Toronto-Dominion Bank (TSX:TD)(NYSE:TD) reported a disappointing Q4 2016 earnings report, but despite the mediocre numbers, its American business was firing on all cylinders. The American segment will drive Toronto-Dominion Bank stock higher next year, especially considering the tailwind of having president-elect Donald Trump pushing for lower corporate tax rates. Toronto-Dominion Bank will be the biggest beneficiary of the Big Five Canadian banks since the company has the biggest exposure to the U.S.
If you’re looking for a buying opportunity on a terrific forever business, then now is the time to buy Toronto-Dominion Bank, because, fundamentally, 2017 is setting up to be a very strong year for this company.
Toronto-Dominion Bank is the best Canadian bank, and it has always traded at a premium compared to its peers in the Big Five, but more recently, the bank hasn’t had as big a premium as it had over its peers in the past. As the U.S. segment starts picking up next year, we can expect Toronto-Dominion Bank to see this premium increase as the valuation gap between its peers increases.
The company also has an unmatched risk-management strategy. A Canadian housing collapse will not affect Toronto-Dominion Bank as bad as it will its peers. A rout in commodity prices, as we’ve seen earlier this year, will not cause the stock to pull back as bad either. The company is very well diversified, and the U.S. segment is a huge competitive advantage that the company has over its peers.
Toronto-Dominion Bank is incredibly cheap right now, especially considering the tailwinds the company will be riding next year. The stock currently trades at a 1.7 price-to-book multiple, which is lower than its five-year historical average multiple of 1.8. The price-to-earnings multiple is in line with historical averages at about 13.3.
The company has a fantastic earnings and dividend-growth history, with a very impressive ROE of 17.27%. You may be wondering if the premium over the other banks is worthwhile, especially considering Toronto-Dominion Bank has a smaller yield of 3.4%. Some of the other Canadian banks yield over 4%, so, as a dividend investor, why would you buy into Toronto-Dominion Bank?
It’s a common misconception that Toronto-Dominion Bank is an overvalued Canadian bank because of the premium, but I believe this premium is not big enough considering the safety and growth potential offered by the stock.
The disappointing Q4 earnings report could be your last chance to buy Toronto-Dominion Bank at under $64. While investors are nervous regarding the disappointing Q4 report, you can load up on shares, as the stock is very well positioned to be the best-performing stock of the Big Five Canadian banks.
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Fool contributor Joey Frenette has no position in any stocks mentioned.