In a surprise move, Toronto-Dominion Bank (TSX:TD)(NYSE:TD) announced its acquisition of First Horizon. Typically, acquisition announcements lead to the acquiring company’s common stock to drop and the stock of the company being acquired to rise. Indeed, TD stock reacted by dipping 2.3%, while First Horizon stock jumped 28.7%.

TD stock’s acquisition

Because of the announcement of TD Bank buying First Horizon, the latter bank’s stock traded at US$23.48 per share at the close of the market yesterday after a big jump. First Horizon still has upside of about 6.5% to reach TD stock’s offer price.

In an all-cash transaction, TD Bank plans to acquire First Horizon for US$13.4 billion (or US$25 per common share). Taking a medium- to long-term view, it is a fair price to pay. It would be about 14.4 times normalized earnings and “9.8 times First Horizon’s estimated 2023 fully-synergized earnings.”

As explained in the press release, TD management sees multiple benefits in the acquisition. First, it would “accelerate its U.S. growth strategy, creating [a] top six U.S. bank with immediate presence and scale in fast-growing TD-adjacent markets.” Second, it “creates important future growth opportunities through [the] combination of First Horizon and TD capabilities and customer-centric business models.” Third, it expects the transaction to be “immediately accretive to its adjusted [earnings per share] at closing … and over 10% accretive to its estimated 2023 adjusted earnings per share on a fully synergized basis.”

TD Bank is “retaining client-facing bankers with no planned closures of First Horizon banking centers.” This is a good thing, because it allows old clients to feel right at home and saves TD Bank renovation costs and time.

Notably, the transaction is not a done deal yet. It still requires approvals from First Horizon shareholders and U.S. and Canadian regulatory authorities. If everything goes smoothly, TD Bank expects the transaction to close in TD’s fiscal Q1 2023.

TD Bank is terminating its common stock buybacks … for now

Simultaneous to the acquisition announcement, TD Bank also announced that it was terminating the automatic share-repurchase plan. Although common stock repurchases generally help elevate the underlying stock price and the earnings per share of the company, they only benefit long-term shareholders if the purchases are made at good valuations. Right now, at best, most analysts would agree that TD stock is a hold at the current full valuation.

So, the bank doesn’t lose anything by halting share repurchases at this point. Instead, it’s a good idea that it terminated buybacks and is using excess capital to invest in its future by expanding its market share in one of its core markets in the United States.

For instance, in the last four months or so ending on February 28, 2022, TD Bank stock bought back almost $2.2 billion worth of common stock at an average price of $104.50 per share, which is about 12.8 times earnings. Compare that to its 15-year normal price-to-earnings ratio of about 12.1 times. So, TD Bank is probably better off investing excess capital and paying out dividends, as it is doing now.

Although the stock is fully valued, the quality dividend stock still pays safe and growing dividends and should steadily rise in price over time. Therefore, it’s still a “hold” for long-term shareholders.

The post TD Stock Makes US$13.4B Acquisition: What it Means to Investors appeared first on The Motley Fool Canada.

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The Motley Fool has no position in any of the stocks mentioned. Fool contributor Kay Ng has no position in any of the stocks mentioned.