The Toronto-Dominion Bank (TD) in Toronto, Canada, is the fifth-largest bank in North America and the second-largest bank in Canada, with more than C$1.70 trillion ($1.31 trillion) in assets (as of October 31, 2021). Operating in Canada and the United States, the bank has more than 26 million customers.

Shares of TD have surged 30% in price year-to-date and 3.5% over the past six months, reflecting increasing investor attention due to its high dividend yield. 

The stock’s 3.75% forward dividend yield is 41.4% higher than the industry average of 2.65%. And the bank recently raised its quarterly dividend payout to C$0.89 ($0.69), payable in January 2022.

Here is what could shape TD’s performance in the near term:

TD Ameritrade Sale

In October 2020, TD sold its partly owned broking subsidiary TD Ameritrade Holding Corporation to Charles Schwab Corporation. TD reported a revaluation gain of $2.3 billion from the transaction. However, this sale might have a negative impact on TD’s bottom line in the near term because its brokerage division had been a significant source of earnings.

Nonetheless, TD’s stake in Charles Schwab increased to 13.5% under the stockholders’ agreement, affording the bank a profit from the synergies.

Bleak Financials

For its fiscal fourth quarter, ended October 31, 2021, TD’s revenues declined 8% year-over-year to C$10.94 billion ($8.46 billion). Its expenses rose 4% from its year-ago value to C$5.95 billion ($4.60 billion). Its net income declined 26% from the same period last year to C$3.78 billion ($2.92 billion). And its EPS came in at C$2.04, down 27% from the prior-year quarter. However, the bank’s PCL ratio declined 56 basis points year-over-year, indicating lower credit default risk.

Stable Growth Prospects

Analysts expect TD’s revenues to rise 1.4% in its fiscal 2022 first quarter (ending January 2022), 4.2% in the current year, and 7.6% next year. The consensus EPS estimates indicate an 8.3% year-over-year improvement in the current quarter, a 2.3% increase in the current year, and a 6.4% rise next year. In addition, the Street expects TD’s EPS to rise at a 4.9% CAGR over the next five years.

However, a complex macroeconomic environment might affect TD’s growth trajectory next year. TD CEO Bharat Masrani said recently, “While we have good momentum entering the year, the road ahead is likely to be bumpy.” He added that meeting the bank’s 7% - 10% medium-term adjusted EPS growth target would be challenging in 2022.

Stretched Valuation

In terms of forward non-GAAP P/E, TD is currently trading at 11.61x, which is 5.3% higher than the 11.02x industry average. The stock’s 1.84 forward non-GAAP PEG ratio is 87.7% higher than the 0.98 industry average.

Moreover, TD’s forward Price/Sales and Price/Book multiples of 4.09 and 1.70, respectively, are significantly higher than the 3.33 and 1.22 industry averages.

POWR Ratings Reflect Uncertain Prospects

TD has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a grade of C for Quality and a D for Value. TD’s 33.32% trailing-12-month net income margin is 10.8% higher than the 30.08% industry average. However, the bank’s 0.83% trailing-12-month ROA is 1.4% lower than the 1.36% industry average, which is in sync with the Quality grade. In addition, the stock’s higher-than-industry valuation metrics justify the Value grade.

Of the 97 stocks in the C-rated Foreign Banks industry, TD is ranked #66.

In addition to the grades I have highlighted, one can view TD ratings for Growth, Momentum, Sentiment, and Stability here.

Bottom Line

As one of the biggest banks in North America, TD is expected to grow at a stable rate over the long term. However, rising inflation rates and the end of stimulus measures are expected to substantially increase the bank’s operating expenses in the near term. Furthermore, TD’s CEO expects the revenue pressure from the United States Paycheck Protection Program’s loan forgiveness to be a major challenge for the bank in the near term. Thus, we think investors should wait until the economy stabilizes before investing in the stock.

How Does the Toronto-Dominion Bank (TD) Stack Up Against its Peers?

While TD has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, Barclays PLC (BCS), UBS Group AG (UBS), and Bank of China Limited (BACHY), which have a B (Buy) rating.

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