We came across a bullish thesis on The Toronto-Dominion Bank (NYSE:TD) on ValueInvestorsClub by afgtt2008. In this article, we will summarize the bulls’ thesis on TD. The company’s shares were trading at $52.55 when this thesis was published, vs. the closing price of $59.60 on Feb 25.
A series of ATMs in a row, symbolizing the company’s 24/7 banking services.
TD provides various financial products and services in Canada, the United States, and internationally. It operates through four segments namely Canadian Personal and Commercial Banking, U.S. Retail, Wealth Management and Insurance, and Wholesale Banking.
The primary reason why the stock performance has been muted is the lengthy investigation of its Anti-Money Laundering program for which the bank has taken full responsibility. A fine of $3 billion has been imposed, which has already been provisioned for. An asset cap of its US business (accounting for 30% of TD’s total earnings), should not be a bottleneck to its growth since the deposits are concentrated in high-quality liquid assets (HQLA) and there is sufficient scope to generate better margins by exploring the high-yield spectrum. The current loan to deposit stands at 50% and if this is aligned with the regional average of 76%, it could translate into a 15% increase in earnings for the US business.
The current price reflects a potential 50% upside considering an earnings multiple of 13x which is close to its peer Royal Bank of Canada which was trading at 13.5x. The potential value that can be realized from its ~10% stake sale in Schwab will be beneficial to its shareholders since Schwab is trading at 20x. The position is Schwab provided access to deposits from sweeping accounts but due to it being demand deposits required TD to park these funds in low-yield high quality assets. With no real economic value from this engagement, TD can reduce its stake and use the funds to buy back shares that are available at an attractive valuation.
TD currently has a forward dividend yield of ~5%. With a CET 1 ratio above 13%, it is expected that TD can sustain this rate over the long term. The attractive yield along with a 50% potential upside provides a strong investment case for a bank that has a robust balance sheet and sufficient scope for business growth.
While we acknowledge the potential of TD as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than TD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: 8 Best Wide Moat Stocks to Buy Now and 30 Most Important AI Stocks According to BlackRock.
Disclosure: None. This article was originally published at Insider Monkey.
Hedge Fund Resource Center