Income Expert Banks on Toronto

12/19/2016 7:00 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

Valuations are pretty steep all around, but at 13-times trailing GAAP earnings, a 3.4% dividend yield and a 20-year history of 13.53% compound annual growth, I'm willing to put some cash to work with this Canadian banking stock, asserts Jack Adamo, editor of Insiders Plus.

We're going to add to another position today in a previous recommendation — Toronto-Dominion Bank (TD), which was founded in 1855 and provides financial and banking services in North America and internationally.

It operates more than 2,800 automated banking machines, and a network of more than 1,200 branches in Canada. Its U.S. segment provides retail and commercial banking operations through a network of more than 1,300 stores located from Maine to Florida.

Its Wholesale Banking segment provides a range of capital markets and investment banking products and services to companies, governments, and institutions in financial markets worldwide.

Toronto-Dominion's fiscal year does not coincide with the calendar year, so we have Q4 and full-year earnings now. All dollar figures are Canadian. Total revenues rose 8.7% for Q4 and 9.2% for the year to $34.3 billion.

Because of several large items distorting year-over-year comparisons, adjusted earnings are more relevant here, so I'll use them. (GAAP growth is much higher.) EPS rose 7.0% for the quarter and 5.6% for the year to $1.22 and $4.87.

With the Canadian economy heavily weighted to the oil & gas business, the improving outlook in that sector should cause a pickup in bank earnings, as well as some strengthening of the loonie against the greenback, which will further help our returns.

Full-year dividends per share were $2.16, up 8.0% from last year. The dividend payout ratio was conservative at 46.1%, giving shareholders adequate funds to live off, while retaining enough cash for growth and future dividend increases.

In performance metrics, the efficiency ratio was excellent at 55%, 2.5% better than last year's 57.5%, which most banks would die for. The Common Equity Tier 1 Capital ratio was a very solid 10.4%.

It is my belief that overall returns for stocks and bonds over the next decade or so will not be what they've been in the past, so we may not see that ten percent plus growth rate in TD going forward.

However, I continue to see TD banks spreading across the U.S. wherever I go and the company is growing in other countries as well.

TD's solid recent growth despite the crash in the oil economy and the weak loonie show that management is doing a great job, so I think we're likely to see long-term returns superior to the market.

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