2023-08-01 07:36:55 ET
Summary
- TD Bank gets a hold/neutral rating today, in line with the SA quant system rating.
- Positives: Share price vs 200-day SMA, dividend yield vs sector average, capital & liquidity position.
- Headwinds: Valuation high vs sector average, lack of YoY net income growth.
- Risks of office property exposure in their loan book are very low.
Research Brief
Due to recent popularity of my research articles covering Canada-based banks & insurance companies, I decided to look for another one that happens to be a dividend gem.
Toronto-Dominion Bank (TD), which I will just refer to as TD Bank, is one of those banks deemed globally systematically important according to the Financial Stability Board in 2022, and though its parent group is Canada-headquartered it also trades in the US on the NYSE and its US-based business also known as "TD Bank" is based in New Jersey.
Though they are not in this month's batch of bank earnings calls, as their next quarterly earnings release is not until August 24th, today we will look at most recent results and ahead of its next earnings call try to determine of this is a value buy or not.
My own experience with this bank goes back years ago as a client at the now-defunct Commerce Bank in New Jersey, known for being open 7 days a week and for a free penny-arcade coin counting machine in the lobby, which I remember well. The bank chain was later acquired by TD Bank.
Some notables to mention from this company's website : TD Bank division total assets $422B, 9.9MM customers, 2,700 ATMs, branches in 15 states and D.C.
Ratings Methodology
Our goal is to find undervalued stocks of companies with solid financial fundamentals, that pay competitive dividend yields. Our key industry focus is tech, financials, insurance, innovation.
To simplify my rating of an equity, I have broken it down into whether I would recommend or not recommend based on these individual factors:
- Valuation vs Sector Average.
- Dividend Yield vs Sector Average.
- Positive YoY Net Income Growth.
- Capital & Liquidity Strength
- Stock Price vs 200 Day SMA.
If I recommend on all 5 categories, it is a "strong buy", 4 categories is a "buy", 3 is a hold, and less than that is a sell rating. Then I compare my rating to the consensus ratings from Seeking Alpha & Wall Street.
Valuation vs Sector Average: Not Recommended
Let's go into valuation first. As with my other articles, I am using the forward P/E ratio and forward P/B ratio, taken from Seeking Alpha data . Then, I compare to the sector average. I am not privy to which companies this website includes in its "sector average", however.
From the data shown, the forward P/E of 12.33 is nearly 19% above the sector average.
My target range is for the P/E to be at or below the sector average, or no more than 5% above it if the price-to-book is also relatively undervalued.
Taking a look, however, I see that the P/B is at 1.43, so you're paying almost 1.5X book value for this stock, and that is 33% above the sector average. Too high in my opinion. I am looking for something closer to a price-to-book of 1.0 or less.
Based on the data, I would not recommend this stock in the category of valuation at this time.
Dividend Yield vs Sector Average: Recommend
The next question I ask is whether this stock is right for my readers who are dividend-income investors like I am. The answer is in the data below, taking from Seeking Alpha official data .
As of July 31, the trailing dividend yield is 4.29%, with a dividend of $0.72 per share, paid quarterly. In some bank & insurance stocks I recently researched, I have seen the yield anywhere from 3% - 6%.
Further, I like the positive dividend growth trend in the last 5 years. For example, it went from an annual dividend in 2018 of $2.04 to $2.74 in 2022, an increase of 34% in 5 years. This is a good sign that a bank is committed to returning capital back to shareholders and has the liquidity each year to do so, even while some other companies have reduced to cut back dividends, while some in the tech sector don't pay dividends at all.
For August, I am adding another metric to look at, and that is frequency & stability of dividend payments. As the table below shows, this bank has made steady quarterly dividend payments in the last 4 years, with the quarterly payment generally increasing in that time. Another positive.
Though some of my readers in the comments have brought up tax topics when it comes to dividends but also Canada-based stocks, unfortunately as a matter of policy I don't go into that realm in these articles and would rather refer you to your tax professional for that.
Finally, the big question is how the dividend yield for this stock compares with that of its sector. The answer is in the table below.
As the table shows, both the trailing and forward dividend yield is 23% to 26% above its sector average. This is impressive. My target is for a stock's yield to be at least 5% -10% above sector average in order to be highly competitive in this category, so this one goes past that target.
Hence, based on the evidence given, I would recommend this stock in the category of dividends.
Positive YoY Net Income Growth: Not Recommended
At first glance, the income statement from the end of April after their last quarterly result looks disappointing, appearing to have dropped YoY, along with the earnings per share. Further, there is no steady rising trend in net income over the last year but rather a lopsided trend, with a peak last October.
On a positive note, however, from the top-line it appears that net interest income saw a significant YoY growth, as did non-interest income.
As far as interest income, considering that the Fed recently raised rates, the current sentiment is that those rates will hold after the next Fed meeting, so both are good for this bank I would say. Consider that rate-watching platform CME Fedwatch has already predicted an 82% probability that rates will hold steady after the September meeting:
Also, when digging further into what could have impacted earnings for the last quarter, the Wholesale Banking business segment had acquired Cowen, which caused a one-time acquisition expense to be booked in that quarter.
