Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is one of the few dividend-growth kings that you can comfortably buy for your TFSA on any form of weakness without the need to worry about moat deterioration or any other long-term implications.
Not only is the bank a wonderful outlet into the red-hot U.S. market, but TD Bank has one of the best risk-management strategies out there, making it better insulated from a single point of failure (like a Canadian housing collapse) than many of its peers in the Big Six. TD Bank has also been one of the most conservative lenders out there, so newly announced mortgage rules really won’t cause any detrimental effects to the top or bottom line. This conservative approach has led to vastly fewer loan losses and a lower implied volatility on the earnings front.
Moreover, TD Bank’s focus on retail banking has also helped pave the way for a lesser amount of earnings volatility. It’s this lack of volatility that has made TD Bank one of the highest-quality premium banks of the Big Five. And that’s not even taking into consideration management’s commitment to embracing of technology to future-proof itself from potential up-and-coming disruptors in the FinTech space.
The large number of software patents that TD Bank has made over the past few years leads me to believe that TD Bank is treating the tectonic shift the industry is about to face as an opportunity to get the leg-up on its peers through patented technological applications that will give the company a durable competitive edge over peers that will be inclined to follow suit.
Given the immense disruption that technology is going to have on the financial services industry, TD Bank realizes that to protect its business from disruption, it’s going to need to double-down on tech, whether it’s through filing patents to protect innovative new tech applications or through the acquisition of smaller FinTech firms for their talent pools.
With all this in mind, it’s not a mystery why shares of TD Bank have historically traded at a hefty premium over its peers. At the time of writing, though, TD Bank shares are down over 8% from their 52-week high. And although worthy of a premium multiple, the stock is not the most expensive Canadian bank based on its trailing P/E multiple. That title goes to Royal Bank of Canada for the time being. TD Bank stock trades at a 11.3 forward P/E and a 1.9 P/B, both of which are lower or in line with its five-year historical average multiples of 13.3 and 1.9, respectively. The dividend yield, currently at 3.8%, is also 0.5% higher than it normally is.
Given TD Bank’s lower volatility and evidence of its technological innovation, I think shares are an absolute bargain at these levels, so those with room in their TFSAs should strongly think about initiating or adding to their position today, because I don’t think this discount will be sticking around forever.
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