Bank stocks are down considerably amid rising fears that recent bank failures in the United States and Europe could be the tip of the iceberg. Contrarian investors are wondering if Canadian banks like TD (TSX:TD) are now oversold and good to buy for a portfolio focused on dividends and total returns.
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TD Bank overview
TD is Canada’s second-largest bank with a current market capitalization near $142 billion. The company is known for its strong retail banking operations in Canada, but TD also has a significant presence in the United States after a string of acquisitions over the past 20 years. In fact, TD operates more branches south of the border than it does in Canada with a focus on the eastern part of the U.S. running from Maine down to Florida.
TD trades near $78 per share at the time of writing. The stock was $93 in February.
Investors are concerned that TD’s previously agreed deal to buy First Horizon, a U.S. regional bank in the southeastern part of the country, will add significant risk if it closes. TD agreed to pay U.S. $13.4 billion to buy First Horizon last year, but First Horizon’s share price has plunged as much as 40% below the takeover price in the recent selloff.
Investors are also concerned that persistent inflation and higher interest rates will push the Canadian and U.S. economies into a deeper recession than economists predict. If the hot jobs market reverses and unemployment surges, households struggling to cover rising mortgage costs could start to default. Canadians are carrying near-record debt levels, primarily in real estate, so there is concern that a housing meltdown could occur. If that happens, TD and its peers with large mortgage portfolios could come under additional pressure.
TD has a strong capital position and is large enough that it should benefit from cash inflows, as people pull unprotected savings out of smaller banks and put the money in the larger institutions. Housing market fears are probably overblown and the plunge in Canadian bank stocks is likely exaggerated.
Canadian banks operate under regulations that differ from the regional banks in the United States, so the risk profile is not the same. This doesn’t mean Canada’s banks are immune to the volatility in the broader global financial markets, but they should be better positioned to ride out the storm. The Canadian banks made it through the Great Recession and should get through the current crisis as well.
Should you buy TD stock now?
In its 2023 forecast, TD expects fiscal adjusted earnings to increase over last year, despite the economic headwinds. At the current multiple of 9.5 times trailing 12-month earnings, the stock appears undervalued. Investors can get a 4.9% dividend yield while they wait for the share price to recover.
Ongoing volatility should be expected, and additional downside is certainly possible in the near term, so I wouldn’t back up the truck just year, but contrarian investors with a buy-and-hold strategy might want to start nibbling on TD, as it sits near the 12-month lows.
