sector risks
TD finished Q3 with $241 billion in Canadian residential mortgages. The company says its uninsured component represents 43% of the portfolio, and the loan-to-value ratio on those mortgages is 59%.
That means the housing market would have to drop significantly before TD sees any material losses. Most market watchers anticipate a slow pullback in housing prices rather than a sharp decline, so TD should be well positioned to weather the storm.
The company’s strong CET1 capital ratio of 10.1% is also reassuring.
TD has very little energy exposure. Less than 1% of the total loan book is connected to oil and gas companies, so there isn’t much risk on that front.
Dividend growth
TD pays a dividend of $2.04 per share. Today, that provides a nice yield of 3.9%. The distribution is very safe, and investors should see continued growth, although the size and frequency of the increases could begin to slow down in the next year or two.
Should you buy?
The stock has rallied off the August lows, so the easy money has already been made. Having said that, TD has been a great builder of wealth for its long-term investors, and that trend should continue. The stock is priced at 12.7 times trailing earnings, which is attractive based on the five-year average. If you are a buy-and-hold investor, TD is a solid pick.
