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Why Toronto-Dominion Bank Is up Over 2%

Toronto-Dominion Bank (TSX:TD)(NYSE:TD), Canada’s largest bank as measured by assets, announced its third-quarter earnings results before the market opened this morning, and its stock has responded by rising over 2% in early trading. Let’s break down the quarterly results and the fundamentals of its stock to determine if the rally can continue and if we should be long-term buyers today.

A very strong quarterly performance

Here’s a quick breakdown of 10 of the most notable financial statistics from TD Bank’s three-month period ended on July 31, 2017, compared with the same period in 2016:

Metric Q3 2017 Q3 2016 Change
Net interest income $5,267 million $4,924 million 7.0%
Non-interest income $4,019 million $3,777 million 6.4%
Total revenue $9,286 million $8,701 million 6.7%
Adjusted net income $2,865 million $2,416 million 18.6%
Adjusted diluted earnings per share (EPS) $1.51 $1.27 18.9%
Total assets $1,202.4 billion $1,182.4 billion 1.7%
Total deposits $773.9 billion $757.9 billion 2.1%
Total loans, net of allowance for loan losses $592.4 billion $571.6 billion 3.6%
Total equity $73.5 billion $71.2 billion 3.2%
Book value per share $36.32 $35.68 1.8%

What should you do with the stock now?

It was a phenomenal quarter overall for TD Bank, and it posted a very strong performance in the first nine months of fiscal 2017, with its revenues up 5.1% to $26.88 billion, its adjusted net income up 15% to $7.98 billion, and its adjusted diluted EPS up 14.8% to $4.18. The second-quarter results also crushed the consensus estimates of analysts polled by Thomson Reuters, which called for adjusted diluted EPS of $1.36 on revenue of $8.74 billion.

With all of this being said, I think the post-earnings pop in TD Bank’s stock is warranted, and I think it still represents a great investment opportunity for the long term for two fundamental reasons.

First, it’s still undervalued. Toronto-Dominion’s stock still trades at just 12.4 times fiscal 2017’s estimated adjusted EPS of $5.37 and only 11.7 times fiscal 2018’s estimated adjusted EPS of $5.71, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 13.1. These multiples are also inexpensive given its current earnings-growth rate and its estimated 7.9% long-term earnings-growth rate.

Second, it has a fantastic dividend. TD Bank currently pays a quarterly dividend of $0.60 per share, equal to $2.40 per share annually, which gives it a generous 3.6% yield. Investors must also note that its recent dividend hikes, including its 9.1% hike in March, have it positioned for 2017 to mark the seventh consecutive year in which it has raised its annual dividend payment, and it has a target dividend-payout range of 40-50% of its adjusted net income, so I think its continually strong growth will allow this streak to continue for the foreseeable future.

With all of the information provided above in mind, I think all Foolish investors should strongly consider initiating long-term positions in TD Bank today with the intention of adding to those positions on any significant pullback in the future.

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Fool contributor Joseph Solitro has no position in any of the stocks mentioned.

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