Toronto-Dominion Bank is listed on the
Toronto Stock Exchange (TSE) with ticker TD.TO and on the New York stock
exchange (NYSE) with ticker TD.
Company Background (source Yahoo Finance):
The
Toronto-Dominion Bank, together with its subsidiaries, provides financial and
banking services in North America and internationally. The company’s Canadian
Personal and Commercial Banking segment offers various financial products and
services to approximately 14 million personal and small business customers
through a network of 1,179 branches and 2,845 automated banking machines; and
telephone, Internet, and mobile banking in Canada. This segment offers
financing, investment, cash management, international trade services, and
day-to-day banking needs to medium-sized Canadian businesses; financing options
to customers at point-of-sale for automotive and recreational vehicle purchases
through its auto dealer network; and credit cards. Its Wealth and Insurance
segment offers direct investing, advice, and asset management services to
institutional and retail clients; and a range of insurance products, including
home, auto, credit protection, travel, life, and health insurance, as well as
credit card balance protection products. The company’s U.S. Personal and
Commercial Banking segment provides retail and commercial banking services in
the United States. This segment offers its financial products and services
through a network of approximately 1,317 stores located along the east coast
from Maine to Florida; telephone, mobile, and Internet banking; and automated
banking machines. Its Wholesale Banking segment provides a range of capital
markets and investment banking products and services comprising underwriting and
distribution of new debt and equity issues; providing advice on strategic
acquisitions and divestitures; and meeting the daily trading, funding, and
investment needs to companies, governments, and institutions in financial
markets worldwide. The Toronto-Dominion Bank was founded in 1855 and is
headquartered in Toronto, Canada.
Analysis
Current Yield and Dividend Growth:
Toronto-Dominion
Bank currently pays a dividend of CAD 0.47 per quarter for a CAD 1.88 annual
dividend. At the close of market on Friday, March 7th TD’s price per share was
CAD 50.47. This gives the stock a current dividend yield of 3.72%. Normally I
look for a dividend yield of at least 3%, so I will be satisfied with this
dividend yield from TD. In 2004, Toronto-Dominion Bank paid an annual dividend
amount of CAD 0.68 per share. The dividend trend has been up each year as it
now pays CAD 1.88 annually per share. This gives TD a 10 year annual compound
dividend growth rate of 10.82%. Toronto-Dominion Bank has increased its
dividend now 3 years in a row. Toronto-Dominion Bank´s dividend growth rate had
been good on last 3 and 5 years, 9.91% and 6.54%. 1 year growth rate is
excellent 11.72%. Toronto-Dominion Bank
normally pays dividend in January, April, July and October.
EPS Growth:
Toronto-Dominion
Bank's EPS has grown an average of 16.37% over the past 10 years, 7.24% in the
past five years and 10.71% in the past three years. Last year EPS grown only
2.37%. Toronto-Dominion Bank's EPS of development in the past years seems not to be
very good. Analyst estimates for 5 year earnings growth rate per annum are 9.23%
(http://finance.yahoo.com/q/ae?s=TD.TO+Analyst+Estimates) If that will happen,
investors can be satisfied.
Net Income:
Toronto-Dominion
Bank's net income has increased by an average of 19.81% over the past 10 years,
11.33% in the past five years and 12.19% in past three years. Last year net
income grew up only 2.98%. The net income trend looks similar to the EPS trend.
Revenue Growth:
Toronto-Dominion
Bank's revenue has increased 10.50% over the past 10 years, 12.73% in the last
5 years, 11.69% in the last 3 years and 17.91% in the last year. The
development of revenue looks very promising.
Outstanding Shares:
In the last
10 year period, Toronto-Dominion Bank's amount of shares has increased every
year. That I basically don’t like, because more shares outstanding, my shares
are giving me a smaller portion of the earnings.
Payout Ratio:
Toronto-Dominion
Bank's dividend payout ratio has been in the past 10 years on average 5.50%.
Last 12 month period, the payout ratio was about 46.90%. This means that Toronto-Dominion
Bank was distributed around 50% of profits to shareholders and keeping 50% of
profits to grow the company. I like this payout ratio because it is fairly low
and I don’t believe Toronto-Dominion Bank's should have any trouble maintaining
dividend growth in the future.
ROE:
Toronto-Dominion
Bank's ROE has been around 16% over the past 10 years, which are ok for me.
Net Profit to long term debt:
This number
tells me how many years it will take to pay off the current long term debt of
the company by using all net profit in it. I would like to see this ratio to be
less than 5, because in that case the company is able to pay for all long-term
debt for less than five years and on my opinion then the company doesn´t have
too much debt. Toronto-Dominion Bank's long term debt had been clearly under 5
times net profit in last 10 years. In year 2009 it was the highest 4.43, but
has gone down after that, last year it was only 1.48.
Value
To find out
share fair value I mainly use these methods. (http://www.passive-income-pursuit.com/search/label/stock%20valuation%20method).
Graham
Number:
The Graham
Number valuation method was conceived by Benjamin Graham, the father of value
investing, and calculates the maximum price one should pay for a company given
the earnings and book value. Toronto-Dominion Bank has earned CAD 3.46 per
share in the last twelve months and has a current book value per share of CAD 25.59.
The Graham Number is calculated to be CAD 44.63, suggesting that TD is overvalued
about by 13%.
