TD Bank (TSX:TD) saw its share price drop considerably in recent weeks amid the broader pullback in TSX bank stocks caused by fears that bank failures in the United States might be the beginning of a wider global problem. Investors who missed the rally in TD stock that occurred at the start of 2023 are wondering if TD’s shares are now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
TD Bank overview
TD is Canada’s second-largest bank with a current market capitalization near $146 billion. The stock trades near $80 per share at the time of writing compared to $93 in February and nearly $100 at this time last year.
TD likely came under added pressure in the past few weeks due to its ongoing bid to acquire a regional bank in the United States for US$13.4 billion. First Horizon operates primarily in the southeastern states and would be a reasonable addition to TD’s existing American operations that currently run from Maine down the east coast to Florida. TD actually has more retail branches south of the border than it does in Canada. The conclusion of the First Horizon deal would make TD a top-six bank in the U.S. banking sector.
TD investors wonder, however, if the company is paying too much to buy First Horizon after the share price plunged as much as 40% below the agreed takeover price during the recent rout. The U.S. government is working hard to reassure markets that the regional banks are sound, but investors are still worried that more surprises could emerge.
Time will tell as the impacts of aggressive interest rate hikes continue to work their way through the financial system.
In Canada, TD’s large residential mortgage portfolio is also worth watching. All of the large Canadian banks benefitted from soaring housing demand and rising prices in recent years, as buyers binged on historically low rates to scope up homes and investment properties. Variable-rate loans are already straining household budgets, and the longer fixed-rated mortgages remain at current levels, the higher the risk that a wave of defaults could occur when people need to renew their loans.
Things would have to get pretty bad in the housing market for TD to take a material hit. At this point, a strong labour market and high immigration numbers should put a floor under house prices, while the Bank of Canada keeps rates high to slow the economy down and lower inflation. However, a sudden spike in unemployment combined with persistent high borrowing rates could lead to a flood of listings.
In the event buyers stay on the sidelines to wait for the market to bottom and panic selling ensues, there is a risk that TD and its peers could get stuck with properties that are worth less than the mortgages owed. In that case, the share prices of the banks could come under added pressure.
Dividends
TD is one of Canada’s top dividend stocks. The company has a compound annual growth rate of better than 10% over the past 25 years. Ongoing increases should be on the way, even amid economic headwinds, and investors who buy the stock at the current share price can get a dividend yield of 4.8%.
Should you buy TD stock now?
Additional volatility should be expected until there is more clarity on the outcome of the First Horizon deal. That being said, buy-and-hold investors with some cash to put to work in a TFSA or RRSP might want to consider adding TD to their portfolios at this level. You get paid well to ride out the turbulence and have a shot at decent capital gains in the event the central banks deliver a soft landing for the Canadian and U.S. economies.
