TD Stock: Up 46% Already, with More Profits to Come
This Foreign Bank Stock is a Top Pick for Dividend Investors
America has some of the most solid financial institutions. But as an income investor, you shouldn’t ignore foreign banks altogether.
Toronto-Dominion Bank (NYSE:TD) is a multinational banking and financial services corporation headquartered in Toronto, Ontario, Canada. While the bank does most of its business in Canada, it also offers a generous dividend stream to investors in the U.S. Let me explain.
The first thing to note is that TD stock trades on both the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE). Therefore, it’s very convenient for American investors to purchase shares of this foreign bank.
Moreover, compared to its U.S. counterparts, TD actually has a more generous dividend policy. The largest three banks in the U.S. by total assets—JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC), and Wells Fargo & Co (NYSE:WFC)—have an average dividend yield of 2.16% at the current price. Toronto-Dominion Bank, on the other hand, pays quarterly dividends of CA$0.67 per share, giving TD stock an annual yield of 3.53%.
Of course, if your goal is to just earn a high dividend, you can find plenty of companies with much higher yields than TD stock. What makes this Canadian bank stand out is its ability to raise payouts through thick and thin.
Consider this: in the beginning of 2006, Toronto-Dominion Bank had a quarterly dividend rate of CA$0.22 per share. Today, the amount stands at CA$0.67 per share. That represents an increase of over 200%. (Source: “Dividends,” Toronto-Dominion Bank, last accessed May 25, 2018.)
What’s more is that even during the 2007-2008 financial crisis, when dividend reductions where common among U.S. banks, TD did not cut back its payout to shareholders. In fact, the company even announced a 3.4% dividend increase in August 2008. And since 2011, Toronto-Dominion bank has raised its dividend at least once every year.
The company’s dividend hikes are backed by a rock-solid business. Toronto-Dominion Bank operates through four business segments: Canadian Retail, U.S. Retail, TD Ameritrade, and Wholesale.
Right now, the Canadian and U.S. retail segments are responsible for generating 87% of the company’s total net income.
Net Income by Business
(Data source: “Quick Facts,” Toronto-Dominion Bank, last accessed May 25, 2018.)
Retail banking may not sound as exciting as wholesale banking, but the business is great for paying recurring dividends. Wholesale banking can be profitable with a relatively small number of accounts, but in order to succeed in the retail business, a company would need to set up an expansive branch chain network and acquire a large customer base. In other words, retail banking is a business with high barriers to entry.
Toronto-Dominion Bank already has an entrenched position in the business. The company has 25 million customers and approximately CA$1.3 trillion in assets. Thanks to the industry’s high barriers to entry, it’s difficult for new companies to compete with TD.
With limited competition, existing players like Toronto-Dominion Bank can keep earning oversized profits year after year.
Speaking of profits, the company has just reported earnings. In the second quarter of its fiscal year 2018 ended April 30, 2018, Toronto-Dominion Bank generated adjusted earnings of C$1.62 per diluted share. The number not only represented a 20.9% increase year-over-year, but also beat Wall Street’s already-high expectation of CA$1.50 per share. (Source: “TD Bank Group Reports Second Quarter 2018 Results,” Toronto-Dominion Bank, May 24, 2018.)
Unsurprisingly, the company’s profits easily covered its quarterly dividend payment of $0.67 per share made during this period. The low payout ratio also leaves plenty of room for future dividend increases.
Toronto-Dominion Bank’s safe and increasing dividend income stream is why we recommended TD stock to subscribers of our Income for Life advisory in May 2016. Including automatic dividend reinvestment, the company has delivered a total return of 46% since then, substantially outperforming both the S&P 500 Index and the S&P/TSX Composite Index.
As TD Bank continues to grow its business, I wouldn’t be surprised if the company returns more value to investors in the years to come.