If you want a North American bank with a 100-plus-year history of steady dividend payments, look north of the border. Specifically, Canada-based Toronto-Dominion Bank (TD -1.92%), more commonly known as TD Bank, pays one of the best dividends in the banking industry and has a safe but ambitious growth strategy that could keep its excellent performance going for decades to come.
Toronto-Dominion Bank: The one-minute version
Toronto-Dominion, or TD Bank, is the sixth-largest North American bank, both in terms of total assets and market cap. The bank is based in Canada but has a substantial and growing U.S. operation.
Over the past decade or so, TD Bank has grown rather aggressively, both organically and through a series of retail-oriented acquisitions. Major acquisitions over the past decade include New Jersey-based Commerce Bank and credit card portfolios from Chrysler Financial, MBNA, and Target. Before 2010, TD Bank exited several of its non-core businesses, such as proprietary trading, to focus on retail, a move that seems to have paid off nicely.
In addition to its Canadian and U.S. retail banking operations, TD Bank owns about 42% of TD Ameritrade (AMTD). TD Ameritrade and TD Bank recently entered into an agreement to acquire Scottrade, and as part of this deal, TD Bank will acquire Scottrade Bank, the company's U.S. banking unit, for $1.3 billion, so it's fair to say the growth isn't done yet.
Reasons to love TD
There are several reasons I own TD Bank in my portfolio, and why you may want to take a look as well. For example:
- While other banks are shifting away from a physical presence, TD Bank still emphasizes great, personal customer service. Known as "America's Most Convenient Bank" ever since it acquired Commerce Bank in 2008, TD Bank's branches are open for longer hours than its peers, and many branches are open on the weekends, even Sundays.
- TD Bank has a diverse revenue stream -- just 61% of its earnings come from Canada, making U.S. investors less vulnerable to currency fluctuations.
- Unlike the big U.S. banks, TD Bank has more freedom to set its own dividend policy. This is why the company never cut its dividend during the financial crisis and continues to pay one of the best dividends among the big North American banks.
- Since most of its funding comes from personal and commercial deposits, many of which are non-interest-bearing, TD Bank stands to benefit from the expected interest rate growth over the coming years.
- TD Bank is the No. 1 credit card issuer in Canada and has several high-value co-branding agreements, such as Target and Nordstrom in the United States.
- TD Bank has lots of room to grow its U.S. business, as it is currently only in 15 states and the District of Columbia. However, TD Bank has a top-five market share in all its major markets, including the No. 3 market share in New York City.
- TD Bank is a socially responsible company and is a member of the Dow Jones Sustainability World Index. It was also named "Best Green Bank" in North America by Capital Finance International.
- TD Bank has one of the best credit ratings of any bank, anywhere. With long-term debt ratings of Aa1 (Moody's) and AA- (S&P), it's no wonder Global Finance magazine named TD Bank the "safest bank in North America."
The proof is in the performance
A stock's past performance doesn't guarantee its future results, but it can be a good predictor, especially in regard to dividends and earnings growth. In other words, a stock with a history of growth in a variety of economic environments, as well as a strong history of dividend growth, is more likely to continue these trends than is a stock with a shaky dividend history.
TD Bank has done a good job of consistently growing its earnings, which has allowed it to increase its dividend at an 11% annualized rate since 1995. Even more impressively, you'll notice that there have been no dividend cuts -- even during the financial crisis. How many big U.S. banks can say that?
Furthermore, TD has produced significantly better returns than its peers -- both Canadian and U.S.-based. In fact, over the past decade, TD's average annual total return of 10.4% handily beats the North American average of 2.5% and tops the Canadian big-bank average of 7.8%.
Could TD's best years be ahead?
While I think TD's growth still has a long way to go, the next few years could be particularly good for TD Bank. Now, TD may not be quite as much of a beneficiary of President Trump's de-regulation and economic growth efforts as the big U.S. banks, but with massive U.S. exposure, it would still benefit from a rising-rate environment, as well as the increasing demand for banking services that Trump's job and wage growth initiatives could create.
The bottom line is that the next few years could be a great time to own bank stocks, and TD is a good choice that could capitalize on any "Trump effects," as well as deliver excellent growth in a safe manner for decades.