Investing in quality blue-chip stocks and holding them for several years allows you to benefit from the power of compounding.
For instance, a $1,000 investment in Toronto-Dominion Bank (TSX:TD) stock 20 years back would be worth $3,696 today. After adjusting for dividends, cumulative returns are closer to $7,640. Comparatively, a $1,000 investment in the TSX index would have ballooned to $4,500 in this period after adjusting for dividends.
While TD has outpaced the broader markets in the past, let’s see if the banking giant is positioned to deliver attractive returns going forward.
An overview of TD Bank
Toronto-Dominion Bank is among the largest banks in Canada. Valued at a market cap of $145 billion, TD Bank enjoys an entrenched position in Canada. The banking industry is heavily regulated in Canada, resulting in high entry barriers for new players and low competition for incumbents.
A conservative lending approach allows TD Bank to withstand economic downturns with relative ease while maintaining its dividend payout.
TD currently offers shareholders an annual dividend of $4.08 per share, translating to a yield of 5%, which is very attractive. Moreover, in the last 20 years, these payouts have risen at an annual rate of 9.4%, which is exceptional for a cyclical company.
How did TD Bank perform in fiscal Q4 of 2023?
In fiscal 2023 (ended in October), TD Bank reported adjusted earnings of $15.1 billion and adjusted earnings of $7.99 per share. Due to an uncertain business environment, TD Bank’s earnings fell by 4% year over year in fiscal 2023, even though sales were up 12%.
TD’s expenses surged by 25% in the last four quarters due to higher employee-related expenses, higher acquisition-related charges, and charges related to the termination of the First Horizon deal.
Despite a challenging macro environment, TD’s loans grew 2%, and deposits were up 1% sequentially, allowing the company to widen its net interest margin by four basis points.
TD launched the First Home Savings Account in the fiscal fourth quarter (Q4), adding another revenue stream for the financial services behemoth.
In the U.S., TD Bank’s earnings stood at $946 million in Q4. Its personal loans grew by 12%, and business loans surged by 9% year over year south of the border. Moreover, in the commercial banking business in the U.S., middle market and specialty lending verticals were up 22% and 12%, respectively, in Q4.
The wealth management and insurance segment business grew sales by 9% year over year, with earnings of $501 million, showcasing the strength of TD’s diversified business model.
A focus on costs
Similar to several other companies, TD is focused on lowering its cost base and improving operational efficiencies. Its restructuring program has been driven by TD’s investments in technology and the widening of its digital capabilities.
In Q4, TD undertook certain measures to reduce operating costs, resulting in a restructuring charge of $363 million. It expects to generate $400 million in pre-tax savings this year and an annual run rate savings of $600 million. Priced at 10.2 times forward earnings, TD Bank stock is very cheap and trades at a discount of 10% to consensus price target estimates.
