Bank stocks remain under pressure in 2023 and have underperformed the broader markets in the last two years. For instance, shares of Toronto-Dominion Bank (TSX:TD) are trading 28% below all-time highs, valuing the company at $141 billion by market cap.
However, the pullback has increased the dividend yield for TD Bank to a juicy 5%, making the TSX stock attractive to income-seeking investors. The dividend yield of a company is inversely related to its share prices. So, a selloff may be an ideal opportunity to buy a quality dividend stock at a discount and benefit from outsized gains and elevated yields over time.
Should you buy TD Bank stock for its dividend yield?
The last time TD investors enjoyed such a high yield was during the onset of the COVID-19 pandemic, when the equity markets remained under pressure. Prior to that, TD stock offered investors a dividend yield of more than 7% during the financial crisis of 2008-09.
You would have returned around 622% in dividend-adjusted gains if you invested in TD Bank stock when it traded near multi-year lows in early 2009. Comparatively, the TSX index would have returned just 253% in this period.
Unlike their banking peers in the U.S., several big banks in Canada are equipped with strong balance sheets and robust liquidity positions. While several U.S. banks cut or suspended dividends during the Great Recession in 2008, TD Bank could maintain these payouts, showcasing the resiliency of its business model.
TD Bank currently pays shareholders an annual dividend of $3.84 per share, and these payouts have risen by 9.4% annually in the last 20 years, which is exceptional for a cyclical company.
What is the target price for TD Bank stock?
TD Bank is among the largest companies in Canada. Its retail banking division has a sizeable presence in the U.S. and Canada, allowing it to enjoy a low degree of volatility compared to peers with higher exposure to the capital markets segment.
If you combine TD Bank’s entrenched position in Canada with a conservative loan book and lower-than-average earnings volatility, you have a stock that commands a premium multiple.
However, in the last 20 months, federal banks in most developed markets have hiked interest rates to offset inflation. The rising cost of debt has resulted in a tepid lending environment and rising delinquency rates.
In the fiscal third quarter (Q3) of 2023 (ended in July), TD Bank reported adjusted earnings of $1.99 per share, compared to earnings of $2.09 per share in the year-ago period. However, the banking giant ended the quarter with a common equity tier-one capital ratio (CET1) of 15.2%, which is quite high when compared to other banks in North America.
The CET1 ratio measures a bank’s ability to withstand economic shocks and downturns, and a higher ratio is favourable.
Priced at 9.3 times forward earnings, TD Bank stock is very cheap, given its high dividend yield and earnings growth estimates. Eight out of the 16 analysts have a “buy” recommendation for TD stock, while the rest recommend “hold.” The average target price for TD Bank stock is $92.18, which is 15% higher than current prices.
