Toronto-Dominion Bank (TSX: TD) shares received a solid bump the morning of May 4, as TD stock and First Horizon terminated a US$13.4 billion takeover.
The move would have led to further expansion in the United States for TD stock, but the two banks decided not to go through with the deal. Instead, TD stock will pay a US$200 million break fee as well as a US$25 million fee reimbursement.
How the markets reacted
While TD stock saw a boost in share price, shares of First Horizon stock fell at the news the deal wouldn’t go through. It’s clear why, as American banks continue to trade in a difficult time. Competition in the U.S. has already led to some banks going bankrupt, or others purchased by larger institutions.
TD stock enjoys part of the oligopoly here in Canada, with plenty of provisions for loan losses during these trying times. That being said, exposure to the U.S. is still problematic, and both investors and short sellers were betting against the stock.
Yet even so, analysts believed TD stock would negotiate a lower price for First Horizon. No one thought it would scrap the deal altogether. Yet both blamed “regulatory issues,” which stem from U.S. president Joe Biden coming down on large mergers to keep competition healthy.
What shareholders should do now
This recent move is certainly good for short-term investors, but what about long-term holders of TD stock? This merger in the southern U.S. would have provided TD stock with even more U.S. exposure. That certainly doesn’t look great during a recession, but what about after?
The U.S. tends to rebound quickly, even after a recession. That could have meant TD stock received a great deal for future growth. However, one cannot ignore that this shot-down deal means TD stock can hold more capital reserves in this time of uncertainty — especially with so much U.S. exposure.
So, the question is this for shareholders and potential investors: How long are you looking to invest in TD stock? If it’s long term, growth may slow in the near future. That being said, shares still represent a discount trading at 10.04 times earnings as of writing and hold a 4.74% dividend yield as well.
Look to the past
If you’re worried about the future, the best thing to do in the case of Canadian banks is look to the past. TD stock has been one of the top 10 banks in the U.S. for years now. It continues to expand in the country, though it is now looking for more focus on its online business as well.
During the Great Recession, it took just nine months for TD stock to reach pre-drop highs after hitting 52-week lows. That’s an enormous increase, and one that could be in the future of current investors. Shares of TD stock are about 14% as of writing, providing investors with some growth already. Sure, shares could fall further, but, long term, this still provides a great deal.
So, while TD stock certainly may have to work hard for more U.S. expansion in the future, I think current shareholders should be glad the financial institution has more cash on the books. It may need it.
