I assign a Buy investment rating to The Toronto-Dominion Bank’s (NYSE:TD) shares.
There are multiple factors supporting the case for TD being a good dividend stock, which is why I am bullish on the stock. Specifically, TD’s appealing dividend yield and its 100-plus years’ long dividend payout track record are what make it stand out as an attractive investment choice for dividend-focused investors.
TD Stock Key Metrics
TD announced the company’s financial results for the second quarter of fiscal 2022 (YE October 31) on May 26, 2022 before the market opened.
Toronto-Dominion Bank’s stock price rose by 2% from $73.26 as of May 25, 2022 to $74.63 as of May 26, 2022. TD’s shares continued their ascent by increasing another +3% in the next four trading days to close at $77.04 on the June 2, 2022. This suggests that The Toronto-Dominion Bank’s shares were up by +5% following its Q2 FY 2022 earnings release, which means that the company’s key second-quarter metrics were likely being viewed favorably by investors.
TD certainly did well when it comes to the key headline financial metrics for the company. The Toronto-Dominion Bank’s revenue increased by +10% from C$10,228 million in the second quarter of fiscal 2021 to C$11,263 million in the recent quarter, and its topline came in +11% better than what sell-side analysts were forecasting. TD’s Q2 FY 2022 adjusted earnings per share or EPS of C$2.02 also exceeded market expectations by +5%, despite recording a marginal -1% YoY decline.
The Toronto-Dominion Bank’s solid financial performance in the most recent quarter was driven by a +9% YoY growth in net interest income. Considering a rising rate environment, the bank’s net interest income growth momentum should be sustained in subsequent quarters. Also, it is positive that TD’s credit quality continues to improve. The Toronto-Dominion Bank revealed at its Q2 FY 2022 earnings briefing on May 26, 2022 that its “allowance for credit losses decreased $231 million quarter-over-quarter to $6.9 billion or 87 basis points” in the recent quarter.
Another key metric relates to dividends. Income-focused investors will be pleased to know that The Toronto-Dominion Bank maintained its quarterly dividend in absolute terms at C$0.89 per share for the recent Q2 FY 2022. The company had earlier raised its quarterly dividend per share from C$0.79 to C$0.89 in the fourth quarter of fiscal 2021. In the subsequent two sections of the current article, I will delve deeper into TD’s dividends to determine if it is a good dividend stock.
What Should Investors Know About TD’s Dividend?
There are three key factors that investors should know about TD’s dividend in considering whether the stock is a suitable investment candidate for dividend investors.
Firstly, The Toronto-Dominion Bank offers attractive dividend yields.
TD’s historical trailing twelve months’ dividend yield is 3.5%. Looking ahead, TD boasts consensus forward fiscal 2022, 2023, and 2024 dividend yields of 3.7%, 3.9% and 4.2%, respectively as per sell-side’s consensus estimates.
The Toronto-Dominion Bank’s dividend yields are reasonably good on an absolute basis, and they are also comparable with that of its peers. According to Seeking Alpha’s “Key Stats Comparison” data, TD’s peers such as Wells Fargo (WFC), Citigroup (C), Royal Bank of Canada (RY), and Commonwealth Bank of Australia (OTCPK:CMWAY), offer forward dividend yields in the 2.2%-3.9% range.
In conclusion, The Toronto-Dominion Bank passes the dividend yield test with flying colors.
Secondly, TD is also a dividend growth stock, on top of being a high yield play.
Based on the company’s corporate factsheet, The Toronto-Dominion Bank’s dividends have grown by an excellent +11% CAGR between 1996 and 2022. Looking ahead, the market’s expectations are that TD will continue to grow its dividends at a relatively fast rate. As per sell-side consensus data sourced from S&P Capital IQ, The Toronto-Dominion Bank’s dividends are projected to increase by a +9% CAGR for the FY 2022-2024 period.
As highlighted earlier, TD most recently increased its quarterly dividend payout by +13% in Q4 FY 2021. The company has a policy of reviewing its dividend once per year, typically in the first or last quarter of the fiscal year, which typically results in a dividend raise.
Thirdly, TD places a strong emphasis on shareholder capital return (including dividends) as part of its capital allocation policy. This is validated by Toronto-Dominion Bank’s management comments at prior investor calls.
