Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is arguably Canada’s best bank. I believe shares of TD deserve to trade at a substantial premium to its Big Six peers. The management team has an excellent risk-management strategy to mitigate the effects of a severe economic downturn, so investors can sleep comfortably at night knowing that TD Bank will probably be the first out of the gate when it comes time to rebound. At the other end, if the economy continues to pick up from here, then there are a tonne of reasons to be excited if you’re a shareholder of TD Bank.
In general, the Canadian banks are just great. You could have a monkey throw a dart at a board of the Big Six banks to figure out which one to buy, and you’d still do very well over the long term. Canada’s banks have shown over many decades that they’re reliable holdings that can help a long-term investor snowball their profits. They’re truly buy-and-hold forever stocks! Although you can’t go wrong with any Big Six Canadian bank, there are many reasons to prefer TD Bank over the others.
First, TD’s U.S. business is head and shoulders above that of any Canadian bank. TD has more branches in the U.S. than it does in Canada, which is a good thing, especially when you consider how unstable the Canadian economy can be at times.
Why is a solid U.S. presence so important today?
Trump’s pro-growth agenda is still in the cards, and that’ll likely cause the Federal Reserve to take a more hawkish tone over the next few years. Higher interest rates, lower corporate taxes, and higher consumer spending are all positive trends that’ll be working in TD Bank’s favour over the next few years. That means exceptionally strong results from the U.S. business can be expected over the next couple years thanks in part to various tailwinds.
Second, TD Bank has a retail banking focus, which provides a less volatile stream of earnings. A less volatile earnings stream can be labelled as “higher-quality,” especially considering how volatile and unpredictable the Canadian market can be. The U.S. exposure and retail banking focus forms an extremely robust foundation that investors can rely on through thick and thin.
Fantastic third-quarter results could be the start of a sustained rally
In the most recent quarter (Q3 2017), TD Bank clocked in an EPS of $1.51, crushing analyst expectations of $1.37, which caused shares to surge in the trading session that followed. Revenue and net income increased by 6% and 17% to $9.2 billion and $2.7 billion, respectively. It was truly an outstanding quarter thanks to the Canadian and U.S. retail segments, which showed strength in its operations. I believe the post-earnings rally was warranted and could be the start of a rebound to the $70 levels over the short term.
Bottom line
TD Bank showed strength in the latest quarter, and suddenly, many investors forgot about the short-term issues that were plaguing the stock earlier in the year. TD Bank has a high-quality earnings stream and a strong U.S. foundation that can be built on further for many years.
As more tailwinds mount, expect more terrific quarters like this over the next five years. TD Bank is worth every penny of its premium valuation, and I would strongly encourage investors to initiate a position before shares take off.
Stay smart. Stay hungry. Stay Foolish.
