Toronto-Dominion Bank (TSX:TD) has had a fairly strong 2018 thus far. The stock is up just over 10% in 2018 and although we have to take into account the nose dive the blue chip Canadian stock took during the fourth quarter crash of the TSX in 2018, investors who took advantage of it have reaped the benefits.
TD has long been one of the best dividend stocks in the country, and as such is one of the more popular stocks on the TSX today. The stock is one of the largest holdings in many Canadian ETFs that focus on banks as well. The real question is, should you be picking up TD Bank right now, in the wake of a looming recession?
Toronto Dominion Bank has weathered the storm better than most
Investing is a long term game, we all know this. Avoiding the purchase of stocks due to looming economic conditions is in my opinion an egregious error. Do companies struggle during poor economic times? Absolutely, especially lenders. As economic uncertainty rises, people start to pinch pennies and the end result is lower financing revenue for banks.
But missing out on value today in hope that you’ll gain more value based on a future event isn’t the way to go about things. We’re currently in one of the biggest bull runs in history, and those who have been sitting on the sidelines waiting for the market to crash have been missing out on some extraordinary gains.
Canadian Banks , in particular TD Bank weathered the storm during one of the biggest economic disasters in recent decades, the 2008 financial crisis. As American institutions cut dividends left, right and center, there wasn’t a single Big 5 bank that did so. Sure, TD Banks share price was nearly cut in half, but this allowed investors to simply dollar cost average their positions into an astonishingly low price.
A falling housing market doesn’t have to be a bad thing
A lot of investors are concerned about the housing bubble here in Canada. Prices are up, and buyers are few and far between. However, as prices fall back to reasonable levels, we can expect to see more buyers emerge. Especially in the extremely low interest rate environment we’re currently in.
Lower mortgage rates in both the United States and Canada are making houses more affordable, but economic concerns are currently outweighing this. With the United States dropping interest rates, we could see similar action here in Canada which could give a bump to the market due to more purchasing power being available to prospective homeowners.
Even in the event of a recession, TD Bank is in a strong position financially
TD Bank saw revenue grow in every segment of its retail operations last quarter, with 6% growth in both its Canadian and U.S. retail segments and 13% with its wholesale banking. The company generates significant cash flows and its diversification across North America will allow it to succeed better in a recession than a stock that primarily drives revenue here in Canada like CIBC (TSX:CM)
Forget about short term events. The value in TD Bank comes from a long term buy and hold strategy. TD Bank is currently the only Canadian bank that is growing its dividend at a double digit pace over the course of the last 5 years, and has raised dividends consistently since 2011. This is far better than a struggling Canadian bank like The Bank of Nova Scotia has achieved as it struggles to expand internationally.
Poor market outlook has left the Canadian bank trading at a deep discount, with a forward price to earnings of only 10.42. If you’re just learning how to buy stocks in Canada, the forward price to earnings compares expected earnings per share of the company to its current price, not its past earnings.
Analysts expect the company to grow at a rate of 6% annually over the next 5 years. Combine that with a 4.02% dividend yield at the time of writing, and you have one of the most reliable stocks in the country earning you double digit returns on an annual basis.
**Daniel Kent is long TD.TO