TD Bank (TD) — or Toronto Dominion Bank, as it’s better known in Canada — may not seem like a good choice with its national economy in recession and the global financial sector still trying to get back on a consistent growth footing.
But the fact is, TD is the exception to the rule in Canada and is also growing its reputation and footing in the U.S. It’s already one of the top 10 banks in the US.
Toronto Dominion has a proven record of shareholder-friendly growth and is currently rebuilding its operations to better take advantage of technological changes going on in the financial sector.
Granted, the latter is a work in progress, but the fact that CEO Bharat Masrani has taken his time (he’s been running TD for nearly two years) before making any major moves shows that he is patient and has his sights set on long-term growth at TD.
TD Stock Making Smart Moves
In October, the bank announced it was beginning new rounds of cuts as it preemptively began to protect itself from the slowing institutional trading desks and the weakening Canadian economy. TD laid off half of its New York municipal bond trading desk, brought in a new CFO and moved a long-time division chief to its brokerage operation TD Ameritrade.
We are seeing similar actions from most large institutions. Bond trading used to be a big money-maker for banks, but the global recession has cut those profits significantly and banks are restructuring.
Toronto Dominion has said it will be looking to tighten operations in Canada as well, but that will likely be more on the retail side than the trading side. Cost-cutting in Canada is simply responding to economic necessity; if business is slowing you have to find other ways to grow until the economy expands again.
Masrani is hoping to make cuts and then use the money to grow the business in the U.S. in more promising sectors. He also has begun to make big shifts in senior management to put his own team in place, with the goal of incorporating a more technological focus on bank operations.
Fortunately, as the No. 1 lender in Canada, TD stock has the least amount of exposure to the struggling Canadian energy sector of all its competitors — 0.08% of its accepted loans. That means no matter how long low oil and natural prices continue, TD earnings won’t be at risk.
And its U.S. exposure — about 33% of total revenue — is essentially in Northeastern states. Many of these are high-income states where low energy prices help drive consumer spending (and credit card spending), which actually helps the bank’s earnings.
Bottom Line
It’s important to bear in mind that this isn’t a trade; it’s an investment. TD’s compounded annual growth rate (CAGR) is over 10%. At current prices it’s throwing off a 3.8% dividend with annual dividend growth of 12% a share for decades.
These are the kind of numbers that make this an investment. It also has a Moody’s rating of Aa1, one of the highest ratings of any global bank its size (TD stock has over CAD1 trillion in assets).
Given the difficult market environment, TD is a rock in the storm. It has avoided most of the financial meltdown of 2008 (aside from its ill-timed purchase of a U.S. bank in 2008) and has side-stepped the challenges in the Canadian energy patch that threatens most of its contemporaries.
It’s also a bargain a current levels.
Richard Band’s Profitable Investing advisory service helps retirement savers outperform the market without losing a minute of sleep along the way. His straightforward style and low-risk value approach has won seven Best Financial Advisory awards from the Newsletter and Electronic Publishers Foundation.
