The big banks of Canada have generated inflation-beating wealth for long-term shareholders, showcasing the resiliency of their business models. For instance, shares of Toronto-Dominion Bank (TSX:TD) have returned 286% to investors in the last 20 years.
After adjusting for dividends, these returns are much higher at 738%. Comparatively, the TSX index has returned 361% in dividend-adjusted gains since January 2004. In addition to capital gains, TD stock’s investors have derived a majority of their upside from dividends.
Currently trading 23% below all-time highs, TD Bank stock offers a tasty dividend yield of 4.70%. As historical gains don’t matter much to potential investors, let’s see if TD Bank stock is a good buy right now.
TD Bank stock is trailing the market
The Canadian banking sector is highly regulated, allowing market leaders, including TD Bank, to enjoy entrenched positions for several decades. Moreover, TSX banks have a conservative lending approach, which limits their growth. But, it also ensures that TD and its peers are armed with strong financials and robust balance sheets, allowing them to thrive across business cycles and maintain their high dividend payouts.
Valued at $148 billion by market cap, TD Bank is one of the largest banks in North America. It derives a sizeable portion of revenue from the U.S., a region where TD aims to gain further traction.
In 2022, TD Bank disclosed plans to acquire First Horizon, a U.S. bank with a strong presence on the East Coast. It also planned to acquire Cowen, an investment banking company. While TD completed the acquisition of Cowen in 2023, it had to shelve plans to acquire First Horizon as U.S. regulators raised concerns over TD’s lack of money laundering control mechanisms.
Further, a tepid lending environment due to rising interest rates coupled with higher delinquencies has acted as headwinds for TD Bank stock in the last two years.
What’s next for TD Bank stock?
TD Bank ended the recent quarter with a tier-one capital ratio of 14.4%, the second highest among North American banks. The ratio measures a bank’s ability to withstand an economic downturn, and a higher ratio is favourable.
TD Bank is focused on expanding south of the border and has opened 18 new locations in the U.S., driving future cash flows and earnings higher.
The Canadian big bank pays shareholders an annual dividend of $4.08 per share and has increased these payouts by 9.4% annually in the last 20 years, which is exceptional for a company part of a cyclical sector.
The ongoing pullback allows investors to buy quality blue-chip stock at a discount and benefit from outsized gains when market sentiment improves.
Priced at 10 times forward earnings, TD Bank stock trades at a reasonable valuation, given its high dividend yield. Additionally, once the macro situation improves and interest rates are lowered in the second half of 2024, TD Bank should continue to grow earnings at a higher pace.
Out of the 16 analysts tracking TD Bank stock, eight recommend “buy,” and eight recommend “hold.” The average target price for TD Bank stock is $89.7, indicating an upside potential of 8%.
