A stock that you can hold for life is the “holy grail” of Tax-Free Savings Account (TFSA) investing. The practice of buying and selling stock is stressful, time-consuming, and prone to causing underperformance. But if you can find a quality TFSA stock that takes you up and up year after year, you can rest easy and make money. In this article, I share my number one weighted TFSA stock and why I’ll never let it go.
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TD Bank
Toronto-Dominion Bank (TSX: TD) is my number one TFSA stock. I hold 168 shares of this stock: 108 in my TFSA and 60 in my Registered Retirement Savings Plan (RRSP). While I might sell a portion of the stock from time to time — it is getting a little pricey these days — I have no intention of ever completely exiting. The company is a strong one, with a dominant position in Canadian banking, and it has a conservative approach to balance sheet management, with high capital and liquidity ratios. I see the stock as a source of dividend income that I can count on for decades.
Strong fiscal management
The biggest thing that TD Bank has going for it, on a long-term basis, is its conservatism. History has shown that banks that are prudent and disciplined in their lending fare better than those that try to strike it rich. The reason is that banks are heavily leveraged, and those that take on many risky loans/high interest deposits without corresponding high-quality liquid assets are at elevated risk of failing.
TD excels on this score. The bank has excellent risk management practices, as evidenced by its 14.5% common equity tier one (CET1) ratio and its 146% liquidity coverage ratio. The CET1 ratio measures how much high-quality capital (treasuries, common equity, etc) it has to back up its deposits. The liquidity coverage ratio dictates how many high-quality liquid assets a bank has relative to expected 30-day outflows. The higher a bank’s CET1 and liquidity coverage ratios, the better. The Basel III minimum CET1 ratio is 4.5%, so TD is a full 10% ahead of the minimum. Likewise, TD’s 146% liquidity coverage ratio is well ahead of the 100% minimum. So, TD is a stable bank that manages its risks well.
A strong brand
Strong fiscal management is not the only thing a bank needs to survive. A bank can have high CET1 and liquidity ratios and still suffer issues if there’s a big enough run on it. It’s here that trust comes into play. A bank that depositors trust is likely to see stable balances and little need to actually utilize its liquid assets. TD really shines here. The bank has a great brand and enjoys high trust from Canadians. In the U.S., it has taken some reputational damage related to money laundering issues, but that doesn’t appear to have harmed its reputation with retail depositors. So, TD’s brand provides strength that investors can count on.
Valuation
Last but not least, TD Bank is both performing well and modestly valued. Its last several quarters showed substantial growth on a year-over-year basis, despite the asset cap the bank is under in the United States. For example, last quarter, the bank’s adjusted revenue grew 7%, and its adjusted earnings grew 20%. Despite the growth, the bank trades at a relatively modest 17 times earnings and 2.12 times book. These multiples are actually slightly high by bank standards, but are far below average for both the TSX Index and the S&P 500. So, relatively speaking, TD still looks like a decent TFSA stock to hold today.
