July is turning out to be a month where I am putting a lot of cash to work. This is already my third purchase for the month! Whenever I make a purchase, I like to share my buys to document and illustrate how I am building my income stream over the course of months/years. My main goal is simply to keep investing at regular intervals and build my passive income over the course of time. In staying true to tradition, here’s another purchase in my portfolio adding to an existing position.
I added to my position in Toronto-Dominion Bank (TD.TO) with 25 shares @ C$52.28. The company yields 3.87% adding C$51.00 to my annual passive income.
Recent Buy Decision
- The Canadian banks are some of the safest and best run companies in the world.
- The bank has a long track record of paying dividends – which have been paid since 1857, and has been raising aggressively after a freeze in dividend growth during the financial crisis.
- As discussed in this article from earlier this year, the banking industry is facing headwinds as the Canadian economy faces commodity price collapse issues and possible housing bubble in Canada. However, as I highlighted, the banks are well protected and are primed for long term investors to start nibbling.
- Bank of Canada (BoC) earlier this morning cut its interest rate by 25 basis points to 0.5%. However, TD immediately announced that it was only going to reduce the prime rate by
10 basis points15 basis points(1) – essentially, not passing on the savings and stimulation to the economy as BoC intends. This means that the spread between overnight BoC rate and prime rate increases furthermore after an increase earlier in the year (see image below). The spread expanded from 2.0% to 2.1% in Jan 2015…and now expands to2.25%2.20%(1)! What does that really mean? More/easier profit for the banks going forward. This is great news for shareholders, but not so much for consumers. - The cut in interest rate also resulted in the Canadian dollar to drop against the US$. But there is a silver lining – companies with a big exposure in the US market benefit from this drop – especially the ones that report their financials in CAD$, which includes the banks such as TD. According to the 2014 annual report, the geographical diversification is: 65.5% Canada, 27.9% US and 6.5% Other Intl.
- The fundamentals are attractive with a PE 12.89 and Forward PE 10.9.
Risks
- Canada faces recessionary headwinds due to the collapse in oil and commodity prices. As expected, the financial sector will suffer whenever a country is hit by a recession. There are reports that Canada is already in recession, although BoC is sidestepping and avoids answering that question directly.
- The fall in energy prices have also resulted in a fall in the Loonie (Canadian dollar). This might affect the earnings reports of the Canadian companies going forward.
- The Canadian housing market is in a bubble territory according to many economists. If the bubble pops, the banks although protected by the taxpayer backstopped CMHC insurance, will still face some problems going forward. Some initial reports are already suggesting that the correction has started in Alberta, which is the hardest hit province due to the falling oil prices.
Further Reading
- My previous TD stock purchase in Feb 2015
- Toronto-Dominion Bank Dividend Stock Analysis
- It’s Time to Start Nibbling the Canadian Banks
- Look To Canadian Banks For a Strong Financial Exposure
- 2014 Annual Report
- See my list of other recent purchases
Full Disclosure: Long TD.TO. My full list of holdings is available here.
(1) Update: TD later last night reduced the prime rate to match the competition after initial prime rate announcement from 2.75% to 2.70%. The spread still increases, as mentioned in the post, but by a smaller margin.
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