According to earnings commentary :
Reported non-interest expenses for the quarter were $1,189MM, an increase of $413MM, or 53%, compared with the second quarter last year, reflecting TD Cowen and the associated acquisition and integration-related costs.
Here is what it looked like in the YoY comparison for that business segment:
So, taking into account the one-time Cowen acquisition costs, and the fact that both interest income and non-interest income have shown YoY growth and the rate environment I think will continue to benefit the bank, I am convinced the next quarterly earnings call will see better days when it comes to net income.
However, at the moment it has not shown YoY growth as of the last results, so for now I do not recommend this stock in this category, since positive trends in YoY income growth is one of my rating criteria.
Capital & Liquidity: Recommend
The following is a positive sign of this bank's capital strength, getting my attention with a CET1 of 15.3%, and an LCR of 144%:
Also notable to mention, since this spring we saw a few regional bank failures in the US due to risk exposure to uninsured deposits, I want to take a moment to reassure readers that TD Bank's US business has at most 1/3rd or less of deposits that are "uninsured" deposits, as per the chart below, thereby I don't think the bank's liquidity will be impacted by some sudden "run" by uninsured depositors fleeing the bank.
When looking at the last quarterly balance sheet , this bank has a big one, with over $5B in cash & equivalents, $1.4T in total assets, $1.3T in total liabilities, and $85.7B in positive total equity.
I think it's safe to say that I can recommend this stock based on its parent company's capital & liquidity.
Stock Price vs 200 Day SMA: Recommend
As of the writing of this article, before market open on Monday July 31st the shares of TD Bank were trading at $65.03.
My investing idea, as in recent articles is to track the 200-day SMA and trading within a range of 5% below and above that moving average. In this case, with that moving average being $63.21, I am using a trading range of $60.04 - $66.37.
Based on that range, the current share price is within buying range, so I recommend it.
I have put together a quick spreadsheet below to illustrate an example trade based on my investing idea:
In this simulated trade, I am buying 100 shares at the current trending price of $65.03, holding for 1 year to get the full year dividend income and yield, and selling at 5% above the current 200-day SMA, to achieve a capital gain. My total simulated return on capital invested is 6.49%.
A risk to this idea is that after buying the shares, the moving average turns downward for an extended period, thereby causing unrealized losses on the portfolio.
In case you're wondering what trading range I would not recommend buying at, based on this investing idea it would be a price that is over 5% above the SMA, so let's say a price trading at 10% above the SMA I may consider overpriced for a value buying opportunity. Now, if it was suddenly trending 10% below the 200-day SMA, it could still be a dip buy opportunity or perhaps a value trap as well.
This is why I use my 5-step holistic rating approach to any equities I rate, to get the entire picture rather than just looking at share price.
Do share in the comments section your thoughts on spotting value traps with this stock!
Ratings Score: Hold/Neutral
Today, this stock won 3 of my 5 ratings categories, and earned a hold /neutral rating. This is by no means a "negative" rating, and in fact it is in line with the consensus from the Seeking Alpha quant system. However, it is less bullish than the consensus from Wall Street and Seeking Alpha analysts, as seen below.
Risks to My Outlook: Exposure to Office Property
A risk to my neutral / hold sentiment on this stock is a question other analysts and investors will ask, and that is what exposure does their CRE portfolio have to office property, the black sheep of the CRE portfolios lately it seems!
So, after some digging, here is what I found..
Turns out, of their highly diversified CRE portfolio, just 11% is in office properties, as the chart below shows.
Further, of the overall loan book at the bank, it seems CRE is just 10% of that, and the office segment is just around 1%:
So, I am not convinced that this bank's exposure to offices is a major risk, although it is worth keeping an eye on. The key data point above to consider is that 31% of their CRE portfolio is tied up in multi-unit housing insured by the CMHC. That is almost a third of the portfolio.
Analysis Wrap Up
To wrap up today's analysis, here are the key points we discussed.
Today I rated this stock a hold/neutral, in line with the Seeking Alpha quant system which also rated it a hold.
Positives: dividend yield vs sector average, stock price vs 200-day SMA, capital & liquidity.
Headwinds: valuation too high vs sector average, net income growth YoY was down.
The risk to office properties in their CRE portfolio was addressed.
In closing, I want to reiterate that although my rating is lukewarm on this stock, it is not a negative reflection of this otherwise systemically critical and very large banking giant, but rather a holistic view of many parts together.
I expect the late August earnings call will show an improvement in earnings per share, and for those "holding" this stock currently and who bought it earlier at a much cheaper price, I predict the next positive earnings call could lead to some more bullishness on the share price. Again, it will not have the Cowen acquisition cost in the next quarterly results like in the last one.
Consider that three out of the last four quarters reported had beat earnings estimates, so I predict for Q3 we can see a potential earnings beat between $0.02 and $0.10.
For further details see:
TD Bank: A Nice 4% Dividend Yield But Waiting On Better Earnings In Q3