By: Jacob Bishop, AIM student at Marquette
University
Disclosure: The AIM Equity
Fund currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary:
•
Toronto-Dominion Bank (NYSE:TD) is a
multi-national retail banking corporation that engages in financial products
and services globally. They operate through three segments: Canadian Retail,
U.S. Retail, and Wholesale Banking.
•
Since TD operates mainly in Canada, it is held to strict regulations regarding
the amount of risk the firm is allowed to take. As a result, TD is under
scrutiny for its current level of leverage and liquidity.
•
TD applied for a blockchain patent to digitally track assets at the beginning
of April. TD believes this is the future of finance and intends to incorporate
it into their banking systems.
•
Senior Executive Colleen Johnston has announced her retirement after 14 years
with TD. Her career spanned three decades and saw her take positions with TD as
Group Head of Direct Channels, Technology, Marketing and Corporate & Public
Affairs.
Key points:
TD
operates predominately in Canada which subjects them to more scrutiny of their
liquidity than other countries due to the financial regulation. Due to this
scrutiny, they facilitate notably lower percentages of loans than the average
bank. Toronto-Dominion Bank’s loan to deposit level in 2017 was 75.27%,
significantly lower than the industry average of 90%. As a result, TD is
lending out less than its total level of deposits compared to the industry.
While this number has consistently declined year over year, posting a 5 year
average of 79.14%, this may be a key part of their success. Consistently
keeping a lower loan to deposit ratio has allowed them to remain relatively
liquid, making them one of the safest multinational banks to invest in. They
consistently have cash on hand that allows them to invest into new projects
such as financial technology.
TD
submitted a patent application for “an apparatus for use in a digital asset
tracking system that includes a storage device and a processor coupled to the
storage device.” This device would be used to create decentralized ledgers that
contain information about the assets under management as well as the value of
transactions the bank facilitates. The eventual goal of the blockchain technology
is to reduce the risk of having a centralized ledger where information can be
more readily accessed by criminals, as well as increase the speed of data
processing. The application states that the technology “makes the system fairly
robust in comparison to centralized server systems by allowing multiple
distributed networks to verify the contents of a single ledger”. TD was listed
as one of the top 10 companies investing in blockchain, indicating they believe
that it is the future of the industry.
Colleen
Johnston has announced her retirement from TD after 14 years with the firm.
This is a notable retirement as she was a major part of the company; Colleen
was CFO from 2005 to 2015, guiding them through the financial crisis as well as
facilitating the banks expansion in North America. In addition, over the past
two years she was a major part of the banks technology capabilities and digital
customer experience. The incorporation of blockchain was facilitated through
her office. As a result of this retirement, the senior executive team has
undergone major changes in roles until they can find a replacement.
What has the stock done
lately?
Over
the past three months, TD’s stock price has steadily declined 7.75% from $60.20
to where it currently stands at $55.87. While this may be a significant
decline, the stock has done well in the medium term; TD has increased from
$36.65 in the past two years (52.44%). In addition to this increase, the
company posted an EPS of $4.21 in 2017, slightly beating expectations. TD
announced they will begin trading ex-dividend on April 9th. The
stock will pay a dividend of $0.519 per share on April 30th to
shareholders who purchased TD prior to April 9th.
Past Year Performance: TD’s stock price has dropped 5.02% in value
over the past year, but that may be more of a result of volatile markets than
company performance. Net Income in 2017 grew to $7,946 million, up 19.5% from
2016. The amount of loans facilitated increased by 7.94% and the amount of
deposits increased by 10.26%. They paid dividends of $1.80 in 2017 (10%
increases from 2016). Their financial statements indicate strong growth in all
aspects, a trend investors will be rewarded by in the long term.
Source: FactSet
My Takeaway
Despite
Toronto-Dominion Bank’s recent stock price drop, all signs show positive
growth. The company consistently posts strong financial statements that show
investors that the firm is a major player in the financial industry. The
company’s recent investment into disruptive technology shows that they are
focusing on long term development and intend to capitalize on changes in the
industry. The stock produces a consistent dividend stream; TD’s compound annual
dividend growth rate over the past 20 years is higher than 10%. Due to the
strong financials, consistent dividend stream, and growth into emerging
technologies, I recommend TD as a strong buy.