At the company’s Q4 FY 2021 earnings briefing on December 2, 2021, TD emphasized that “we are pleased to be able to return capital to shareholders” when it announced the increase in its quarterly dividend to C$0.89 and a new share buyback program for 50 million shares.
Separately, The Toronto-Dominion Bank highlighted at its most recent Annual Shareholders Meeting on April 14, 2022 that “when regulators allowed it, we increased our dividend by 13% and repurchased 21 million common shares” and “in doing so, we created value for you, our shareholders.” In other words, TD is very committed to distributing excess capital back to the company’s shareholders and believes that this is part of shareholder value creation. The only thing stopping TD will be exceptional circumstances like during the pandemic period, when financial regulators put in place additional requirements relating to capital.
In summary, The Toronto-Dominion Bank is a good dividend play, given its high dividend yield, positive dividend growth outlook, and the company’s focus on shareholder capital return.
Is TD Bank Stock’s Dividend Reliable?
In the previous section, I focused primarily on the upside potential for TD Bank’s future dividends. But it is equally important to evaluate the downside risks for The Toronto-Dominion Bank, or more specifically the probability of TD reducing or omitting its dividends going forward.
In my opinion, TD’s dividend is reliable and safe.
One key factor is The Toronto-Dominion Bank’s historical dividend payment track record. As indicated in the company’s investor presentation slides, TD has consistently distributed dividends to its shareholders for 164 years without fail. This is the strongest validation of TD’s commitment to dividends.
Another key factor is that TD’s dividend payout ratio is optimal, i.e., not too low and not too high. This implies that The Toronto-Dominion Bank’s current dividends are sustainable.
TD’s dividend policy is to pay out 40%-50% of its earnings as dividends every year, as disclosed in its investor presentation. The company’s dividend payout ratios were 43% and 40% for Q2 FY 2022 and Q2 FY 2021, respectively. Notably, The Toronto-Dominion Bank mentioned at the RBC Capital Markets Canadian Bank CEO Conference on January 10, 2022 that “dividends should have some kind of a relationship with the earnings power on an ongoing basis” so as to be able to “maintain consistency in all your payout ratios over time.” In other words, TD has set its dividend payout ratio at a level that it is comfortable maintaining.
In a nutshell, the downside risks for TD’s future dividends are limited, and the stock should easily meet the “reliability” criterion for dividend stocks.
Is TD Bank A Good Long-Term Investment?
The key thing investors should focus on when analyzing TD as a good long-term investment is “balance”. Well-run banks which are also good long-term investments tend to be able to strike a good balance between maintaining capital position strength, delivering shareholder capital return, and reinvesting for future growth.
The Toronto-Dominion Bank had a Common Equity Tier 1 (CET1) capital ratio of 14.7% as of end-Q2 FY 2022 which appears to be too high. The good news is that TD’s recent proposed acquisition of First Horizon (NYSE:FHN) should help to reduce the company’s CET1 ratio to approximately 11% (a more optimal level) as per a March 14, 2022 article published by Fitch. A May 31, 2022 Seeking Alpha News article that FHN shareholders have recently voted in favor of the planned takeover by TD, suggesting that The Toronto-Dominion Bank is making good progress in closing this deal (targeted completion in Q1 FY 2023).
This recent M&A transaction involving First Horizon and the quarterly dividend raise in Q4 FY 2021 are a good illustration of how TD allocates capital well. Considering the strength of TD’s capital position, keeping too much excess capital on its books does not create value for shareholders. Instead, The Toronto-Dominion Bank has considered its capital allocation priorities and options carefully, and it decided on a balanced approach of both returning excess capital (e.g., increase in quarterly dividend payout) and investing for future growth (e.g., proposed M&A).
I see TD Bank as a good long-term investment because the company is good in managing and allocating excess capital which is the key to long-term success notwithstanding the inevitable ups and downs in financial markets.
Is TD Stock A Buy, Sell, Or Hold?
TD stock is a Buy, as I judge it to be a good dividend stock. The company’s 164-year dividend payout track record gives investors confidence that its dividend is reliable. The Toronto-Dominion Bank’s forward dividend yields in the 3%-4% range should also be sufficiently attractive from a dividend investor’s perspective.