Why Toronto-Dominion Bank (TSX:TD) Stock Is Still a Strong Buy

Here’s why you should consider buying Toronto-Dominion Bank (TSX:TD)(NYSE:TD) for total returns and a growing dividend.

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Toronto-Dominion Bank (TSX:TD)(NYSE:TD) stock tends to outperform its peers and the market. Despite popping 2% after reporting its fiscal second-quarter results, TD stock is still a strong buy.

Why TD stock rose after reporting earnings

After reporting its fiscal Q2 2019 results on Thursday, TD stock rose 2.2%. TD Bank did markedly better than it did in the first quarter, which indicates that the first-quarter lackluster results were likely a short-term phenomenon.

For the quarter, TD Bank reported adjusted earnings-per-share growth of 8% over the same period in the prior year, a profound improvement from the 0.6% growth of fiscal Q1 over the same period in the prior year.

The highlight goes to TD Bank’s U.S. Retail segment, which saw adjusted net income growth of 20% (15% in U.S. dollars) to $1.26 billion (US$948 billion) against the same quarter in the prior year.

Its Wholesale business also witnessed a rebound to profitability from a small loss in the first quarter, resulting in net income of $221 million for the quarter.

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TD Bank’s recent results

For the first half of the fiscal year, TD Bank saw healthy revenue growth of 7.2%, while adjusted diluted earnings per share increased by 4.4% to $3.32. There was an obvious drag on the bottom line from the first-quarter results.

TD Bank’s financial position remains strong. At the end of Q2, it had total assets of more than $1.3 trillion (up 5.6% year over year), total deposits of $875 billion (up 5.5% year over year), total loans of $663 billion (up 6.7% year over year), and total equity of $84.9 billion (up 10.7% year over year). Additionally, the bank’s common equity tier 1 capital ratio was solid at 12% (up 200 basis points year over year).

Why TD stock is still a strong buy

TD is a quality stock that offers outperforming returns and a safe, growing dividend. At about $75.50 per share as of writing, it’s still slightly undervalued trading at a blended price-to-earnings ratio of about 11.3 compared to a long-term normalized multiple of 12.1.

Although the growth may be slower this year, the bank expects longer-term growth of 7-10%; combined with its yield of 3.9% at writing, TD stock can deliver long-term returns of about 11-14% per year. These estimated returns are excellent for a quality stock like TD.

This year, TD’s payout ratio is estimated to be about 43%. So, it’s reasonable to expect dividend growth that could be slightly higher than its actual earnings growth assuming that the bank were willing to steadily expand its payout ratio towards 50%, which would align with its big Canadian peers.

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 Kay Ng owns shares of The Toronto-Dominion Bank.

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