Toronto-Dominion Bank’s (TSX:TD)(NYSE:TD) first-quarter earnings release shows just how sensitive the Canadian bank is to international phenomena; the Trump tax cut has affected TD more than any of its competitors, shaving more than $450 million off the bottom line of the lender due to the write-downs TD was forced to take on its portfolio of deferred tax assets.
As fellow Fool contributor Matt Litalien has pointed out, investors focusing on the company’s adjusted bottom line (net of one-off items such as write-downs to the company’s portfolio of assets aimed at reducing its tax exposure in the U.S.) will notice a marked increase in year-over-year profitability at TD.
This profitability has started to roll in during the company’s Q2 earnings results, with the bank posting strong adjusted earnings of $1.62 per share compared with analyst consensus estimates of $1.50 during this period. TD also saw an increase of more than 20% in bottom-line profitability growth over this time frame, suggesting the lender’s international assets may continue to be undervalued by financial markets.
I’m going to touch on why TD’s international portfolio is so important to Canadian investors, and why TD remains my top pick in the Canadian financials space for long-term investors.
Investments made over a long period of time contribute to today’s results
I have pointed out in the past that unlike some of TD’s peers, who have gotten into the mindset of investing in the U.S. only recently, TD has been on the forefront of this movement for a long time. In fact, many of the large acquisitions the company made happened following the financial crisis of 2008/2009, when banks in the U.S. looked unattractive to global players. In a sense, TD got a steal for many of its assets; it’s now holding a world-class portfolio of retail and commercial lending operations south of the border.
With prices for U.S. financials continuing to increase due to a number of Trump-related tailwinds, which are unlikely to abate any time soon, I prefer to invest in companies that had the foresight to see what was happening on the horizon and take advantage of previous market dynamics; in that sense, TD is unparalleled in its ability to provide value to shareholders, and it’s likely to continue to do so over the long term.
Rising interest rates domestically and abroad
The rising interest rate environment investors find themselves in will affect everything from their mortgage rate renewals to how they allocate capital in their long-term portfolios. Many sectors, such as utilities and real estate, have rightfully seen a devaluation relating to the prospectus for long-term cash flows due to the fact that the ability for such firms to earn profits is directly tied to interest rates and the attractiveness of the yields of these equities when compared to more attractive fixed-income alternatives.
Financials such as TD typically see increased profitability during times of rising interest rates due to a widening spread between what the lender is able to borrow at and the increasing market lending price to consumers. While mortgage volume is expected to slow somewhat, the fact that TD is so diversified globally allows Canadian investors to benefit from growth outside Canada to a much greater degree with TD compared to its peers.
Stay Foolish, my friends.
