I have owned shares in TD for the last year or so now. As part of my newly regular update on the stocks I continue to own, I provide my quick analysis for why I think TD is a good one to own. This is of course my opinion.
TD Bank (stock ticker: TD on the NYSE) is one of the “Big 5” Canadian banks, the 2nd largest bank in Canada, and the 6th largest bank in North America. Over the years, TD has enjoyed a consistent and conservative regulatory environment in Canada that prevented it from making the mistakes made in Iceland, Europe, and of course as we all know, the United States (there are too many links for the US financial crisis). Consequently, TD has enjoyed fairly steady, conservative growth. Indeed, the Canadian banking industry overall was on a path to deregulation which from 2001 onward allowed it to expand into other lines of business such as Insurance, and investment in foreign countries such as the US and Latin America. The Canadian Government was considering further deregulation in 2007-8 just before the financial crisis, as a matter of prudence, since the US and Europe were enjoying wild gains before the crash. Luckily that didn’t happen.
I have watched TD Bank for a long time now, from before they started investing in the US, or opened up their Insurance business, and have always had a “good feeling” with my experiences this bank. It may be because my favourite colour is green. In the past decade, they have notably increased their focus on Customer Service by leading the banks in extending bank hours, opening more branches in neighbourhoods, and also investing early in their website for an online banking experience (apparently they were the first bank in N. America to do so, according to wikipedia). Notably, they have been consistently recognized for top customer service by JD Power, a third party auditor. This bank reminds me a lot of the strategic focus employed by TELUS, a company I posted about here. Perhaps it is because Mr. Darren Entwistle is on the board for TD Bank that this is not a coincidence.
Taken from their website here, TD is made of 4 main lines of business:
- Canadian Personal and Commercial Banking including TD Canada Trust and TD Auto Finance Canada
- Wealth and Insurance including TD Wealth, TD Ameritrade, and TD Insurance
- Wholesale Banking including TD Securities
- U.S. Personal and Commercial Banking including TD Bank, America’s Most Convenient Bank and TD Auto Finance U.S.
In the US, TD has been expanding along the East Coast, purchasing BankNorth in 2004 (as per wikipedia), and expanding that footprint by buying failed banks after the crisis, in other states.
Overall, TD has done really well in the past 10 years, outpacing the S&P500. Looking at the last 5 years since the market crash however, is not quite as exciting a story, see the image below. But, it’s keeping pace on the average, so still good. Plus, I’m not sure if these charts reflect adjusted gains from events like dividends, which is highly relevant. I’m still figuring this charting thing out.
(chart courtesy of http://www.freestockcharts.com)
Why I like TD
I’m not sure if this makes them an outlier, but when reviewing TD’s history of growth and acquisitions, the company has a calm history of patiently waiting for the right moments to enter into new markets, or acquire a competitor. In particular, their US growth strategy was well done as they took advantage of the cheap deals to expand their footprint. Another example is their decision to buy back TD Waterhouse at a third of the price they sold it for, in 1999.
I also really like that they were one of the first banks to embrace new technology with their PC banking platform in 1996, and in 1999 had a pretty decent website. Canadian business in general is known to be very conservative relative to technology (many of my friends still swear by their Blackberry!), so TD is a bit refreshing in that they are early adopters.
TD Bank differentiates itself by its customer satisfaction rankings. It has ranked highest in customer satisfaction 8 years in a row. To that end, a recent personal example, I was able to attend a free seminar on Options trading the other day, run by TD at a downtown branch. It was very informative and completely for education on the topic, instead of a sales job, which in honesty is what I expected.
It also is a top employer in Canada, as measured by Aon Hewitt. This one for me is what I watch for. How a company treats its employees is critical for me as an investor. There is a balance between delivering share value to investors, and treating your team well. Like Stephen Covey’s favourite parable, don’t kill the goose for the golden eggs. Treat the employees well and the company will do well, and hence my share price.
A History of Returns and Growth
TD had the highest total Shareholder Returns (TSR) among Big Five Canadian Banks for the 3, 5 and 10 year time periods (although it tied for first at the 3yr mark), according to TD’s annual report. That’s not bad, and I believe this speaks to their relentless focus on customer experience. It will be fun to watch this in the next 5 years if they can match it. While growing their share price, they are also raising dividends, with 2 increases per year since 2011.
Looking to the US, TD is also pursuing a growth strategy for the US market, as they opened up their 1300th store in 2012. They are currently have the 11th largest store network in the US, up from 0 in 2004. Not bad in less than a decade. Their TD Ameritrade business is also pulling in record profits. As their growth strategy continues, I would expect their other lines of business to benefit.
I like TD Bank because of its focus to Customer Experience, similar to the successful strategy employed by TELUS Communications Inc, another pick. They are also a regular in the top-employer list within Canada. When I searched the US side of the bank for similar recognitions, there were many to review there as well. Lastly, TD has a strong commitment to the environment with recycling, paper reduction, efficient energy use, etc.
The Canadian banking industry seems to be a fairly mature market, so I would look to the US to find the interesting discussion around growth. TD seems to be employing it’s successful model used in Canada in its expansion in the US, by using store fronts as a great place to engage customers in banking products and services. They are expanding rapidy, with 1300 “stores” in less than 10 years, or 130 stores a year, or 10 stores a month, on average. Each store is an opportunity to sell not only banking solutions, but wealth management and insurance solutions as well. If they can achieve this while also maintaining strong focus to delivering excellent customer experience, they will continue to gain marketshare. And let’s face it, the US market is a lot bigger than Canada’s, so this is exciting.
The insurance business is the one area of TD which I don’t understand too well. I know that insurance serves the likes of Warren Buffett well, since Berkshire has a large insurance component to their business. But we see the risks associated with the business as well after significant weather related events dented TD’s bottom line in 2013. I’ll have to read more about that piece, and if anyone has any comments to share about it, I’d welcome it.
One thing to note, before I sign off, it’s interesting seeing TD’s flat growth over the past few years as the SP500 has gained (see the chart image above). Whether this means they are poised for another jump in share price value or not, I’m not sure. The decision for me to stay invested or not is due to being an investor vs. a speculator. I’m in for the long haul on the reasons stated above. Also, I have read some chatter that the S&P500 this year (2013) has only really gained on rises in pe ratio, which means that the market has driven up share prices high, unsupported by actual earnings. In other words, the market may be due for a sell-off. TD’s PE ratio has also climbed in the last half of this year but is not wild compared to it’s 5 year average. Hard to say what the immediate future holds, but for a 5-year investment, TD all the way.
I have gotten to know this company well over the past several years, and I will continue to monitor their success in the news, and in my own portfolio!