Toronto-Dominion Bank: Banking Dividends

by The Compound Investor

Bank stocks often generate a mixed response from long-term investors. That is typically because they have a nasty propensity to go very quickly from hero to zero – and in some cases that “zero” can be taken literally too. That said, it is hard not to be impressed by the performance of a bank like Toronto-Dominion (TD). The Canadian giant is quite popular with dividend investors due to its long track record of paying cash to shareholders. Indeed, I have been tempted to buy the stock on multiple occasions in recent years.

We should probably start with a brief overview of the bank since this is its first appearance on the site. Suffice to say, it is a big one. Total assets here clock in at circa C$1.7T, enough to put the bank in fifth or sixth place in North America on that measure. Toronto-Dominion actually operates on both sides of the border, and boasts around 25 million clients in total world-wide.

In terms of its business, the company breaks itself down into three reporting segments: Canadian Retail, US Retail and Wholesale. The bank’s Wholesale segment – investment banking, capital market services and so on – is a pretty tiny part of the profit mix. That leaves Canadian Retail and US Retail, which are hopefully fairly self-explanatory. Think residential mortgages, secured loans, auto financing, credit cards, unsecured personal loans, commercial lending to small and mid-sized business, insurance, and so on. The key point to take away is this: around 40% of its gross loan portfolio is made up of Canadian residential real estate loans. That is to say, mortgages and home equity lines of credit.


Now, any discussion of a bank has to touch on the impact of COVID-19. In Canada, real GDP fell around 13% in the first half of the year. The comparable figure south of the border was a drop of just over 9%. Toronto-Dominion expects Canadian GDP to fall by 5.6% in real terms this year. It also sees the unemployment rate at 9.7%, up around 400bps on last year. You can see why that might present an issue for a large retail bank. Toronto-Dominion alone has around C$240B worth of residential mortgages sitting on its balance sheet. It has another C$100B or so by way of home equity lines of credit.

In spite of the above, the bank has posted some reasonable looking numbers so far. That is largely due to the fiscal response by governments on both sides of the border, the extent of which has been every bit as unprecedented as the pandemic itself. Anyway, the bank has set aside C$6.3B for bad loans so far this year – three times as much as last year – though it has remained profitable. It managed to report net income of circa C$2.25B in its 3Q20, down around C$1B year-on-year on the back of the aforementioned increase in loan loss provision. Net income came in at C$6.75B over 9M20 as a whole (the bank’s fiscal year ends in October), down from C$8.8B at the same point last year.

Another bright spot is that the bank remains well capitalized. Its CET1 ratio came in at 12.5% at the end of 3Q20, up around 150bps from the end of 2Q20 and 50bps on the equivalent period-end last year. That increase came on the back of a drop in risk-weighted assets as well as positive retained earnings generation. Indeed, the bank probably has scope to return some of this capital directly to shareholders once conditions normalize.

Banking Dividends

I briefly mentioned the dividend record in the preamble which, suffice to say, is pretty darn impressive. The bank has paid uninterrupted cash distributions going back to the 1850s. Granted, that long period includes some hefty cuts, but it is still quite impressive. The dividend growth record may not be quite as long, but it is still eye-opening for a North American bank. Toronto-Dominion hasn’t cut its annual cash dividend for well over two decades now. That is, for me at least, literally a lifetime.

Given the above, it is not hard to see why income investors like this one. They have banked their weight in dividend cash over the past decade or so. Back then, the company’s stock price was around the C$37 per share mark. It has paid out a cumulative total of approximately C$21 per share by way of dividend cash in the intervening period. That’s the kind of record that sticks out big time in the yield starved world we find ourselves in.

The stock trades on both the New York Stock Exchange and in Toronto. At 1-for-1, the conversion is easy enough, but I will stick with the Canadian figures for consistency. American readers can simply convert all numbers using the prevailing exchange rate. The shares ended the week at just under the C$62.10 mark. The annualized dividend stands at C$3.16 per share, equivalent to a yield of 5.1% if my math is right. Analysts expect that to be covered by earnings of just over C$5.05 per share this year, rising to C$5.54 per share in FY21. At circa 11x forward earnings and a 5.1% dividend yield, income seekers may wish to have a closer look at what is a prolific dividend stock.


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