High yield opportunity with TD

Toronto Dominion Bank or TD Bank is the fifth largest bank in North America by total assets. The bank offers a full range of financial products and services to 26.5 million customers worldwide.

It operates through three business lines:

  • Canadian retail accounting for 58% of earnings (TD Canada Trust, Business Banking, TD Auto Finance, TD Wealth, TD Direct Investing and TD Insurance),
  • US retail (28% – TD Bank, TD Auto Finance, TD Wealth and investment in TD Ameritrade), and
  • Wholesale banking (14% – TD Securities).

TD Bank has a large presence with more than 2,300 retail branches and over 6,200 ATMs in North America and 15 TD Securities offices worldwide.

The bank operates in four of the top 10 metropolitan areas and 70% of its operations are in the wealthiest states of the U.S. It is one of the tenth largest banks in the US.

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Revenue Growth & Market Exposure

TD Bank occupies the #1 or #2 market share position for most of the retail products in Canada and has a composite market share of 21%. It enjoys the top two investment dealer status in Canada and continues to build an integrated North American dealer franchise with global reach. Strategic branch locations in Canada and the U.S. position the bank to better serve its clients.

TD Bank has access to nearly 110 million people in the U.S. within its footprint. Over the years, the bank has been increasing its retail focus driven by lower-risk businesses with stable, consistent earnings. Retail earnings now account for 86% of the total earnings mix.

Over the years, TD Bank has completely transformed from a traditional to a client-focused North American dealer. TD Bank provides a wide spectrum of financial products and services ranging from personal banking to business and commercial banking, credit cards, wealth, and insurance in the retail segment. In the wholesale banking segment, the bank offers research, investment banking, capital market services, and global transaction banking.

TD Ameritrade is a leading US brokerage firm with more than $1.7 trillion in assets. The bank is also expanding its product capabilities with the launch of new ETFs for high net worth and institutional clients. In addition to banking products, TD Bank and its subsidiaries offer customized private banking and wealth management services through TD Wealth and vehicle financing and dealer commercial services through TD Auto Finance. 

TD Bank is a 165-year-old growth company and ranks among the leading online financial services firms globally, with 14.5 million active digital customers and 9.6 million mobile users. The bank undertook some restructuring charges in the last year to modernize its operations and improve its efficiency. 

Q4 was marked by lower PCL and lower insurance claims when compared to the rest of the quarters, and increased loans, deposits, and client activity in the Wealth business. The bank witnessed strong auto finance and RESL originations, and higher General Insurance premiums.

TD Bank introduced first-to-market digital capabilities with the launch of TD GoalAssist and TD Global Transfer for international money transfer. The bank continued to make investments in new digital capabilities, including TD Auto Finance’s self-service portal and Unsecured Lending’s end-to-end digital transformation.

Dividends

TD Bank is a Canadian Dividend Aristocrat having raised its dividend for more than a decade. It has a 164-year long dividend history. Its current dividend yield stands at 4.4% with a reasonable dividend payout ratio of 49%.

TD Bank has a target payout ratio of 40%-50%. The bank last raised its dividend by 9%+ YoY and has compounded its dividend growth by more than 9% over the last decade. 

The bank has a history of proven performance delivering industry-leading long-term shareholder returns in the past. It has achieved more than 13% CAGR in earnings over the last decade. TD Bank is anticipating to grow its earnings by 7%-10% over the medium term. It last increased annual dividend paid by 11% and ended the quarter with a robust CET1 ratio of 13.1% despite 2020 results being significantly affected by the COVID-19 pandemic.

TD Bank continued to pay and even increase dividends during the year, despite a challenging operating environment, lower interest rates, and volatile markets. The bank closed the transaction between TD Ameritrade and Charles Schwab, making TD the largest shareholder of a highly regarded U.S. investment firm.

The acquisition should enable consistent earnings growth in the coming years and beyond. The bank suffered as a result of the pandemic and had to increase its provisions for credit losses (PCL). It, however, recovered gradually in the third quarter. TD bank expects global real GDP to contract by 3.8% in CY2020 and the global economic outlook for 2021 to remain uncertain.Strong investment in digital initiatives, solid customer focus, and a large footprint have helped TD Bank to consistently deliver solid results.

The bank is in an excellent position to drive significant volume growth in its retail business on the back of economic recovery. TD bank also stands a good chance to benefit from organic growth opportunities in key customer segments. It occupies a leading market share in NYC and is targeting the top five positions in all its major markets in the U.S. A diversified, retail-focused business model and North American reach are strong enablers for the bank.

TD is expanding its U.S. wholesale business with a presence in New York and Houston.

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Competition

The bank competes with other leading Canadian banks like Royal Bank, Bank of Montreal, Scotiabank, Canadian Imperial Bank of Commerce, and National Bank.

National Bank ranks amongst the six largest commercial banks in Canada, while CIBC caters to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S., and around the world.

Scotiabank is a leading international financial services provider with a rich history of 185 years while the Bank of Montreal is the eighth largest bank in North America by assets and Royal Bank is one of Canada’s largest banks.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYieldYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:RYRYRoyal BankFinancial ServicesBanks - Diversified0.62108.36121.1413.4213.428.080.043.990.534744.320.113567Tollbooth - UnregulatedNONOYESNOCanada1
TSE:TDTDTD BankFinancial ServicesBanks - Diversified0.6377.14109.6311.7411.746.570.044.100.481043.160.131067Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BNSBNSScotia BankFinancial ServicesBanks - Diversified0.6274.4070.7313.9813.985.320.054.840.676743.600.107867Tollbooth - UnregulatedNONOYESNOCanada1
TSE:BMOBMOBank of MontrealFinancial ServicesBanks - Diversified0.57103.9852.9312.6812.688.200.044.080.517144.240.078657Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CMCMCIBCFinancial ServicesBanks - Diversified0.62117.3341.0612.8412.849.140.054.980.638945.840.098567Tollbooth - UnregulatedNONOYESNOCanada1
TSE:NANANational BankFinancial ServicesBanks - Diversified0.5880.1627.0012.9812.986.170.043.540.460342.840.104067Tollbooth - UnregulatedNONOYESNOCanada1
TSE:CWBCWBCanadian Western BankFinancial ServicesBanks - Regional0.5833.452.9311.7211.722.860.033.470.405641.160.089667Tollbooth - UnregulatedNOYESYESNOCanada1
TSE:LBLBLaurentian BankFinancial ServicesBanks - Regional0.4234.861.5114.7314.732.370.054.590.675141.600.081324Tollbooth - UnregulatedNONONONOCanada1

Bottom Line

For Canadian investors, TD can be a core holding and one of the few stocks with stock appreciation, dividend growth, and a good dividend yield. It is a good long term investment offering strong growth prospects.

Positive developments on the vaccine should pave the way for recovery in 2021. TD Bank continued to strengthen its market-leading position in key product lines expanding its product capabilities as well as digital and distribution transformation.

The bank is in a good position to leverage its industry-leading design center to create a rich customer experience. A reasonable dividend payout ratio of less than 50% should also support future dividends.

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.