Toronto-Dominion Bank (TSX:TD) has faced a tough stretch in recent years. With its stock down about 11.5% over the last three years, many investors are asking, “Has TD lost its shine?” While no one can predict the future with certainty, analyzing its past performance and the factors driving its business can help form an educated guess on where TD stock could be in three years.
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A long-term perspective: Past performance and resilience
Looking at the longer term, over the past decade, TD Bank still managed to deliver a solid return of 128%, or an annualized compound growth rate (CAGR) of about 8.6%. While this isn’t stellar, it’s still a positive, respectable return.
TD’s primary operations in retail banking — both in Canada and the U.S. — mean that the stock is highly sensitive to economic cycles. During the past two recessions, the bank stock saw significant declines in the range of 30-50%. However, the underlying business was far more resilient. Despite these sharp drops in the stock, TD’s adjusted earnings per share (EPS) fell by only 15-20%. In hindsight, these downturns often represented overreactions in the market, where investors feared worse outcomes than materialized.
Moreover, TD’s reliable dividend payout — historically sustainable thanks to its solid earnings — adds a layer of appeal for long-term investors. As of fiscal 2024, TD had a payout ratio of 52% of adjusted earnings, which suggests the dividend is well-supported by its earnings and should remain steady, even if the stock temporarily sells off. This suggests that when the stock sells off, it’s likely a good opportunity to buy the dip for long-term investors.
Three potential scenarios for TD stock’s future
With that background in mind, let’s explore three different scenarios for TD stock over the next three years.
The base case: Steady growth with modest returns
In a base-case scenario, where TD continues to deliver stable, predictable growth, it’s reasonable to project a 5% annual increase in its EPS. Assuming its stock valuation remains unchanged, the TD share price would reach about $90 in three years. This would provide a dividend yield of 5.4%, similar to what the stock yields today at $78 per share. If these projections hold true, investors could see annualized returns of approximately 10.3% — a solid, conservative outcome for the long term.
The bear case: Economic headwinds and lower growth
In a more pessimistic scenario, we might see slower earnings growth, say, just 3% per year. This could occur if we experience an economic downturn or sustained market volatility. In this case, TD stock could fall to about $77 per share. Despite the lower price, the dividend yield would likely rise to 7.6%, making it an attractive option for income-focused investors. However, the annualized return would be more modest at around 5%.
The bullish case: Strong growth and a rising valuation
On the flip side, in a bullish scenario where TD benefits from higher-than-expected earnings growth — let’s assume 7% annually — the stock could see a rise in valuation, potentially reaching $108 per share in three years. This optimistic outlook could generate annualized returns close to 17%, making TD one of the standout performers in your portfolio.
The Foolish investor takeaway
While past performance doesn’t guarantee future results, TD Bank’s strong track record, solid dividend, and position in the North American banking sector suggest it remains a valid investment. Whether the stock moves in a conservative, neutral, or more bullish direction, it’s clear that TD offers opportunities for those willing to hold for the long haul.
