BalkansCat
Elevator Pitch
My Buy investment rating for The Toronto-Dominion Bank’s (NYSE:TD) (TSX:TD:CA) stock remains unchanged.
I assessed The Toronto-Dominion Bank to be a “good dividend stock” based on its “track record and yield” in my prior article for the company published on June 3, 2022. With the current write-up, I review TD’s most recent financial results for the fourth quarter of fiscal 2022 (YE October 31).
TD delivered an earnings beat for the recent Q4 FY 2022, and the bank has guided for a faster pace of earnings growth in FY 2023. I think that The Toronto-Dominion Bank’s current valuations haven’t fully factored in the bank’s positive financial outlook. Therefore, I choose to maintain my Buy rating for TD’s shares.
What Were Toronto-Dominion Bank’s Expected Earnings?
The Toronto-Dominion Bank registered a normalized earnings per share or EPS of C$2.09 for both Q4 FY 2021 and Q3 FY 2022 as per S&P Capital IQ’s historical financial data.
Prior to the bank’s actual financial results announcement, the sell-side analysts had expected TD’s bottom line to contract by -2% on both a QoQ and YoY basis to C$2.04 in Q4 FY 2022.
In the subsequent section, I touch on how The Toronto-Dominion Bank fared relative to expectations.
Did Toronto-Dominion Bank Beat Earnings?
TD achieved an adjusted EPS of C$2.18 for the final quarter of fiscal 2022, as indicated in the bank’s most recent quarterly earnings press release.
In other words, The Toronto-Dominion Bank’s actual Q4 FY 2022 bottom line translated into a +4% growth in both YoY and QoQ terms, and this was +7% superior to what the analysts had previously anticipated (C$2.04).
In the company’s Q4 FY 2022 earnings presentation slides, TD highlighted that it benefited from “margin expansion and volume growth in personal and commercial banking businesses” in the most recent quarter. These were the key drivers of The Toronto-Dominion Bank’s fourth quarter earnings beat.
I’ll discuss The Toronto-Dominion Bank’s other key metrics (apart from normalized EPS) in the next section.
TD Stock Key Metrics
There were other positive takeaways from The Toronto-Dominion Bank’s most recent quarterly financial results besides the better-than-expected bottom line. In this section, I focus my attention on a couple of key metrics for TD.
The first key metric is dividends.
The Toronto-Dominion Bank declared a dividend per share of C$0.96 for the upcoming quarter, and this is +8% better than the company’s prior quarterly dividend of C$0.89 per share.
In my earlier June 3, 2022 write-up for TD, I described The Toronto-Dominion Bank as a “dividend growth stock” making reference to the bank’s track record of growing its dividends by a “+11% CAGR between 1996 and 2022.” TD has indeed lived up to its billing as a dividend grower with its most recent quarterly dividend hike.
The second key metric is net interest margin.
The Toronto-Dominion Bank’s net interest margin expanded significantly from 2.21% in the fourth quarter of fiscal 2021 and 2.62% in the third quarter of fiscal 2022 to 3.13% for the most recent quarter.
At the bank’s Q4 FY 2022 results briefing, TD noted that the increase in the bank’s net interest margin was the result of “deposit margin expansion” and the “improvement in treasury returns on our investment portfolio.”
The third key metric is the growth in costs.
TD has struck a good balance between maintaining profitability and investing in future growth.
As disclosed in its Q4 FY 2022 results presentation, The Toronto-Dominion Bank’s non-GAAP adjusted expenses (+9%) grew at a slower pace as compared to the increase in its non-GAAP adjusted revenue (+12%) for the recent quarter. TD reiterated its commitment to cost optimization, noting at its Q4 FY 2022 earnings briefing that “I would expect us to moderate the rate of expense growth over the subsequent quarters.”
At the same time, TD isn’t backing away from investments that can help to drive the bank’s future growth. At the company’s most recent quarterly investor call, The Toronto-Dominion Bank revealed that a “significant portion of” the increase in adjusted expenses for its US retail segment is attributable to “investment spending”, rather than “inflationary pressures.”
In a nutshell, The Toronto-Dominion Bank has performed reasonably well in the fourth quarter of fiscal 2022, taking into account both its earnings beat and other key metrics such as those mentioned in this section.
What To Expect After Earnings
Investors should expect The Toronto-Dominion Bank to deliver a faster pace of bottom line expansion in the new fiscal year 2023 following its Q4 FY 2022 and full-year FY 2022 results announcement.
TD has guided for its normalized EPS to grow by +7%-10% for FY 2023 as noted in its recent quarterly earnings media release. Based on the midpoint of its financial guidance, the bank’s management expects TD’s normalized EPS to increase by +8.5% from C$8.36 for FY 2022 to C$9.07 in FY 2023. This will represent an acceleration in The Toronto-Dominion Bank’s bottom line growth as compared to its +5.7% normalized EPS growth for FY 2022.
The Toronto-Dominion Bank explained at its Q4 FY 2022 earnings call that its FY 2023 bottom line growth guidance is supported by “further rate increases that are embedded in the forward curve” and “acquisitions.” Specifically, TD indicated in its fourth quarter results press release that the bank has two M&A transactions that are expected to be completed in 1Q 2023 (the acquisition of Cowen) and 1H 2023 (the acquisition of First Horizon), respectively.
Is TD Stock A Buy, Sell, Or Hold?
I continue to rate TD’s stock as a Buy. The Toronto-Dominion Bank’s recent quarterly financial results were good, and it is expected to turn in a good performance for the new fiscal year as well judging by its management’s guidance. More importantly, TD’s valuations are attractive. The Toronto-Dominion Bank currently trades at a 10.2 consensus forward next twelve months’ normalized P/E (versus 10-year mean P/E metric of 11.5 times), and offers a consensus forward next twelve months’ dividend yield of 4.1% as per S&P Capital IQ data.
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