Last week was a busy one for the Canadian markets. It was bank earnings season, which is always one of the most anticipated weeks in the markets. Canada’s Big Six banks form an oligopoly and are considered bellwethers of the economy.
This week was particularly exciting as it marked the first report since the Feds lifted the dividend freeze on financial institutions. This meant that banks could finally raise dividends and announce share buybacks after almost two years stuck in neutral.
One bank that stood out was Toronto Dominion Bank (TD), and I remain bullish on the company after strong Q4 and Fiscal 2021 results. (See Analysts’ Top Stocks on TipRanks)
Strong Quarterly Results
TD Bank was one of only two banks that topped on both the top and bottom lines. Earnings of C$2.09 beat by C$0.14, and revenue of C$10.94 billion beat by C$1.04 billion.
The bank also recorded a recovery in provision for credit losses (PCL) of C$123M versus a PCL of C$937M last year. As a reminder, the banks had booked some significant PCLs considering the pandemic and the anticipated impacts.
The good news is that the banks navigated the pandemic much better than expected. Today, those PCLs are now reversing course as the banks are well capitalized. Speaking of which, TD Bank’s CET1 ratio rose to 15.2% which is the highest among all the big six banks. It also marked a 200 basis point improvement over Q4 of Fiscal 2020.
Management struck a positive tone on its quarterly conference call as the bank remains well positioned to be one of the best performing banks in the country.
I’m proud of what we’ve accomplished this year, we’ve stood shoulder-to-shoulder with our customers, colleagues, and communities, supporting them through the worst of the pandemic and helping them participate in the recovery. There is still much work to do to ensure that this recovery is sustained and sustainable. But we meet the challenge from a position of strength powered by our proven business model, guided by our long-term strategy and investing purposefully in our businesses to position them for future growth.
Bharat Masrani, CEO
Worth noting, TD was one of the worst-performing banks in the first half of the year and, at one point, was arguably the cheapest bank in Canada. It has since closed that valuation gap in a big way. The stock is up ~33% year-to-date and has gone from one of the worst to one of the best for the year.
Dividend Raise and Share Buybacks
In terms of the dividend, TD Bank did not disappoint. It announced a 12.6% raise to the dividend, which puts its forward payout ratio at 38.7% based on Fiscal 2022 estimates.
Considering the bank’s historical payout ratio is in the low 40s, investors can expect another healthy raise next year.
On top of the dividend announcement, TD Bank announced the largest buyback of its peers. The company has filed to buy back up to 50M shares, which represents 5% of shares outstanding.
All in all, the banks are flush with cash, and the aforementioned strategies are likely just the beginning. TD Bank remains an excellent choice for investors looking for safe and growing dividend and market-beating returns.
Wall Street’s Take
Turning to Wall Street, TD Bank earns a Moderate Buy consensus rating based on six Buys, four Holds, and only one Sell rating.
The average Toronto-Dominion Bank price target of $84.24 puts the upside potential at 13.18%.
Disclosure: At the time of publication, Mat Litalien had a position Toronto-Dominion Bank.
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