Buying quality stocks on the dip is one of the most profitable investment strategies out there. It’s one of the main ways Warren Buffett made his wealth, and it tends to work for small-time investors as well. Of course, determining what is really “quality” is the tricky part of this strategy. Sometimes, companies simply fail, and their shares go all the way to $0. But other times, you find true quality on sale. In this article, I will explore one magnificent Canadian dividend stock down 18% to buy and hold forever.
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TD Bank
Toronto-Dominion Bank (TSX:TD) is Canada’s second-biggest bank by assets. It has historically been one of the country’s fastest-growing banks as well. The bank launched a massive U.S. expansion push in the mid-2000s that resulted in TD branches being common sights in New York and throughout New England. Since then, the bank has grown faster than its Big Six peers.
Why it got beaten down
More recently, TD’s U.S. growth story hit a snag when the bank got caught up in a money laundering scandal. What happened was that tellers in New Jersey, New York and Florida got caught laundering money for cartels. The U.S. Department of Justice (DoJ) investigated the bank and ultimately found the corporation liable for what the tellers had done because it lacked proper controls to prevent the tellers from doing it. The DoJ ultimately fined TD $3 billion and capped its U.S. retail assets at $430 billion. As a result, apart from investment banking, TD can no longer grow in the United States.
A large buyback
Although the DoJ fine and asset cap were major penalties for TD, they weren’t without their positives. The asset cap, for example, freed up a lot of cash. In order to comply with the asset cap, TD has to remove money from its U.S. retail business whenever the segment’s assets approach $430 billion. The money can be put into other segments (e.g., Canadian Retail or U.S. Investment Banking) or spent on dividends and buybacks. TD appears to be going with the latter approach. After selling about $8 billion worth of Charles Schwab shares to comply with the asset cap, the bank then announced it would use the money to finance a buyback. The buyback is currently ongoing and is likely a big part of why TD stock is widely outperforming the market this year.
Profitability
Despite the fine TD took last year, the bank remains quite profitable, with a 16.5% profit margin, a 7.5% return on equity and a 0.42% return on assets. These figures are a little below average for a large Canadian bank, but they should improve as the $3 billion fine fades into the rearview mirror.
Valuation
Last but not least, TD Bank is among the cheapest of large North American banks, trading at just 11 times adjusted earnings and 1.3 times book value. This is much cheaper than Royal Bank and Bank of America. Despite this, TD is comparable to those banks in terms of profitability and growth. So, TD appears to be a bargain today.
