Investors looking for consistent growth and reliable dividends have long turned to Toronto-Dominion Bank (TD 0.46%), better known as TD Bank. Shares of the Canadian bank have a proven record of resiliency, navigating previous downturns with ease. They have also produced above-average dividends, with a yield now around 5%.
Over the past 24 months, however, TD Bank stock has been in a slump. Shares have lost roughly one-quarter of their value over that period, and while the dividend has remained reliable, some wonder if the high payout is truly sustainable.
Is this your chance to buy a blue-chip stock at a discount, or is more trouble still to come?
Growth is stagnating
With a market cap north of $100 billion and nearly 30 million customers worldwide, TD Bank is a behemoth. By assets, it's the second-largest bank in Canada , a market dominated by a handful of powerful competitors. This size provides many advantages, allowing the company to invest in growth initiatives both domestically and internationally. It also provides enough firepower to outright buy the competition, something TD Bank has done dozens of times in recent decades.
Since the start of 2022, however, growth has slowed to a standstill. Assets have flatlined, and because TD Bank's profits are a direct function of total assets, the market has considerably reduced the price it's willing to pay for the stock. Two years ago, shares were priced around 2 times book value. Today, they're valued at just 1.5 times book value -- a 25% reduction, which accounts for the 25% fall in the stock price.
Shares have stabilized in recent months, but it seems the market is no longer willing to bet on growth, keeping the valuation under pressure.
TD Price to Book Value data by YCharts
Slow growth isn't all bad
Asset growth at TD Bank can no longer be assumed, but that doesn't mean the bank is in trouble. The company's common equity Tier 1 ratio -- a measurement of a bank's financial strength -- is one of the best in Canada, while internal cash flows remain strong enough not only to support a 5% dividend, but also launch a stock repurchase plan for 30 million shares. The company's net interest income, meanwhile, a profitability metric which captures the difference between a bank's interest-bearing assets and liabilities, is near an all-time high . Growth concerns aside, TD Bank is doing just fine.
What, then, should investors expect of TD Bank stock? At its current valuation, shares are priced near historic lows across several metrics. On a price-to-book basis, for example, shares were a bigger bargain only during the crashes of 2008 and 2020, both of which turned out to be short-term blips in the stock's long-term rise. There would likely need to be a headwind of similar magnitude to pressure the stock further.
Even if the days of growth don't return, there's still reason to believe in TD Bank as an investment. The 5% dividend is completely supported with current cash flows, and the share repurchase plan should reduce the total share count by 1% to 2%. According to the bank's CEO, Bharat Masrani, there could be additional share repurchases in the future, too.
Between dividends and stock buybacks, total shareholder yield should be around 6% to 7% per year. That's not a terrible return, considering the bank's long-term stability. Should growth tick upward once again, returns could be even higher, especially if the stock's valuation multiples rerate higher toward historical averages.
There's no guarantee that a return to growth is around the corner for TD Bank. Last year, it canceled a scheduled takeover of First Horizon, an acquisition that would have meaningfully boosted its growth trajectory in the U.S. market. The failure cast doubt on the bank's ability to continue expanding via acquisition. Still, the stock is hardly priced for perfection. At current levels, shares offer reasonable returns through dividends and share repurchases, with any potential growth offering bonus upside.
