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.
