Thursday, June 21, 2018

Stock Analysis - Toronto-Dominion Bank

Individuals get up each day and often "force" themselves to go to jobs.  I say "force" themselves because studies have shown that a vast majority of people hate their jobs.  When at your place of employment, individuals are forced to take breaks and lunch at certain times.  They are forced to show up by a certain time each day.  Some employers have even given workers a hard time if they go to the bathroom when it is not break or lunch time!  You don't think this happens? Well, I personally seen it happen at one of my former jobs.

Most people wonder if there is a better way.  Majority of people decide on keeping the status quo, because it is a lot easier than trying to do something different.

A person can positively change their life with a simple concepts.  These simple concepts are to lower expenses and pay yourself first.  Some people might look at their budget and say there is no way they can find anything to cut.  It is imperative a person has to set themselves up to pay themselves first.  This might be trimming expenses and/or increasing their income.  Their income can be increased through a side hustle or second job.

Wages have been quite stagnant since the 70s.  Wages have gone up mostly only due to inflation.  When you work at a job, every employee of a company sometimes gets a raise of same amount or percentage at the same time.  This type of raise is called a Cost of Living increase.  A real raise to me is when you are called into the manager's office and told you are getting a raise.

With the money you get from paying yourself first, you can save and invest this to make more money.  This will ease your stress and eventually give you more choices in life.  Imagine, leaving the rat race and able to live life on your own terms. 

One of they ways of investing is via stock market instruments.  Some of these market instruments pay income via dividends, distributions, interest or premiums while others don't.  We are best to give the former more of our attention.  When a stock pays a dividend, that is cold hard cash hitting your brokerage account. Similar for instruments that pay distributions or interest.  An investor can receive premiums from options if they are the seller of an option and not the buyer of the option.

Canada has some great assets that an investor can own.  Toronto Stock Exchange is mostly financials and energy stocks. 

Canada has 5 big banks that are really solid companies and are considered to be some of the best banks in the world.  These banks are Toronto Dominion Bank (TD), Bank of Montreal (BMO), Royal Bank of Canada (RY), Bank of Nova Scotia (BNS) and Canadian Imperial Bank of Commerce (CM).  The Canadian Imperial Bank of Commerce is more commonly known as CIBC.  All these 5 banks trade on both the NYSE and Toronto Stock Exchange.

I recently did an analysis on Royal Bank, which you can read about here.


      Toronto Dominion Bank aka TD Bank is known for their office hours.  Their branches are open late Monday - Friday and also reduced hours on the weekends.  Other banks might have some branches open on Saturday, but the numbers are extremely low.

The Toronto-Dominion Bank, together with its subsidiaries, provides various personal and commercial banking products and services in Canada and the United States. It operates through three segments: Canadian Retail, U.S. Retail, and Wholesale Banking. The company offers personal deposits, such as checking, savings, and investment products; financing, investment, cash management, international trade, and day-to-day banking services to small, medium, and large businesses; financing options to customers at point of sale for automotive and recreational vehicle purchases through auto dealer network; credit cards; investing, advice-based, and asset management services to retail and institutional clients; and property and casualty insurance, as well as life and health insurance products. It also provides capital markets, investment banking, and corporate banking products and services, including underwriting and distribution of new debt and equity issues; providing advice on strategic acquisitions and divestitures; and trading, funding, and investment services to companies, governments, and institutions, as well as offers telephone, Internet, and mobile banking services. The company offers its products and services under the TD Canada Trust, TD Bank, and America's Most Convenient Bank brand names. It offers personal and business banking products and services to approximately 15 million customers through a network of 1,128 branches and 3,157 automated teller machines in Canada; and to approximately 8 million retail customers through a network of 1,270 stores. The company was founded in 1855 and is headquartered in Toronto, Canada. (Source: Yahoo Finance)
TD Bank currently pays annual dividend of $2.68 per share.  The current yield is 3.49%.  The dividend payout ratio is currently 47.3% based on the current dividend and the trailing twelve months of $5.65 per share.

The 5-year dividend CAGR comes in at 10.2%.  This is greater than 6.8% CAGR of their Canadian peers.

TD is currently yielding better than the broader market, which is S&P TSX Composite Index.  The current yield is slightly better than the stock's own 5 year average.

Now, I will go into looking at some fundamentals of the stock.

TD revenues grew from $14.669 billion in 2008 to $36.149 billion in 2017.  This is a compound annual growth rate, or CAGR, of 10.54%.  This is a great CAGR for revenues.

TD makes money via a lot of different mediums. The have a lot of branches in the United States besides Canada.  TD bank goes above and beyond for their customers.  Besides their branches being open M-F, most of them are open on both Saturday and Sunday.  During the week, most branches are open to 8pm.  Majority of the TD's competition in both Canada and United States do not open on weekends or late on week nights.

TD earnings per share grew from $4.87 in 2008 to $5.54 in 2018.  This is a CAGR of 1.44%.  When revenues have such a large CAGR compared to this, this means a further investigation is required.  So looking at a 10 year chart of TD.TO, we see a 2:1 stock split on Feb 3 2014.  So, I take a look at Morningstar for TD, and notice the earnings are basically half of what's in the 2008 annual report.
So, therefore factoring in the 2:1 stock split, the revenues grew from $2.44 in 2008 to $5.54 in 2018.  This represents a CAGR of 9.54%.

This is quite what I expected.  The big 5 Canadian Banks are known as some of the best banks in the entire world.

The long-term debt to equity ratio comes in at 0.129.  The interest coverage ratio comes in at 5.02.  An interest coverage ratio of 5.02 looks good.  This ratio is an indication of a company's ability to pay interest on its outstanding debt.  The higher the interest coverage ratio the better.

Now, we look at the profitability of TD.  The average annual net margin over the last 5 years is 25.45%.  Net margin is basically, when everything is account for, this is the amount of profit for each dollar.  The average annual return on equity for the last 5 years is 14.19.

Now, we will look at the valuation by using a dividend discount model. We will use a discount rate of 10% and a dividend growth rate of 7%.  The dividend growth rate of 7% is on the conversative side.  North America did not have a major recession since 2009. The only recession we had was due to low oil prices, which did not  cause havoc across the entire economy.

The Dividend Discount model gives us a fair value of $95.59.

The P/E ratio is in line with the stock's own 5 year average and is lower than that of the broader market.

The price to cashflow is 10.6 is way about the average 3-year P/CF of TD and is greater than that of the broader market.

I do not want to solely rely on the dividend discount analysis fair value of $95.59. So, Morningstar has a fair value of $79.00.

If you have another fair value estimate from a different research, it give an even better estimate.  With the 2 fair values, we take the average which gives us a fair value of $87.30

The stock is currently trading at $76.74.  The shares are potentially 14% undervalued.


With the stock possibly 14% undervalued and trading at P/E of 13.58 for trailing twelve months.  TD is a solid company and has rewarded shareholders with increasing dividends in the past several years.

The stock has risen the last  while and has shown resistance at around $70 in the past six months.  This stock would be great buy on a dip.

Disclosure: Do not own TD currently.


I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk


  1. nice analysis man!

    own td and love em. recently just started a position in bns though as it seems to be a better value.

    are you going to do a analysis on them?
    keep it up


    1. Passivecanadian,

      Thanks for dropping by. I am going to do analysis on BNS in the next few days. I own BNS directly with the transfer agent and inside margin account.

      I don't think I will do BMO or CM at this time but might do them in the future. I own these 2 banks as well.