Mimic Warren Buffett With Canada’s 2nd-Biggest Bank

Warren Buffett is a big fan of U.S. banks, and TSX investors can mimic Buffett’s plays with Canada’s most American bank, Toronto-Dominion Bank (TSX:TD)(NYSE:TD).

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Warren Buffett is a fan of American banks. This fact is made abundantly clear by his holdings, which include a number of financial stocks — both commercial and investment banks. In the third quarter of 2018, Buffett loaded up on $13 billion worth of U.S. bank stocks, bringing his total holdings in the sector to $75 billion.

That’s quite a vote of confidence in U.S. finance. But what about Canadian investors, who would like to piggyback off the Oracle’s wisdom while supporting Canadian companies? Sure, you can emulate Buffett by picking up Bank of America shares. But there’s something romantic about supporting the home team by investing in domestic stocks.

So, is there any way for Canadian investors with a domestic preference to piggyback off Buffett?

Surprisingly, yes. Although all Canadian banks earn the lion’s share of their revenue from domestic operations, there is one Big Five bank that’s growing by leaps and bounds in America. And its U.S. growth is so frothy that it may even overtake the company’s domestic operations.

Toronto-Dominion Bank (TSX:TD)(NYSE:TD)

TD is one of Canada’s most ubiquitous financial institutions. It had a long run as Canada’s biggest bank by market cap, although it was recently overtaken by Royal Bank of Canada. TD has long been an analyst favourite, owing to its combination of growth and stability. But apart from its overall strong financial picture, there’s one very specific reason for investors to consider putting some of their assets in TD shares. And it plays in perfectly with Warren Buffett’s love for U.S. banks.

Huge growth in the U.S.

It’s no secret that TD Bank is growing in the U.S. In Q4, TD’s U.S. retail banking business grew by 44% year over year. Not only is this strong growth, but the growth accelerated, as Q4 2017 saw only 11% growth over 2016.

Owing to the strong growth, TD’s U.S. retail business is on the verge of overtaking Canadian retail as the company’s largest business segment. This makes TD the most American of Canadian banks — and, more importantly, gives the stock tonnes of room to grow in a larger market where it’s currently a relatively small player.

Other considerations

TD’s strong U.S. growth is the main reason for Buffett-admirers to consider the stock. But there are other factors that make TD a good bet for any investor, including its moderately strong 9% earnings growth, above-average dividend yield, high profit margin (30%), and decent ROE (15%).

That said, when it comes to TD, that U.S. retail business is everything. TD is only the eighth largest retail bank in America, which means it has plenty of room to grow before the law of diminishing marginal returns catches up with it. As TD’s U.S. retail business gets bigger, we could see the company’s earnings growth start to accelerate, as its fastest growing-sector will make up a larger share of earnings.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned.

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