Toronto-Dominion Bank Stock Looks Severely Undervalued After Unwarranted 9% Dip

Toronto-Dominion Bank (TSX:TD)(NYSE:TD) stock is a wonderful bank with a valuation that’s too good to pass up after its latest acquisition.

| More on:
hand using ATM

Image source: Getty Images

Toronto-Dominion Bank (TSX:TD)(NYSE:TD), or TD Bank for short, took such a huge hit to the chin on Tuesday’s brutal trading session, finishing the day down just over 3%. Indeed, it was a tough day for the banks in general. Sadly, the Ukraine-Russia crisis doesn’t look like it will end anytime soon. With sanctions being slapped on Russia, growing fears of an imminent recession seem to be taking hold.

With such a flat U.S. yield curve, all signs point to a potential recession down the road. Indeed, the economy is still healing from the coronavirus recession suffered just under two years ago. With rampant inflation and surging oil prices, it certainly seems as though a more stagflationary environment is possible. It’s ugly out there, and investors are looking to prepare for the worst, as last week’s bounce-back looks to have run out of steam in a big way.

TD acquires First Horizon in historic deal

This week, TD Bank also pulled the trigger on a big banking deal that it’s been hinting at for quite some time. The firm is poised to acquire First Horizon bank in a deal worth $13.4 billion, the biggest deal in TD’s history. Undoubtedly, the price tag is high and is a likely reason why TD Bank stock was sagging considerably lower than some of its peers in the Canadian banking basket. Undoubtedly, U.S. banks have been under much pressure on Tuesday. Still, I think the selling is overdone, especially when it comes to the likes of TD Bank.

TD is a very high-quality manager that would never have made such a sizeable deal just to appease shareholders. If there’s no value, TD’s managers would have been fine with their backup plan: returning capital to investors. First Horizon was just too good of a bank to pounce on. The Tennessee bank bolsters TD’s presence in the United States. While there is some risk that accompanies such deals, I do think that given the environment up ahead the deal will prove a worthy bargain.

Indeed, higher rates and robust economic growth are likely, even if many fear a recession. Even if there is a recession in 2022 or 2023, it may be a mild one, or a continuation of the pain experienced prior to the modest bounce-back from the COVID recession.

What about the valuation?

TD stock goes for 12.8 times trailing earnings, with a 3.6% dividend yield. That’s pretty much in line with other Canadian banks. With First Horizon and a potential Goldilocks environment (higher rates, higher loan growth) on the horizon (forgive the pun), I think TD is a far greater bargain than its relatively depressed metrics suggest. That’s why I’d pounce before TD and its peers continue knocking baseballs out of the park.

Will there be a bit of turbulence over the nearer term, as the Bank of Canada brings up yet another reason not to raise rates? Sure. But at the end of the day, it will be TD’s fundamentals that will shine through. Over the next five years, it’s really hard to get a risk/reward like that offered by TD. It’s just a truly wonderful business and perhaps more wonderful following its purchase of First Horizon.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette owns TORONTO-DOMINION BANK. The Motley Fool has no position in any of the stocks mentioned.

More on Bank Stocks

Senior Couple Walking With Pet Bulldog In Countryside
Bank Stocks

A Different Bank for a Comfortable Retirement

Want a comfortable retirement? Investing in this different bank today can help you reach that goal through a solid income…

Read more »

thinking
Bank Stocks

Bank of Montreal (TSX:BMO) Raises Dividend: Is the Stock a Buy?

Bank of Montreal is about to get a lot bigger. Should you buy the stock?

Read more »

Bank Stocks

Bank of Nova Scotia (TSX:BNS) Hikes Dividend: Time to Buy the Stock?

Bank of Nova Scotia delivered strong fiscal Q2 2022 results. Is the stock undervalued?

Read more »

edit Sale sign, value, discount
Bank Stocks

2 Blue-Chip Bank Stocks Trading for a Discount Right Now

Value-seeking investors have an excellent opportunity to add these two blue-chip bank stocks to their portfolios for a discount.

Read more »

data analyze research
Bank Stocks

With a 6 Percent Yield, Time to Buy Cheap Shares of IGM Financial?

The wealth management company had record earnings, but the shares are trading at a one-year low.

Read more »

close-up photo of investor Warren Buffett
Bank Stocks

Warren Buffett’s #1 Rule in Investing: How Can Investors Apply it?

Warren Buffett's number one rule in investing is to never lose money. Here's what you can focus on to make…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

3 Cheap Bank Stocks to Buy Ahead of Earnings

Canadians should look to snag undervalued bank stocks like National Bank of Canada (TSX:NA) and others in late May.

Read more »

stock data
Bank Stocks

Annoyed With Inflation? Then Buy These 2 Bank Stocks

Rising inflation is annoying, but if you want to counter it, choose quality assets like the two biggest bank stocks…

Read more »