There’s no question that Toronto-Dominion Bank (TSX:TD)(NYSE:TD) will enjoy huge tailwinds that will propel its stock a lot higher over the next few years. Rising U.S. interest rates, lower U.S. corporate taxes, and terrific U.S. growth prospects are all catalysts that will make Toronto-Dominion Bank the top performer of the Big Five Canadian banks.
According to traditional valuation metrics, shares of Toronto-Dominion Bank appear more expensive than its peers in the Big Five. I believe the contrary is true as shares of Toronto-Dominion Bank may actually offer investors with the largest amount of value at current levels. The company has always traded at a premium to its peers, and there’s a good reason for this. The company has a fantastic management team that can manage risk effectively, and it grows by leaps and bounds organically as well as through acquisitions.
Toronto-Dominion Bank’s U.S. banking segment continues to be a powerhouse
Most of Toronto-Dominion Bank’s acquisitions have been in the U.S. retail division. The company has penetrated the U.S. market better than any of its peers in the Big Five and will be best positioned to reap the rewards from a strengthened U.S. economy under President Donald Trump.
Toronto-Dominion Bank still has more room to run in the U.S. market, and the management team will do everything in its power to unlock value for shareholders through strategic acquisitions to give the company an even larger presence in the U.S.
I believe Toronto-Dominion Bank’s impressive ability to grow in the U.S. market will allow it surpass the market cap of Royal Bank of Canada in a few years.
The safest dividend on the TSX?
Toronto-Dominion Bank has a majority of its earnings coming from the retail segment, which is a lower-risk business with predictable earnings. The company’s peers in the Big Five have its earnings coming from many other segments which are more volatile with less predictable earnings.
Warren Buffett values businesses whose future earnings can be easily predicted. This method allows investors to sleep at night knowing that earnings and dividends will increase by a consistent amount for any given year. This is why there’s a valuation premium on shares of Toronto-Dominion Bank. As Warren Buffett used to say, “It’s better to own a wonderful business at a fair price than a fair business at a wonderful price.”
The dividend-payout ratio is also on the low side when compared to its peers in the Big Five at 46%. This means the company has a safer dividend with a greater potential for growth over the medium term.
Toronto-Dominion Bank is a fantastic stock that is best positioned to be a huge winner in 2017. If you’re looking for a dividend-growth superstar to be your core holding, then look no further that Toronto-Dominion Bank. The stock may seem expensive, but it’s actually quite cheap right now.
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Fool contributor Joey Frenette has no position in any stocks mentioned.