Good Day Everyone,
Thank you for joining me as I go through my stock pick of the Year….. TD Bank!
Before I get started, I just want to make one thing clear: This stock pick is not necessarily the stock in the whole market I think will perform the best, but TD is the one I feel has the best blend of stability, growth potential, dividends, and positive trends going for it in 2017.
So as usual, let’s start at the beginning. The stock is at the 52 week high (when is a Canadian Bank stock not near 52 week highs?) but it still pays a 3.25% dividend, which it has been growing every year since 2010. It’s also worth noting that they didn’t reduce their dividend in 2008-2010 during the financial crisis.
So why the banking sector? And secondly, why TD? There are 5 huge banks in Canada and Scotiabank was by far the strongest performer last year? TD was just grouped in with the other 4 in terms of stock performance in 2016, so why TD in 2017?
Let’s break this answer down into 2 parts
I like the banking sector because…
- I see interest rates in the US continuing to increase which should help banks with American exposure lend at higher rates relative to their deposit interest thereby increasing their margins
- Oil seems to have stabilized so further pain from the oil and gas sector in Canada should be limited
- I don’t see an implosion in housing prices in Canada (although they are high). Anyone that lives in Toronto knows how hard it is to get a house, the demand far outweighs supply. I’m no housing expert though so I’m less confident about this one
- How can you be bearish on Canadian banking? It’s the best in the world!
I like TD Because…
- TD has the biggest exposure to the US which leads means…
- A Trump/Republican government should making cut down on banking regulations, making easier for banks to profit in the US
- Strong commitment from management to growing the dividend
- TD has a lower exposure to the oil and gas industry relative to some of their peers
So let’s take a look at some of these points one at a time
Exhibit 1: TD’s US Exposure
As you can see from the paragraph below, TD has more branches in the US than in Canada. They are the most levered to the American economy of the big 5 banks in Canada.
Exhibit 2: A Trump US can make TD a leader again!
I’ve attached a good article above on how Trump’s pro banking stance can help the banking industry succeed under his tenure. By removing pesky regulations, banks can thrive in the new political climate in the US. I will post some snippets below to summarize, I encourage you guys to read the full article.
- “The most immediate change is likely to be a leadership change at the Consumer Financial Protection Bureau” “likely with someone more friendly to the industry”
- There’s a possibility that Trump and a Republican-controlled Congress will pursue legislation to significantly weaken or even eliminate the CFPB altogether, Peterson says.
Exhibit 3: TD’s Strong Commitment to Growing the Dividend
I am a strong believer in dividend investing, and companies that grow their dividend consistently is the gold standard. TD has been growing the dividend consistently since the 90’s and I foresee that trend continuing.
Exhibit 4: Steepening of the Yield Curve
I found a really cool site that shows a time lapse of the US yield curve since 2000. You can play the whole thing, but I want to focus just on 2016. http://stockcharts.com/freecharts/yieldcurve.php
You can see that as the year ends (around when Trump is elected) the yield curve starts to steepen. This means that bond yields are higher, profitability at banks rise as they can lend at higher rates while still paying out relatively low rates for short term deposits. A useful article on that can be found here.
As the economy in the US improves, I expect interest rates to slowly creep up. Canada on the other hand, may take a while longer for economic recovery. According to Dejardins, it may take the Bank of Canada until 2018 to start raising interest rates. Their research can be found here.
Even in a low interest rate environment, TD has still managed to grow profits and dividends, so a boost to their American operations will hopefully see that growth accelerate on the top and bottom line.
Bottom Line: My stock of the year pick might not be a sexy one, but I think this is one of the most recognizable and stable dividend growth stocks out there. With their exposure to the US market, I have no reason to believe they won’t continue to outperform the TSX (as they have for the better part of a decade). If you’re an indexer, I won’t recommend you switch over to investing in individual stocks. If you do build your own portfolio, I see TD as a great pick not just for 2017, but for the long term because like I mentioned above; how can you possibly be bearish on Canadian Banking?! I look forward to tracking this as well as all my stock of the month picks at the end of the year! Until then…
Have a Great Day!
Disclaimer: I don’t own any shares of stocks mentioned in this post. These opinions in this post are mine alone. Please ensure any investment decisions you make meet your risk tolerance and objectives.
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