Is TD Bank a good dividend stock? Consider track record and performance (NYSE: TD)
Summary in seconds
I assign a buy rating to The Toronto-Dominion Bank (NYSE: TD) shares.
There are several factors that support TD as a good dividend stock, which is why I’m bullish on the Stock. Specifically, TD’s attractive dividend yield and more than 100-year history of paying dividends make it an attractive investment choice for dividend-oriented investors.
Key TD Stock Metrics
TD announced the company’s financial results for the second quarter of fiscal 2022 (YE Oct. 31) on May 26, 2022 before markets open.
The Toronto-Dominion Bank’s share price rose 2% from $73.26 on May 25, 2022 to $74.63 on May 26, 2022. TD shares continued their ascent rising another +3% over the next four trading days to close at $77.04 on June 2, 2022. This suggests that shares of The Toronto-Dominion Bank rose +5% after the release of its second quarter results of fiscal 2022, meaning the company’s key metrics in Q2 were likely viewed favorably by investors.
TD has certainly done well when it comes to the company’s key financial metrics. 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 last quarter, and its turnover was +11% higher than sell-side analysts expected. TD’s second-quarter fiscal 2022 earnings per share or adjusted EPS of C$2.02 also beat market expectations by +5%, despite a marginal decline of -1% year-on-year.
The Toronto-Dominion Bank’s strong financial performance in the most recent quarter was driven by +9% year-over-year growth in net interest income. Given an environment of rising rates, the growth momentum of the bank’s net interest income should continue over the coming quarters. Additionally, it is positive that TD’s credit quality continues to improve. The Toronto-Dominion Bank disclosed during its second quarter fiscal 2022 earnings briefing on May 26, 2022 that its “allowance for credit losses decreased by $231 million quarter-over-quarter. ‘other to settle at $6.9 billion or 87 basis points’ in the last quarter.
Another key metric relates to dividends. Income-oriented investors will be pleased to learn that The Toronto-Dominion Bank maintained its quarterly dividend in absolute terms at C$0.89 per share for the recent Q2 of fiscal 2022. The company had previously increased its dividend quarterly per share from C$0.79 to C$0.89. in the fourth quarter of fiscal 2021. In the next two sections of this article, I will dig deeper into TD’s dividends to determine if it is a good dividend stock.
What should investors know about the TD dividend?
There are three key factors investors should know about TD’s dividend to determine if the stock is a suitable investment candidate for dividend investors.
First, The Toronto-Dominion Bank offers attractive dividend yields.
TD’s historical dividend yield over the last twelve months is 3.5%. Looking ahead, TD is showing consensus dividend yields for fiscal years 2022, 2023 and 2024 of 3.7%, 3.9% and 4.2%, respectively, based on consensus sell-side estimates.
The Toronto-Dominion Bank’s dividend yields are reasonably good on an absolute basis, and they’re also comparable to those of its peers. According Looking for Alpha Data from ‘key stats comparison’, TD 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.
Second, TD is also a dividend growth stock, in addition to being a high yield stock.
According to the company’s fact sheet, Toronto-Dominion Bank dividends have grown at an excellent CAGR of +11% between 1996 and 2022. Looking ahead, the market expects the TD continues to increase its dividends at a relatively rapid pace. According to consensus sell-side data from S&P Capital IQThe Toronto-Dominion Bank’s dividends are expected to grow at a CAGR of +9% for the period of fiscal 2022-2024.
As previously reported, TD recently increased its quarterly dividend payout by +13% in the fourth quarter of fiscal 2021. The company has a policy of reviewing its dividend once a year, usually in the first or last quarter of the year. exercise, which generally results in an increase in the dividend.
Third, TD places great emphasis on shareholder return on capital (including dividends) as part of its capital allocation policy. This is confirmed by Toronto-Dominion Bank management’s comments in previous phone calls with investors.
During the company’s fourth quarter fiscal 2021 earnings briefing on December 2, 2021, TD noted that “we are pleased to be able to return capital to shareholders” when announcing the increase in its quarterly dividend to C$0.89 and a new share buyback program for 50 million shares.
Furthermore, the Toronto-Dominion Bank noted at its last annual meeting of shareholders on April 14, 2022 that “when the regulators authorized it, we increased our dividend by 13% and repurchased 21 million common shares and “in doing so, we have created value for you, our shareholders.” In other words, TD is very committed to returning excess capital to shareholders in the company and believes this is part of creating The only thing that will stop TD will be exceptional circumstances like during the pandemic period, when financial regulators have put in place additional capital requirements.
In summary, The Toronto-Dominion Bank is a good dividend bet, given its high dividend yield, positive outlook for dividend growth, and the company’s focus on return of shareholder capital.
Is the TD Bank Stock dividend reliable?
In the previous section, I focused primarily on the upside potential for TD Bank’s future dividends. But equally important is assessing the downside risks for The Toronto-Dominion Bank, or more specifically the likelihood that TD will cut or omit its dividends in the future.
In my opinion, the TD dividend is reliable and safe.
The Toronto-Dominion Bank’s dividend payout history is a key factor. As noted in the company’s presentation slides to investors, TD has consistently distributed dividends to its shareholders for 164 years without fail. This is the best validation of TD’s commitment to dividends.
Another key factor is that TD’s dividend payout ratio is optimal, meaning neither too low nor too high. This implies that The Toronto-Dominion Bank’s current dividends are sustainable.
TD’s dividend policy is to pay out 40% to 50% of its earnings annually as dividends, as outlined in its presentation to investors. The company’s dividend payout ratios were 43% and 40% for the second quarter of fiscal 2022 and the second quarter of fiscal 2021, respectively. Notably, the Toronto-Dominion Bank mentioned at the RBC Capital Markets Canadian Banking CEOs Conference on January 10, 2022 that “dividends should have some sort of relationship to earnings power on an ongoing basis” in order to to be able to “maintain consistency in all of 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 to TD’s future dividends are limited and the stock should easily pass the “reliability” criterion for dividend-paying 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 that are also good long-term investments tend to be able to strike a good balance between maintaining a strong capital position, returning shareholder capital, and reinvesting for future growth.
The Toronto-Dominion Bank had a Common Equity Tier 1 (CET1) ratio of 14.7% at the end of the second quarter of fiscal 2022, which seems too high. The good news is that TD’s recent proposed acquisition of First Horizon (NYSE:FHN) should help reduce the company’s CET1 ratio to around 11% (a more optimal level) according to a March 14, 2022 article published by Fitch. A May 31, 2022 Looking for new Alphas article that FHN shareholders recently voted in favor of TD’s planned takeover, suggesting that the Toronto-Dominion Bank is making good progress in closing this transaction (expected completion in the first quarter of fiscal 2023).
This recent M&A transaction involving First Horizon and the quarterly dividend increase in the fourth quarter of fiscal 2021 are good examples of how well TD allocates capital. Given TD’s strong capital position, keeping too much excess capital on its books does not create shareholder value. Instead, The Toronto-Dominion Bank carefully considered its capital allocation priorities and options and opted for a balanced approach of both repaying excess capital (e.g. increasing quarterly dividend payout) and to invest for future growth (for example, proposed merger and acquisition).
I view TD Bank as a good long-term investment because the company is good at managing and allocating excess capital, which is key to long-term success despite the inevitable ups and downs in financial markets.
Are TD shares a buy, sell or hold?
TD stock is a buy because I consider it a good dividend stock. The company’s 164-year dividend payout history gives investors confidence that its dividend is reliable. The Toronto-Dominion Bank’s forward dividend yields in the 3% to 4% range should also be attractive enough from a dividend investor’s perspective.