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How the New Tax Policies Will Affect TD Bank

Toronto-Dominion Bank (NYSE: TD & TSE: TD) is one of the main five banks in Canada and is among the top ten banks in the United States of America. TD Bank serves over 26 million customers a year through its three primary business lines: Canadian Retail, US Retail, and Wholesale Banking. Through these lines, they offer services such as individual and business banking, TD Wealth and Asset Management, TD Insurance, and TD Securities. Recently, the Liberal Party in Canada mentioned that if they were to be re-elected, they would raise the corporate tax rate from 15 to 18 percent on all earnings exceeding 1 billion dollars for major banks and insurers. If that was not enough, Trudeau’s Party also plans to implement a Canadian Recovery Dividend on these corporations forcing them to cough up even more in taxes. This plan assembled by Trudeau's Liberal Party has been created to increase Canada’s tax revenue and reduce their debt after spending substantial amounts of money to help Canadians power through the economic declines caused by COVID-19.

Can TD Raise their Dividends Moving Forward if these Bills Are Put into Place?

Toronto-Dominion Bank has a track record of maintaining solid fundamentals. Its robust earnings, profit margins, revenue, and return on equity make TD Bank a very appealing stock to consider for many investors. Even if the Liberal Party were to regain parliament and pass the bills mentioned above to increase the amount TD pays in income taxes, TD would still likely be able to maintain their dividend payments. Moreover, they may be able to increase their dividend payments as major banks and insurers have been sitting on heaps of cash since regulators have prevented them from increasing distributions to shareholders through dividends and investor buybacks due to COVID-19 regulations. Also, TD currently has a payout ratio of 41.69%, according to MarketBeat, which is three percentage points below their average dividend payout ratio over the last ten years. This suggests that the current dividend of $0.79/share, as pictured below in the chart, should increase once regulators lift the restrictions on increasing distributions to shareholders. This makes TD stock a very appealing stock for income investors who are seeking a company with solid fundamentals and future dividend increases.

What do the Technicals Show for TD Bank?

Despite TD Bank’s solid fundamentals, the company’s stock has been trending downward since the Liberal Party’s announcement to tax big banks and insurers. Since the announcement on August 25th, the stock is down 4.52%. Even though the recent downturn has caused a significant drop in the stock’s price, the stock is still up approximately 13.80% year to date. The technical chart below shows a bearish signal known as a death cross indicated by the red circle when the 50-day moving average in red crosses below the 200-day moving average in blue. The death cross is considered one of the most important signals used by technical analysts as its appearance can occasionally detect a major sell-off shortly after. In addition to the death cross, the Relative Strength Index (RSI), a momentum indicator used to evaluate the magnitude of recent price changes, also created a bearish signal when it hit a reading of thirty. An RSI reading of thirty or below is in the oversold territory since the price of the stock moved too far low too fast. After the large sell-off in TD bank, the stock has not shown any recent signs of a trend reversal or further pullback.

How Will TD React to the Election Results?

Based on TD’s reversal since the Liberal announcement on August 25th, it can be assumed that the decrease in cash flow because of the taxes has already been baked into the stock price. The Liberal Party is the current favourite to win the election, and if they do win, it is not expected for the stock price to decrease much more on the news. However, if the Conservative Party of Canada wins the election, the stock may have a bullish reversal, as they have no plans to increase taxes for banks and insurers.

Why Investors Should not be Concerned

Investors or potential investors in TD Bank should pay close attention to the election results this coming September. Even if the Liberal Party wins, I would expect TD to attempt to lower costs in response to the rise in taxes, so they do not have a decrease in net income in future periods. According to an assistant professor of finance at the University of Toronto, the increase in taxes could be offset by increasing revenues by raising costs to customers at the bank who have “inelastic demand.” Ultimately, investors should not be worried about the Liberal’s plan that will affect TD Bank. TD Bank is sitting on piles of cash, and they continue to produce robust profits, which could result in dividend increases in the future.

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