Toronto-Dominion Bank

Toronto-Dominion Bank (TSX: TD) is one of Canada's largest banks and operates via three business segments: Canadian retail banking, U.S. retail banking, and wholesale banking. The bank's U.S. operations span from Maine to Florida, with a strong presence in the Northeast.

Recently, the company launched TD GoalAssist, which is a new mobile app designed to help Canadians set financial goals and invest as per the risk profile of the customers.

Investment Rationale:

• • Consistent Earnings Growth: TD has shown stable bottom-line growth over the years. The group reported a 5-year CAGR of ~8.2% in earnings during the period of FY14 to FY19, which is impressive. The company derives its major earnings from Canadian Retail segment, which reported stable growth over the years.            

Historical Earnings (Source: Company Reports)

• Strong Balance Sheet: The group’s balance sheet remain strong with Common Equity Tier 1 ratio improving to 12.5% from 11% recorded in the previous quarter. Further, the group followed the conservative approach and continued to made provision against the performing loans, which is likely to provide a cushion against any hiccups that may occur in the future.
• An Income Play: The company has an excellent track record of dividend payment. Over the past two decades, the company reported a dividend growth rate of 10% on an annualized basis, which is an indication of strong profitability and cash flows. At the last traded price, the stock was offering a dividend yield of ~5.47%, which is lucrative considering the current interest rate environment. The company targets its future dividend payout ratio within the range of 40% to 50%.                 

Dividend History (Source: Company Reports)

Q3FY20 Financial Highlights:

• Total revenue stood at CAD 10.665 million, as compared to CAD 10,499 million in the previous corresponding period (pcp). The improvement was driven by a significant upsurge in the wholesale banking revenue (grew 53% y-o-y to CAD 1,397 million), while a slide in income from Canadian Retail (down ~2% y-o-y to CAD 6,026 million) and S Retail segments (down ~7% y-o-y to CAD 2,085 million) remained a drag.
• Provision for credit losses stood significantly higher at CAD 2,188 million, as compared to CAD 655 million in Q3FY19, primarily due to the ongoing COVID-19 pandemic.
• Common Equity Tier 1 Capital ratio improved to 12.5%, from 11% in Q2FY20.
• The company reported net income, on an adjusted basis, at CAD 2,248 million, as compared to CAD 3,248 million in pcp.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the ongoing pandemic, the group might witness a higher provision for credit losses, which would take a toll on the company’s profitability.

Valuation Methodology: Price to Book Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The bank has best in class personal connected customer service and is focusing on underrepresented products and markets, and we believe, the room for expansion is huge. Furthermore, with increasing mobile users, accompanied by ‘Everyday Banking Discovery Self-Serve’ digital enhancements, the company is poised for organic and inorganic growth in the coming days. We have valued the stock using Price to Book based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered peers like Royal Bank of Canada, Bank of Nova Scotia etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 57.82 on October 28, 2020.

TD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

BCE Inc

BCE Inc. (TSX: BCE) is the largest communications company in Canada and have more than 22 million consumer and business connections. The company provides advanced broadband wireless, TV, Internet and business communication services throughout Canada. 

Investment Rationale:

• The company turned on Canada's largest 5G wireless network, offering unprecedented mobile data speeds in Montréal, the GTA, Calgary, Edmonton and Vancouver along with Canada's broadest selection of 5G-capable smartphones. Bell announced that Ericsson will join Nokia as a provider of radio access network equipment for Bell 5G, and we are partnering with Western University to accelerate 5G innovation.
• Despite a sluggish economic scenario, the company successfully added 19,023 new retail Internet customers within the wireline segment during Q2FY20, supported by higher residential net activations, supported by the ongoing expansion of BCE’s all-fiber and Wireless Home Internet footprints. We believe, with the gradual recovery of the economy, the growth rate is likely to remain elevated in the coming days.
• The company reported solid liquidity of CAD 5.4 billion (as of June 2020), driven by cash proceeds received from the sale of data centers. Further, the company do not have any debt maturities until Q3FY21. The company reported improved net-debt leverage at 2.86x, which is a key positive.                                   

Financial Snapshot (Source: Company Presentation)

• Despite challenging operating environment, the company continued to distribute dividend, which is encouraging from an income investor’s point of view. At the last traded price, the stock was offering a dividend yield of 6.18%, which is lucrative amid low interest rate environment.

Key Highlights:

• The company would disclose its third quarter FY20 results on November 05, 2020.
• The group would enhance its high-speed internet presence across 70,000 location by the end of 2020 and would expand across 2,00,000 new locations in the next two-years.
• The group informed that its President and Vice Chair Wade Oosterman would discontinue its service on January 04, 2021.

Q2FY20 Financial Highlights:

• BCE declared its second quarter results and posted a 9.1% y-o-y decline in revenue to CAD 5,354 million. The decline was primarily attributable to reduced consumer and commercial activities on account of COVID-19, which negatively impacted the financial results. Service revenue fell 7.5% to CAD 4,800 million while product revenue stood 20.7% lower at CAD 554 million.
• Adjusted EBITDA was 9.45% lower than Q2FY19 at CAD 2,331 million.
• Net earnings stood significantly lower at CAD 294 million, as compared to CAD 817 million in the previous corresponding period (pcp). The decrease was due to an increase in other expense, and inclusion of CAD 452 million of impairment charges related to certain Bell Media TV and radio properties, partly offset by lower income taxes.
• Free cash flow grew 49.6% on y-o-y basis to CAD 1,611 million.

Q2FY20 Financial Highlights (Source: Company Reports)

Risk: The investment is inherent to risks and uncertainties, giving rise to possibilities that the actual result might differ from the expectations. The severity of COVID-19 can have adverse impacts and may lead to the failure to maintain operational networks with regards to significant increases in capacity demands. 

Valuation Methodology (Illustrative): EV to EBITDA

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The fundamentals remain extremely robust with a strong liquidity position, aided by a healthy balance sheet. Furthermore, significant free cash flow generation and access to the debt and bank capital markets provides optimum financial flexibility as well. The stock carries a healthy dividend yield of ~6.18% on an annualized basis, which would attract several income investors. We have valued the stock using EV to EBTDA based valuation method. We have considered Telus Corp, Rogers Communication and Chunghwa Telecom etc., as a peer group for the comparison purpose. Hence, considering the above facts, we recommend a ‘Buy’ rating in the stock at the closing price of CAD 53.93 as on October 28, 2020.

BCE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.