The Toronto-Dominion Bank (TSX:TD) has been one of the best-performing large-cap TSX stocks this year. Up 8.8% for the year, it is easily outperforming the U.S. and Canadian stock markets.
TD currently has a dividend yield just under 5%. The dividend is well covered by earnings, with a very low 36% payout ratio. The question is, is TD stock a buy? In this article, I explore whether TD Bank is a buy for its dividend.
The fine and asset cap consequences
Why is TD stock rising so much this year?
In large part, it’s because the stock got beaten down so badly last year. That year, the bank took a $3 billion fine and a $430 billion asset cap as part of a money laundering settlement with the U.S. Department of Justice (DoJ). The stock went all the way down to $74 when these penalties were announced. Later, though, the bank put out a pretty good earnings release that showed the company was doing fairly well despite the penalties.
As a result of the asset cap, TD basically cannot grow its U.S. retail business anymore. However, it can use money that it takes out of its U.S. retail business to fund dividends and buybacks. It is doing a large buyback financed by U.S. retail asset sales this year. TD also has plenty of room to hike its dividend. So, TD’s dividend could well rise in the year ahead.
Areas where TD can still grow
Despite the fact that TD Bank can’t grow its U.S. retail business in the near future, it has growth opportunities in other areas of its business. Canadian retail banking should see modest single-digit percentage growth if the economy does not enter a recession. Investment banking – TD’s fastest-growing segment in recent quarters – could also continue to see decent growth. This year’s growth in investment banking (IB) fees may be interrupted by the likely recession the U.S. is entering, but TD has good long-term growth prospects in IB.
Valuation
One undeniable positive about TD today is its valuation. At today’s prices, the stock trades at 10.8 times earnings, 2.7 times sales and 1.3 times book value. These multiples are lower than average for North American mega-banks, so TD is among the cheapest of its peer group.
The dividend
Now, it’s time to answer the all-important question:
Is TD stock a buy for its near-5% yielding dividend?
As mentioned previously, the stock’s dividend is well covered by earnings. So the dividend is sustainable if the company’s earnings don’t decline this year. In my opinion, TD’s earnings probably won’t decline this year. Although the U.S. is likely going into a recession, TD is less invested in its U.S. retail segment than it was in the past. The prospects in Canada are also affected by Trump’s trade war, but not to the same extent that the U.S. is: Canada is only facing a trade war with one country, the U.S. is facing several. So Canadian retail should do okay this year.
Taking all of the above together, I think that buying TD for its dividend today should work out fairly well long term.
