Canadian dividend investors are always searching for opportunities to buy top-quality stocks at reasonable prices.
Let’s take a look at Toronto-Dominion Bank (TSX: TD)(NYSE: TD) to see if it deserves to be in your portfolio right now.
Earnings
TD reported strong 2017 results, supported by solid performances in Canadian retail, U.S. retail, and wholesale banking operations. Fiscal 2017 adjusted net income came in at $10.6 billion, representing a 14% increase over 2016.
The Canadian retail segment generated a 9% increase in earnings, the U.S. retail group saw adjusted earnings rise 13%, and wholesale banking earnings rose 13%.
Management has set a medium-term earnings-per-share (EPS) growth target of 7-10%. The bank has a tendency to be conservative on its outlook, as we saw with 2017, so investors should feel comfortable with the guidance for this year and beyond.
U.S. presence
TD is widely known for its Canadian operations, but the company has a large presence in the United States, with branches running right down the east coast from Maine to Florida. In fact, TD has more branches south of the border than it does in Canada.
The U.S. operations, which also include TD’s part of TD Ameritrade, generate more than 30% of the company’s profits. This provides a nice hedge for investors in the event the Canadian economy hits a rough patch.
Risk
Some investors are worried that rising interest rates could trigger a wave of selling in the Canadian housing market. It’s true that a small percentage of homeowners will likely have to sell their properties when the time comes to renew their mortgages, especially if rates rise at a faster clip than expected.
Widespread defaults, while unlikely, would definitely hit house prices, and investors should keep this in mind when evaluating the Canadian banks.
Most analysts, however, expect the broader housing market to cool off at a measured pace on a year-over-year basis.
TD finished fiscal 2017 with $265 billion in mortgages on the books, of which 42% was insured. The loan-to-value ratio on the remaining mortgages was 50%, so house prices would have to fall significantly before TD has a material impact.
The company is well capitalized with a CET1 ratio of 10.6%.
Dividends
TD recently increased the 2018 dividend by 12%. The new quarterly payout provides an annualized yield of 3.8%. The bank has a 20-year compound annual dividend-growth rate of better than 10%, so investors should see the strong trend continue.
Should you buy?
The stock is down from $76 per share in March to $70, which is about 13 times trailing 12-month earnings. That’s not overly cheap, but TD rarely goes on sale and waiting for a sell-off often results in missed dividends and lost upside in the stock price.
The recent downward trend could continue in the near term, providing a better entry point, but investors looking for a top-quality dividend pick for a buy-and-hold portfolio might want to start nibbling on TD today.
