While the Great Recession was leading to dividend cuts at dominant U.S. banks like Citi and Bank of America, Toronto-Dominion Bank (TD 0.76%) held its dividend steady. That's a testament to TD Bank's strength and historically conservative business model.
Today the dividend yield is a relatively generous 4.3%, which investors shouldn't ignore, as it is near the highest levels of the last decade. Put simply, the stock, which has fallen 20% from its 52-week highs, looks like it is on sale today.
Boring at its core
One of the first things to know about TD Bank is that it's based out of Canada. While that means that U.S. investors have to pay Canadian taxes on any dividend received, it also speaks to the core ethos of the bank's management. Canada's banks are highly regulated businesses.
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For starters, the Canadian government has created a system in which there are a few leading banks. TD Bank is one of them. Regulators frown on mergers and acquisitions that might create new competitors or slim down the number of industry giants, all in an effort to create a stable banking environment in the country. So TD Bank is very likely to maintain its industry-leading position in Canada, which provides a solid business foundation.
The efforts of Canada's regulators, meanwhile, have instilled a conservative ethos in the banking sector. So TD Bank doesn't like to take huge risks both in Canada and in the United States, where it is working to grow its presence. That conservative approach suggests that investors don't need to worry so much about economic risk here, noting again that TD Bank was able to sustain its dividend through the Great Recession that basically wiped out the dividends of many U.S. peers.
A tough period
That said, banks are under pressure today thanks to rising interest rates. On one hand, increasing rates allow banks to charge more for loans. However, rising rates can also lead to weak demand for loans and increasing default rates.
Investors appear to be worried about the negatives here right now, noting that there are very real concerns that a recession will unfold in 2023. That would increase the risk posed by customers defaulting on loans. At this point, there doesn't appear to be any major problems brewing in the company's loan portfolio. Credit losses are still fairly low, and the company is increasing its reserves just in case there is an uptick in losses.
Meanwhile, the company's Tier 1 capital ratio, a measure of how well a bank can handle adversity, is at 16.2%, the second best in North America. That suggests that TD Bank will be able to navigate any near-term problems that do arise.
Future growth
There is a slight grain of salt that needs to be taken with the Tier 1 ratio. Part of the reason why it is so high is that TD Bank has been buying things.
For example, it recently completed a deal for Cowen, which will expand its capabilities in the investment banking space. And it is working to close a deal for First Horizon (FHN 0.78%), which will expand TD Bank's presence in key U.S. banking markets in the Southeast. Assuming that First Horizon eventually gets done, the Tier 1 ratio will drop to between 11% and 12%, a range with which TD Bank's leaders are comfortable.
The First Horizon deal is facing some regulatory headwinds, which has required TD Bank to seek an extension from First Horizon on the closing date. That's bad news, but not terrible. The worst outcome is that TD Bank isn't allowed to do the deal and its Tier 1 ratio remains super high.
However, TD Bank seems to think the acquisition will close eventually. And when it does, the bank's U.S. business will grow. That would be a long-term win.
A lot of moving parts
Investors don't like uncertainty, and there's a lot of that today in the banking sector and within TD Bank's own business, thanks to the First Horizon deal. But this conservatively run bank has a strong history of success behind it even during difficult times, and the yield today is historically attractive. Long-term dividend investors should take the time for a deep dive while the stock is still on sale.
