3 Reasons to Add Toronto-Dominion Bank to Your Portfolio

Why now is the time to add Toronto-Dominion Bank (TSX:TD)(NYSE:TD) to your portfolio.

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In a surprising development, Canada’s Toronto-Dominion Bank (TSX:TD)(NYSE:TD) now rates among the 20-largest banks globally by market cap. This would have been unheard of a decade ago when U.S. and European banks dominated the global banking market.

However, since the U.S. housing market bust and the European debt crisis, many of those major global banks are performing poorly as they battle to deal with the fallout from a combination of toxic assets and declining growth.

It is easy to see why Toronto-Dominion is now among the biggest banks globally. Not only does it continue to report solid profitability, but it has a range of attributes that make it an attractive core holding for any portfolio. 

Now what?

Firstly, Toronto-Dominion maintains a solid balance sheet.

Unlike many of its peers south of the border, Toronto-Dominion resisted the temptation to engage in risky lending practices or invest in the collateralized debt instruments that brought a number of U.S. banks to their knees when the U.S. housing market imploded.

It continues to take a conservative approach to risk management. As a result, it has a strong balance sheet and very low exposure to commodities, which are shaping up as one of the biggest risk factors for many banks.

In fact, only 1% of the value of its total loans under management is exposed to the oil industry and less than 0.5% is exposed to the mining industry.

Meanwhile, with over half of its Canadian mortgages insured, the impact of any sharp collapse in Canada’s housing market will have a minimal impact.

Secondly, Toronto-Dominion possesses strong growth prospects.

One of the most attractive aspects of Toronto-Dominion is its exposure to the U.S. market; it’s ranked among top 10 largest U.S. banks. It obtains 30% of its net income from the U.S., giving it considerable exposure to the U.S. economic recovery and reducing its reliance on an oversaturated Canadian financial services market.

As the U.S. economy continues to grow, this will boost its growth prospects, while the strength of the U.S. dollar will help to give its bottom line a healthy bump. This is already having a positive impact for Toronto-Dominion; its U.S. retail loan portfolio for the fourth quarter 2015 grew by 11% year over year, and net income was up by 6% for the same period.

Finally, Toronto-Dominion continues to unlock value and reward shareholders.

One of the key reasons to own Toronto-Dominion is the bank’s long history of rewarding investors through regular dividend hikes. Impressively, it has hiked its dividend every year for the last five years, giving it a juicy 4% yield.

There are signs that this will continue.

Not only does Toronto-Dominion have solid growth prospects and benefit from operating in an oligopolistic industry with steep barriers to entry, but it remains focused on controlling costs. This means that over time its margins will continue to grow, helping to boost its bottom line. 

So what?

The state of the Canadian economy, fears of a housing market meltdown, and concerns over the impact of the commodities collapse have triggered a sharp sell-off of banks in recent months. However, there are signs that much of this perception of risk is overblown and that Toronto-Dominion now appears attractively priced, particularly when its strong growth prospects and tasty dividend yield are accounted for.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

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