The last time I looked at the Toronto-Dominion Bank (TD, Financial), shares had vastly outperformed the S&P 500 over the prior three months. I felt at that time that the stock still had a solid total return potential. Since then, shares are higher by another 18%.
Is there still more upside in Toronto-Dominion, or should investors wait for a pullback before adding the name? Let's look at the company's most recent quarterly result as well as its valuation to determine the answer to that question.
Quarterly highlights
Toronto-Dominion reported results for its first quarter of fiscal year 2021 on Feb. 25. Revenue grew 8.3% year-over-year to just under $8 billion, which topped Wall Street analysts' estimates by $337 million. The year-over-year growth in revenue was the highest percentage since the second quarter of fiscal year 2018. Adjusted earnings per share of $1.45 was a 17% improvement from the prior year and 28 cents above expectations.
Continuing a theme from previous quarters, provisions for credit losses, or PCL, were down 66% on a year-over-year and sequential basis. Toronto-Dominion, like many other financial institutions, allotted more funds to PCLs as Covid-19 negatively impacted both the U.S. and Canadian markets.
Impaired loans, which are those that the bank is unlikely to collect all amounts due on, grew 30% from the prior quarter but fell 58% from the previous year. Performing loans, which are those that have payments less than 90 days overdue, declined 17.7% and 36.5% from the previous quarter and prior year, respectively. Combined, PCLs represented just 0.17% of total loans for Toronto-Dominion, showing how well the company's loan portfolio is performing even under difficult circumstances. Total loans grew 3% with deposits up 24%.
The Canadian Retail segment had a 1% increase in revenue, but net income was higher by 14%. Much of the gain in net income was due to lower PCLs, but higher transaction and fee-based wealth revenue were also up. A 4% improvement in loans and a 21% increase in deposits also contributed to results. Net interest margins decreased 29 basis points to 2.65% due to lower average interest rates.
U.S. Retail revenues were lower by 5% from the prior year while net income fell 11%. On a sequential basis, revenue improved 2% and net income was up 18%. Lower deposit margins and fees were a headwind for the year-over-year comparison, but loan volume growth was up 5%, with commercial loans showing especially strong growth rates. PCL declined 42% and net interest margins fell 83 basis points to 2.24% due to lower average interest rates.
Wholesale Banking is where Toronto-Dominion saw most of its top and bottom-line growth. Revenue improved 25% and net income grew 56%. Trading related revenue was robust with loan, underwriting and advisory fees growing substantially from the previous year as well.
Toronto-Dominion continues to leverage its digital capabilities to improve customer experience. Almost 60% of Canadian customers and 49% of U.S. customers engaged with the bank digitally during the first quarter. Active mobile users for the two regions combined to improve 11% from the previous year. Self-serve transactions as a percentage of all financial transactions grew 660 basis points to 92.1% for customers in Canada. This percentage was up 820 basis points to 78.4% for those in the U.S., showing just how important a digital experience has become to Toronto-Dominion's two largest segments.
Toronto-Dominion is expected to earn $5.32 per share in the current fiscal year. Achieving this result would represent growth of almost 28% from fiscal year 2020. As a reminder, last year's results were severely hampered by PCLs related to Covid-19, so growth will be measured against a low base. However, reaching consensus estimates would have Toronto-Dominion back above its pre-Covid-19 results.
Valuation
Using Friday's closing price of $65.48 and expected earnings per share for the year, Toronto-Dominion trades with a forward price-earnings ratio of 12.3. This is just above the 10-year average price-earnings ratio of 12.2.
At the time of my last article on the company, Toronto-Dominion was trading below its intrinsic value as calculated by GuruFocus.
However, Toronto-Dominion currently has a GF Value of $63.61, which equates to a price-to-GF Value ratio of 1.03 and earns the stock a rating of fairly valued. Shares would have to decline to 2.9% to reach the GF Value level.
In terms of dividends, Toronto-Dominion yields 3.7%. U.S. investors have seen their dividend payments compound at an annual rate of 5.8% over the last decade. The company has a very long tradition of providing income to investors as the first dividend was distributed in 1857. Toronto-Dominion managed to maintain it during the last recession while its U.S. peers were all forced to cut dividends. And with an expected payout ratio of 52% for the current fiscal year, it is likely that Toronto-Dominion will continue to raise its dividend.
Shares of the company are more than 100% above their 52-week low as Toronto-Dominion has proven itself to be incredibly resilient. The discounted valuation that Toronto-Dominion offered during the height of the Covid-19 headwind has disappeared, but the company remains very attractive, in my opinion.
We added to our position at the beginning of the year and are sitting on a nearly 35% gain since first buying shares of Toronto-Dominion in September of 2020. I would prefer a pullback prior to adding again, but the company's ability to navigate the pandemic so successfully coupled with its extensive dividend growth track record make Toronto-Dominion one of my favorite names in the financial sector. On any weakness, we would likely be buyers again.
Author disclosure: the author maintains a long position in Toronto-Dominion.
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