The headlines were on fire earlier this year when it was reported that Toronto-Dominion Bank (TD.T) was the most shorted bank in world. Those headlines have all but disappeared but the bank’s short trade volume was still high in the November 15, 2023 Short Sale Trading Summary released by IIROC which placed the short trade volume at 17.78 million for a 27.28% of total traded during the two weeks leading up to the 15th. So how is the age old Canadian institution doing?
The banking landscape is complex, and Toronto-Dominion Bank’s fortunes are closely tied to broader economic trends. Rising interest rates, while generally beneficial for lenders, bring their own set of challenges. Increased deposit interest rates can squeeze profit margins, a phenomenon that has contributed to the struggles of some U.S. regional banks this year.
To further complicate things, CIBC Capital Markets analyst Paul Holden recently downgraded TD Bank, citing potential risks in the upcoming fourth-quarter earnings. Holden’s apprehension is rooted in broader sectoral trends, including peak credit losses and a challenging Canadian economic environment. This sentiment is echoed by David Burrows of Barometer Capital Management, who advises caution due to potential headwinds, particularly in the real estate sector.
Also, TD Bank’s foray into the fishing industry, particularly through its investment in Chester Basin Seafoods and other similar ventures, emerged as an unexpectedly challenging episode for the bank. Chester Basin Seafoods, primarily dealing in silver hake, encountered significant difficulties, encompassing debt restructuring and the need for vessel repairs. TD Bank, as the secured creditor, felt the strain of these developments, especially considering its approximately $39 million investment in the seafood sector. This situation represented the third instance of a seafood company underperforming within TD Bank’s investment portfolio.
However, the practical realities of these investments have shown less favorable outcomes for TD Bank. While the investments in the fishing sector have faced challenges, the overall impact on TD Bank seems relatively contained. The bank’s diverse investment portfolio and robust financial standing likely cushioned the blow from these less successful ventures. Additionally, the moderate buy consensus rating from Wall Street analysts, coupled with an anticipated 12.14% upside in TD stock, indicates that the market views these setbacks as relatively minor in the context of TD Bank’s overall performance and potential.
Knowing all this, market pundits continue to sing the company’s praises. Toronto-Dominion Bank continues to act as a high-yield dividend stock with a healthy 4.7% dividend yield and a sustainable payout ratio of 48%.
Beyond the payout ratio, TD seems to excel in other crucial metrics like earnings growth, profitability, and dividend growth. In fact, over the past five years, TD’s earnings have seen a healthy compound annual growth rate (CAGR) of 5.7%, escalating to 8.5% over the last decade. Correspondingly, its dividend growth has kept pace, registering an 8% CAGR over the past five years. Also, the banking institution’s strong net margin of 29% in the trailing 12-month period creates a strong buffer against the prevailing weak global economic picture.
Even though TD Bank underperformed in its latest financial report, it still did better than the market in general today. Therefore, it probably isn’t surprising that large institutional investors like Geode Capital Management added significantly to its stake in TD.
TD Bank represents a paradox. On one hand, its strong dividend profile, historical earnings growth, and solid profitability metrics paint a picture of a robust investment. On the other, the looming economic challenges and sectoral risks highlighted by analysts suggest a cautious approach. Investors eyeing TD Bank must weigh these contrasting narratives, balancing the allure of a high-yield dividend stock against the uncertainties of the current economic landscape.
