The Motley Fool

Toronto-Dominion Bank (TSX:TD) Is Eating Everyone’s Lunch

As of Thursday last week, Canada’s Big Five banks reported second-quarter earnings. Although each posted strong earnings, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) stood out as the clear winner.

Did you know?  The banking index is in negative territory this year, and TD is the lone member of the Big Five whose share price has a positive return. Although not spectacular, its 2% year-to-date (YTD) return is impressive given the downward pressure on the sector.

Earnings impress

Each of the Big Five beat analysts’ estimates. TD’s 8% beat was the biggest of them all, double that of the average. Impressive.

TD’s adjusted net profit, which strips out one-time items, increased by 17% year-over-year (YOY). This was also tops among its peers.

The bank’s significant U.S. operations, which account for 29% of the company’s profit, is one of the reasons for its outperformance. Toronto- Dominion’s Canadian and U.S. Retail Net Interest Margin (NIM) continues to trend upwards as it benefits from rising rates both sides of the border.

As long as rates rise, TD will continue to benefit more than most.

Historical outperformance

Earlier, I pointed to TD being the only bank in positive territory this year. Skeptics may point to this being a short-term view. I concur, so allow me to bring forward additional information.

TD has outperformed the Big Five over the past year, five year and 10 year periods. Its five-year outperformance is particularly impressive. It has returned 85%, while Bank of Montreal (TSX:BMO)(NYSE:BMO) is a distant second with a 67% return.

It’s hard to argue with that type of performance.

Dividend growth

Not only have TD investors enjoyed greater capital appreciation, they have also enjoyed outsized dividend growth. TD is a Canadian Dividend Aristocrat, having raised dividends for seven straight years.

In the first quarter, TD extended its streak by raising dividends by 11.7%. This is double that of the annualized growth of the other banks.

The best part? It also has the lowest payout ratio of the Big Five. This means that investors can enjoy dividend growth well into the foreseeable future.

Premium valuation

TD is currently trading at 13.3 times earnings and at 2.0 times book value. Although not expensive compared to the market, these are tops among its peers.

Keep in mind, over the past number of years, TD has commanded a premium over its peers. The reason? TD has consistently outperformed Canada’s biggest banks.

So yes, it commands a premium because it’s eating everyone’s lunch!

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Fool contributor Mat Litalien is long Toronto-Dominion Bank and Bank of Montreal.


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