Sunday, March 9, 2014

Toronto-Dominion Bank Dividend Stock Analysis

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.


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% ( 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.


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.



To find out share fair value I mainly use these methods. (

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 Rates8%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 Rate8%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 Rate9.00%10.00%11.00%

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.


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.

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