Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is giving back some of its recent gains, and investors are wondering if this is a good opportunity to pick up the stock.
Let’s take a look at the current situation to see if TD deserves to be in your portfolio.
Earnings
The Canadian banks are facing some economic headwinds, but TD continues to deliver solid results.
The company generated fiscal Q2 2016 adjusted earnings of $2.3 billion, up 5% from the same period last year. Much of the success is attributable to TD’s strong retail operations.
The bank’s branches are staffed with an army of highly trained sales people who are always on the lookout for an opportunity to suggest a new product or service to existing clients. When you are looking at millions of customers, it doesn’t take long for additional fees of a few dollars here and there to add up to some strong results.
The Canadian business is best known to investors, but TD actually has more branches south of the border.
The American economy continues its recovery, and the strong greenback means every dollar of profit from the U.S. now converts into CAD$1.30. When stated in Canadian dollars, Q2 net income from the U.S. unit was up 21% compared with the same period last year.
Risks
Pundits are concerned the oil rout and a hot housing market will hit the Canadian banks.
TD has less than 1% of its total loan book directly exposed to oil and gas companies, so there is little concern on that front.
Regarding housing, TD finished Q2 2016 with $248 billion in Canadian residential mortgages on the books. That’s a staggering number, but the portfolio looks well positioned to withstand a pullback in the housing market.
The insured component represents 53% of the loans and the loan-to-value ratio on the remaining mortgages is 58%. This means house prices would have to fall significantly before TD sees a material impact.
Dividends
TD has a strong history of dividend growth. The company raised the payout earlier this year, and investors should see the trend continue, although some analysts believe the size of the hikes could be less robust in the medium term.
The current quarterly payout of $0.55 per share yields 4%.
Should you buy?
The stock enjoyed a nice rally off the January low, so the current pullback caused by Brexit fears could continue in the near term.
I would wait for things to settle down a bit before stepping in, but TD deserves to be an anchor holding for dividend investors with a buy-and-hold strategy. If you have some cash on the sidelines, you might want to consider adding the stock to the portfolio on further weakness.
