The time is ripe to invest in the stock market, despite a challenging macro environment. Several companies across multiple sectors are trading at a depressed valuation, allowing you to buy the dip. So, if you have $1,000 to invest in May 2023, consider buying shares of undervalued companies such as Toronto-Dominion Bank (TSX: TD).
Valued at a market cap of $150 billion, TD Bank is among the largest companies trading on the TSX. Down 24% from all-time highs, TD Bank stock also offers you a forward yield of 4.7%, which is quite tasty.
Why is TD Bank stock a buy?
The banking sector has trailed broader markets by a wide margin year to date. Investors are worried about the financial crisis south of the border, where several banks have shut down, as they were exposed to interest rate risks.
The Federal Reserve is unlikely to lower interest rates in the near term, as it aims to bring inflation under control. So, there is a good chance that several regional banks will collapse in the next few months, which creates a great opportunity for TD Bank and its peers. Regional bank customers are withdrawing funds and are shifting capital into big banks such as TD Bank, providing them access to capital at a low cost.
Moreover, the big banks in Canada are much more conservative than their counterparts in the United States. While TD Bank does not expand at an aggressive pace, it is armed with a strong balance sheet, allowing it to maintain dividend payouts across economic cycles.
Additionally, TD Bank is trading at an attractive forward price-to-earnings multiple of 9.5, which is very cheap. Comparatively, analysts forecast adjusted earnings to expand at an annual rate of 10.5% in the next five years.
While TD Bank is part of a highly cyclical industry, it has increased dividend payouts at an annual rate of 8.3% in the last 15 years. After adjusting for dividends, TD stock has returned 332%, compared to TSX returns of just 123%. Analysts remain bullish on TD Bank stock and expect it to surge 23% in the next 12 months.
TD Bank revokes acquisition bid for First Horizon Bank
Shares of TD Bank surged ahead in early market trading on May 4 after it revoked its acquisition offer for First Horizon Bank. The acquisition deal was first announced last February and was valued at US$13.4 billion.
This acquisition would allow TD Bank to gain traction and scale in the U.S., which is a much bigger market. Over the years, TD Bank has inked similar deals with other regional U.S. banks.
Valued at a market cap of US$5 billion, First Horizon stock lost a staggering 33% on May 4 soon after the announcement. It’s quite possible that TD Bank backed out of the deal due to the ongoing selloff surrounding bank stocks that made the acquisition an expensive affair. For instance, shares of First Horizon fell from US$24.9 in February 2023 to US$14.9 in March 2023. It’s currently priced at US$10.5.
TD Bank will have to pay US$200 million to First Horizon as per the termination agreement in addition to a US$25 million reimbursement fee. But the revoked acquisition will provide TD Bank with resources to target organic growth opportunities and further strengthen its balance sheet.
