Canadian bank stocks are continuing to underperform the TSX Composite Index in 2024 so far. While the TSX benchmark trades with 3.3% year-to-date gains after rising to an all-time high last week, shares of most large Canadian banks are in the negative territory. However, the ongoing dip in the financial sector has made shares of Toronto-Dominion Bank (TSX:TD) look even more attractive as they currently trade with nearly 9% year-to-date losses.
In this article, I’ll give you three top reasons why TD Bank stock is a good buy today despite the challenging macroeconomic environment that has pressured the banking industry of late.
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Strong earnings growth and resilience
TD Bank reported the first quarter (ended in January) of its fiscal year 2024 results on February 29, beating analysts’ expectations on both revenue and earnings. Although the bank’s net profit during the quarter trended downward on a YoY (year-over-year) basis, its adjusted earnings per share of $2 per share exceeded Street analysts’ expectation of $1.89 per share.
To add optimism, TD Bank’s quarterly revenue also grew positively by 4.7% YoY to $13.7 billion, driven by strong performance in its Canadian personal and commercial banking segments as well as its wealth management and insurance segment. Notably, this was the 11th consecutive quarter when the bank exceeded Street’s revenue estimates. The bank also improved its adjusted efficiency ratio to 57.4%, down from 58.7% in the previous quarter, reflecting its focus on better cost control amid tough economic times.
While negative factors such as rising provisions for credit losses affected its earnings in the latest quarter, TD Bank’s financial results were impressive, especially considering the impact of the high inflation and elevated interest rates on the economy and consumers.
Focus on growth-oriented acquisitions and expansion
Even as macroeconomic challenges continue to take a toll on the banking sector, TD Bank remains focused on enhancing its long-term growth potential.
Last year, the bank completed the acquisition of the American investment bank firm Cowen, which is now known as TD Cowen. Interestingly, in the January 2024 quarter, TD Cowen contributed positively to TD Bank’s overall fee income from its market-driven businesses. Similarly, its decision to invest in Charles Schwab, the American financial services giant, added about $194 million to TD Bank’s earnings in the latest quarter.
Moreover, TD Bank has a strong financial base, supported by a diversified revenue mix and a robust liquidity profile, which could help it fund more such growth-oriented acquisitions and investments in the future.
TD Bank’s attractive dividend yield
It’s important to note that a selloff in TD Bank started in 2022 when the Bank of Canada began to rapidly raise interest rates to tame the rising inflation in the post-pandemic era. As a result, TD Bank stock has lost over 19% of its value since the end of 2021 to currently trade at $78.28 per share with a market cap of $138.2 billion.
These steep declines in its share prices, however, have created a rare opportunity for long-term income investors to lock in a high dividend yield of 5.3% at the current price level. This is significantly higher than its five-year average dividend yield of around 4.3%, making TD Bank stock even more attractive to buy on the dip today.
