The Toronto-Dominion Bank (TSX: TD) has been one of Canada’s best performing bank stocks this year. Up 14% year-to-date as of this writing, it has handily outperformed both the TSX and the TSX financials sub-index. Investors who bought TD stock when it was going through its U.S. regulatory struggles last year have been well rewarded.
The question is, where does TD go from here? The fine and asset cap the U.S. DoJ gave the bank resulted in the bank freeing up a lot of cash. It put $8 billion worth of that cash into a brand new buyback program. The ongoing buyback might be part of the reason why the stock is up this year, when the TSX is flat and TSX financials are down slightly.
Despite the regulatory issues it has been facing, TD stock has many growth areas that could drive gains in the years ahead. In this article, I’ll explore where I think TD stock will be in three years’ time.
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Recent earnings
TD Bank’s recent earnings release was fairly strong. In the quarter, the company reported:
- $12.8 billion in earnings, up 0.84% year over year (though down from the prior quarter).
- $2.8 billion in net income, down 1.1% year over year.
- $1.55 in earnings per share (EPS), unchanged.
You can see the effect of TD’s buybacks in the metrics above. Although the company’s net income declined substantially, its EPS was flat. That’s because a buyback reduced the number of shares outstanding. In the subsequent section, I will explore TD Bank’s buyback in detail.
The big buyback
TD Bank’s recently announced buyback program is worth $8 billion. TD got the money for the buyback by selling off its Charles Schwab stake and some other investments. The buyback will retire 100 million shares, or 5.7% of TD’s total shares outstanding. That is a decent buyback yield. TD stock yields about 4.9%, so if the buyback is concluded in the next 12 months, the total shareholder yield will be 10.6% (5.7% buyback yield plus 4.9% dividend yield).
Other factors
It’s worth exploring how TD will fare in the years ahead. Although the $8 billion buyback is good, it comes from removing assets from TD’s U.S. retail business. So, growth in that segment will be slow or negative in the year ahead. However, growth has been positive in TD’s Canadian retail business, and in its investment banking business. The investment banking segment grew its earnings 46% year over year last quarter. So, that segment is worth keeping an eye on.
Final verdict: between $120 and $150
Taking into account everything discussed in this article, I suspect that TD stock will be somewhere between $120 and $150 in three years’ time. The bank would get to these levels if it reached a P/E ratio typical of large North American banks. This scenario assumes no earnings growth over the next three years. The bank may well see some growth in the next three years, as it has a fast-growing investment banking business and solid Canadian operations. So, I’m quite optimistic about TD bank stock today.