Average P/E
Ratio:
Toronto-Dominion
Bank`s current P/E is 14.0, which are lower as historical 5 years average high
(15.21) and also lower as 10 years average high (15.03). By calculating using estimated EPS CAD 4.25
for year 2014 and the average 5 years low P/E ratio (10.92) shares fair value
will be CAD 46.43. Using the 10 years the average low P/E ratio (11.05), fair
value will be CAD 46.95. Calculating with 5 years average P/E ratio (13.07),
fair value will be CAD 55.53, with 10 years average P/E ratio (13.04) fair
value will be CAD 55.42.
Average
Dividend Yield:
Toronto-Dominion
Bank`s current annual dividend is CAD 1.88. At the close of market on Friday, March
7th TD’s price per share was CAD 50.47. This gives the stock a current dividend
yield of 3.72%. Average 5 years high dividend yields has been 4.65% and average
10 years high dividend yields has been 4.24%. Those dividend yields give share
fair value CAD 40.40 to 5 and CAD 44.32 for 10 years. Calculating with 5 year
average yield 3.77%, the fair value will be CAD 49.85, with 10 year average
yield 3.48%, the fair value will be CAD 54.10.
Average P/S
Ratio:
Toronto-Dominion
Bank`s current P/S ratio is 3.37 with revenue estimates for the year 2014 (27.40B).
Average 5 years low P/S ratio is 2.55 and average 10 years low P/S ratio is 2.64.
By calculating using the estimated revenue for the year 2014 and the average 5
years low P/S ratio fair value will be CAD 38.25. Using the 10 years the
average low P/S ratio, the fair value will be CAD 39.53. Calculating with 5
year average P/S ratio (2.99), fair value will be CAD 44.83, with 10 years
average P/S ratio (3.08) fair value will be CAD 46.21.
Discounted
Cash Flow:
Analyst
estimates for 5 year earnings growth rate per annum is 9.23%. I will use in my
calculation 60% of that, which are 5.54%. Then I assume that continue growth
after 5 years will be 3%. I use discount rate 10% and EPS CAD 3.46. Total I
calculate for next 30 years. That will give me share fair value CAD 49.21.
| Discount Rates | 8% | 9% | 10% | 11% | 12% |
| NPV of Future EPS | $61.15 | $54.67 | $49.21 | $44.57 | $40.61 |
Dividend
Discount Model:
Toronto-Dominion
Bank`s current annual dividend is CAD 1.88. I assume that Toronto-Dominion Bank
will be able to grow dividends for the next 5 years at the lowest of the 1, 3,
5, or 10 year growth rate or 15%. In this case that would be 6.54%. Then I
assume that after 5 years grow rate will be 5%. To calculate the value I used a
discount rate of 10%. Total I calculate again for next 30 years. That will give
me share fair value CAD 56.45.
| Discount Rate | 8% | 9% | 10% | 11% | 12% |
| NPV of Future Dividends | $76.73 | $65.55 | $56.45 | $49.00 | $42.86 |
Gordon Growth
Model:
The Gordon
Growth Model is a quick way to calculate the fair value of a company using the
current dividend, the expected dividend growth rate, and your required rate of
return or discount rate. Assuming a constant 6.54% dividend growth rate and a
discount rate of 10.00%, the GGM valuation method yields a fair price of CAD 54.34.
| Gordon Growth Model Fair Value Estimate | |||
| Discount Rate | |||
| Dividend Growth Rate | 9.00% | 10.00% | 11.00% |
| 5.54% | $54.34 | $42.15 | $34.43 |
| 6.54% | $76.42 | $54.34 | $42.15 |
| 7.54% | $128.77 | $76.42 | $54.34 |
Future Price:
Toronto-Dominion
Bank has EPS 3.46 (ttm). When I calculate Toronto-Dominion Bank`s future price
with the analyst estimate for 5 years EPS growth (9.23%) and using the low P/E
ratio last 5 years, I come from price CAD 58.77. That would give about 15%
upside for TD´s current price.
Conclusion:
Toronto-Dominion
Bank is one of the Canada’s largest banks with 3 years continuing dividend
increase in a row now and I’m planning to add some financial company in my
portfolio. Based on my analysis, I think Toronto-Dominion Bank is currently relative
fairly valued. Toronto-Dominion Bank`s growth development in past years looks not
very good for me, on last 10 years there are several years, when TD’s EPS went
down. Toronto-Dominion Bank`s payout ratio is under 50%, as it has almost
always been in the past 10 years. So there will be a good reserve for dividend
increases in the future. Based on my value calculation, TD is now trading over
its average low P/E ratio, but lower as it`s an average P/E ratio. When I look
the average dividend yield and average P/S ratio, I see that, TD is now trading
near of its average 5 year yields and over of its historical average 10 year yields
and also over 5 and 10 year average P/S ratio. My calculation of discounted
cash flow gives price CAD 49.21 for the net present value, meaning that TD is overvalued
by 2.56%. Based on the dividend discount model, Toronto-Dominion Bank is worth
CAD 56.45, meaning it's undervalued by 11.8%. Overall I feel that
Toronto-Dominion Bank offers fair value at current levels. However, I'm going
to wait, if the stock price will fall close to the 46.00 CAD before I'm ready
to purchase TD's shares.
Disclosure: I don't own any shares of TD.
Click here to
see my holdings.
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