The Motley Fool

A Generational Opportunity to Be Had With Toronto-Dominion Bank (TSX:TD) Stock?

If you’re like most investors who are fed up with Jay Powell’s overly hawkish non-data-dependent interest rate hike schedule, you may want to consider hedging your bets with some of Canada’s beaten-up banks, many of which are slated to benefit from higher net interest margins (NIMs) — the difference between the interest income a bank receives and the amount paid to its lenders — that come with higher rates both at home and south of the border.

“Fed up” with the Fed

On Wednesday, the Fed hiked the U.S. key rate, as many expected, causing both the markets and the loonie to tumble in lockstep. Chairman Powell then proceeded to forecast another two rate hikes scheduled for 2019 rather than backing away from his “autopilot” rate-hike schedule for a more data-dependent “one-and-wait” schedule that would have been a breath of fresh air for a market that’s on the verge of experiencing the worst December since the Great Depression.

There’s no question that Powell is aggressively tightening the interest rate switch, and assuming he doesn’t blow-up the global economy, quality blue-chip banks like Toronto-Dominion Bank (TSX:TD)(NYSE:TD) may turn out to be a generational buy for long-term buy-and-hold-forever investors.

The top performer gets punished

TD Bank was a huge winner in the last round of quarterly earnings releases for the big banks. For many of the other big banks, there were noticeable dents in the armour, but TD Bank was one of the few names that are firing on all cylinders. Investors don’t seem to care, however, as TD Bank has been battered just as badly as its less-than-stellar peers (like Bank of Montreal) that reported relatively weak third-quarter results in comparison.

Bank of Montreal is poised for a drastic slowdown in 2019, yet its stock has fallen to a similar magnitude as TD Bank since the last round of quarterly results. TD Bank scored over 17% ROE in 2018, EPS numbers are flying, and management is maintaining its guidance for 7-10% in EPS growth for 2019, despite the vast amount of macro uncertainties that could undoubtedly be a huge drag for all businesses.

At the time of writing, TD Bank trades at 9.9 times next year’s expected earnings, which is the cheapest the stock has been in recent memory. A single-digit forward P/E multiple for a premium name like TD Bank, I think, is ridiculous, especially since TD Bank is coming off one of the strongest quarters relative to its peers.

Foolish takeaway on TD Bank stock

Even as Jay Powell crashes the stock market, I still think TD Bank is a strong buy right here (after its 14% drop), because you’re getting a 4% dividend yield (over 21% higher than TD Bank’s five-year historical average yield) and double-digit dividend hikes over the next few years to help further dampen the volatility. Moreover, TD Bank looks best positioned to be the first bank roaring out of the gate when it comes time to rebound.

Who knows? President Trump may replace Powell in favour of a dove. If that happens, the recession risk will fall, and the bottom could be just a few percentage points away, causing the timely TD Bank discount to vanish as shares correct upwards.

Stay hungry. Stay Foolish.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Joey Frenette owns shares of TORONTO-DOMINION BANK.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.