Recent Buy – Toronto-Dominion Bank

TD Bank

July is turning out to be a month where I am putting a lot of cash to work. This is already my third purchase for the month! Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to keep investing at regular intervals and build my passive income over the course of time. In staying true to tradition, here’s another purchase in my portfolio adding to an existing position.

I added to my position in Toronto-Dominion Bank (TD.TO) with 25 shares @ C$52.28. The company yields 3.87% adding C$51.00 to my annual passive income.

Recent Buy Decision

  • The Canadian banks are some of the safest and best run companies in the world.
  • The bank has a long track record of paying dividends – which have been paid since 1857, and has been raising aggressively after a freeze in dividend growth during the financial crisis.
  • As discussed in this article from earlier this year, the banking industry is facing headwinds as the Canadian economy faces commodity price collapse issues and possible housing bubble in Canada. However, as I highlighted, the banks are well protected and are primed for long term investors to start nibbling.
  • Bank of Canada (BoC) earlier this morning cut its interest rate by 25 basis points to 0.5%. However, TD immediately announced that it was only going to reduce the prime rate by 10 basis points 15 basis points(1) – essentially, not passing on the savings and stimulation to the economy as BoC intends. This means that the spread between overnight BoC rate and prime rate increases furthermore after an increase earlier in the year (see image below). The spread expanded from 2.0% to 2.1% in Jan 2015…and now expands to 2.25% 2.20%(1)! What does that really mean? More/easier profit for the banks going forward. This is great news for shareholders, but not so much for consumers.
  • The cut in interest rate also resulted in the Canadian dollar to drop against the US$. But there is a silver lining – companies with a big exposure in the US market benefit from this drop – especially the ones that report their financials in CAD$, which includes the banks such as TD. According to the 2014 annual report, the geographical diversification is: 65.5% Canada, 27.9% US and 6.5% Other Intl.
  • The fundamentals are attractive with a PE 12.89 and Forward PE 10.9.

TD-FastGraphs1

 

image (7)

 

Risks

  • Canada faces recessionary headwinds due to the collapse in oil and commodity prices. As expected, the financial sector will suffer whenever a country is hit by a recession. There are reports that Canada is already in recession, although BoC is sidestepping and avoids answering that question directly.
  • The fall in energy prices have also resulted in a fall in the Loonie (Canadian dollar). This might affect the earnings reports of the Canadian companies going forward.
  • The Canadian housing market is in a bubble territory according to many economists. If the bubble pops, the banks although protected by the taxpayer backstopped CMHC insurance, will still face some problems going forward. Some initial reports are already suggesting that the correction has started in Alberta, which is the hardest hit province due to the falling oil prices.

Further Reading

Full Disclosure: Long TD.TO. My full list of holdings is available here.

(1) Update: TD later last night reduced the prime rate to match the competition after initial prime rate announcement from 2.75% to 2.70%. The spread still increases, as mentioned in the post, but by a smaller margin.

10 thoughts on “Recent Buy – Toronto-Dominion Bank

  1. Congrats on adding to your dividend stream. Looks like the Canadian banks are still getting all the love from the DGI community. They seem like solid investments. Thanks for sharing.

    – HMB

    • Thanks HMB. I keep plugging away – adding to my positions, putting my money to work. The Canadian banks are at a very attractive valuation…although there are a few risks involved, but I think the risks are a bit misunderstood by the market. Great time to load up on the shares!

      Best
      R2R

  2. R2R,

    I have noticed that TD is trading near $40 (US) and looks pretty attractive here. I bought some shares back in January and should probably add some more. I keep getting sidetracked and usually buy energy companies instead. 🙂

    Great job!

    MDP

    • Hey MDP,
      I think after Energy, Financials seem to be very good value….I have been picking up shares in financials quite a bit and am getting pretty heavy.

      Happy Investing!
      R2R

  3. Nice buy buddy. I didn’t realize their yield was approaching 4%. I’m light on the banks, and a buy like TD would add some solid diversification. Take care buddy
    -Bryan

  4. RoadMap,

    Nice nice. I just may have added to a Canadian bank to my portfolio today as well… we’ll have to stay tuned to what that was. Great purchase, Love TD, great forward looking income you added.

    -Lanny

    • Thanks Lanny,
      Looking forward to see what or if you added…keeping your cards close huh? 🙂

      TD is probably the strongest of the lot – just adding away towards a decent sized position.

      Best wishes
      R2R

  5. R2R,

    Nice buy. Really like it. The market doesn’t care much for Canadian banks now, which means I like them. 🙂

    They face some headwinds for sure, but nothing I think will materially and permanently harm the businesses when looking out over the next decade or two. One risk that I don’t see being touched on a lot when looking at banks is the massive number of branches that many of the national players have. It’ll be interesting to see what banking looks like, say, 20 years from now when significant portion of it is mobile/online. I suspect those branches will at some point become something of a headwind of their own.

    Keep it up!

    Cheers.

    • DM,
      The Canadian banks continue to be beaten and I love it and have been adding to my position through the year…and will keep adding for years to come. Its really hard to beat a record like the Canadian banks – which have paid dividends for 150-200 years. Not a lot of companies that can boast a track record like that.
      Interesting point about the branches – it sure will be interesting to see how things progress. As technology evolves, the banks will need to figure out their strategy and I have full confidence in them doing the best for shareholders.

      cheers
      R2R

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