Should You Buy TD Stock for Its 5.2% Dividend Yield?

TD Bank stock trades 27% from all-time highs, offering shareholders a tasty dividend yield of 5.2%. Is TD Bank stock a good buy?

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Canadian bank stocks have trailed the broader markets in the last two years due to higher interest rates. Several central banks, including the Bank of Canada, have hiked interest rates to offset inflation.

A higher cost of debt results in a tepid lending environment across sectors such as personal lending, commercial banking, mortgages, and auto loans. Moreover, several businesses and households need to account for higher interest payments, resulting in narrowing profit margins for corporations and a slowdown in consumer spending.

Additionally, banks have to accommodate for higher delinquency rates amid a deteriorating macro environment, dragging profit margins lower.

One large-cap TSX bank that has trailed the index by a wide margin is Toronto-Dominion Bank (TSX:TD). Down 27% from all-time highs, TD Bank currently offers you a tasty dividend yield of 5.2%. Is the TSX bank stock a good buy right now?

How did TD Bank stock perform in fiscal Q1 2024?

In fiscal Q1 2024 (ended in January), TD Bank reported earnings of $3.6 billion, or $2 per share. Its revenue growth stood at 5% due to higher fee income, contributions from TD Cowen, higher volumes and deposit margins in personal and commercial banking, and an improved environment for its markets-driven business.

TD’s provisions for credit losses, or PCLs, were higher due to consumer credit normalization and credit migration. Its Canadian personal and banking segment increased earnings by 3% to $1.8 billion due to loan and deposit volume growth.

Further, the company recorded its eighth consecutive month of market share gains in real estate-secured lending while personal banking deposits rose 3% sequentially.

In the credit card segment, TD continues to gain traction due to its Aeroplan program. Launched in early 2014, TD Aeroplan credit cards serve more than 1 million Canadians who have earned more than 300 billion points cumulatively on these cards.

However, retail bank earnings south of the border fell by 26% year over year to $752 million as sales declined by 6% due to lower deposit volumes and margins.

Is TD Bank stock undervalued?

Similar to other companies, TD Bank has embarked on a cost-cutting spree to boost the bottom line. Its restructuring program should generate $400 million in pre-tax savings in fiscal 2024, with annual run rate savings of $600 million.

The cost savings will be driven by a 3% reduction in employee count, real estate optimization, and asset impairments, providing the banking giant with the flexibility to reinvest in organic growth and acquisitions.

A lower cost base will allow TD Bank to grow adjusted earnings by more than 5% annually between fiscal 2025 and fiscal 2028. Priced at 10 times forward earnings, TD Bank stock is quite cheap, given its high dividend yield of 5.2%. These payouts have more than tripled in the last 15 years, enhancing the effective yield significantly.

In addition to regular dividends, TD Bank stock should help you benefit from capital gains, too. Analysts remain bullish on TD stock and expect it to surge over 13% in the next 12 months. After adjusting for dividends, total returns may be closer to 19%.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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