Toronto-Dominion Bank (TSX:TD) is one of Canada’s top banks with a sizable position in the U.S. market.
TD Bank stock is a reliable dividend stock that has provided shareholders with ample total returns over the long term. But it has been hit by a slowing economy lately, and the risks are mounting. You may therefore be wondering what to do with the stock at this point. Let’s explore.
When the economy is humming, consumers are healthy, loans are thriving, business activity is strong, and as a result, the banks are doing well. In the opposite scenario, banks begin to struggle. This is where we’re at today.
Provisions for credit losses rising
The sharp rise in interest rates brought higher interest income for the banks. At the same time, these higher rates are causing trouble for the economy. Right now, the consumer is struggling under the weight. Businesses are also struggling, and the economy is being hit.
So, what does this mean for banks like TD Bank? And what does this mean for TD Bank stock? Well, the answer to the second question has already begun to play out. In fact, TD Bank’s stock price has fallen 10% year to date and 27% from its 2022 highs. Further weakness is likely as interest rates are pushing the economy into a recession.
Banks are the barometers of the economy. Today, with the consumer reeling under the pressure of higher interest rates, banks are taking the hit. This is showing up in their provisions for credit losses, which have more than doubled to $756 million in TD Bank’s latest quarter. As per the CEO, earnings per share growth in fiscal 2023 is expected to moderate with each passing quarter.
What to expect from TD Bank
Population growth has definitely been a driving force for many businesses, banks included. Looking ahead, however, the headwinds will likely be too overwhelming. This means that despite securing additional clients and money, the bank will have to deal with a deteriorating consumer and economy. And there will likely be a lot of pain that comes with this.
But let’s remember that TD Bank has come through many troubled periods in its history. Most recently, we had the pandemic. Before that, we had the credit crisis in 2008–09. The message here is that TD Bank, and the Canadian banking system in general, is strong and well-capitalized. This has ensured the bank’s survival and even its continued growth.
In fact, since the credit crisis, TD Bank’s dividend has grown almost 240%. That’s a compound annual growth rate, or CAGR, of 8.4%. It’s an example of a company that has been able to thrive in the long run, and through crises. It should give us confidence of the strength of TD Bank and the Canadian banking system in general.
Bottom line
So, the days ahead will be turbulent as higher interest rates work their way through the economy. In the long run, I’m confident that TD Bank will weather the storm. When I look at TD Bank’s stock price weakness, I think of it as an opportunity brewing. So, the question is, when will be the right time to buy?
I think there’s more downside in the near term. Today it’s yielding a generous 4.86%, and this can provide a nice income stream regardless of what happens to the stock. The lower TD Bank stock goes as troubles mount, the more inclined I would be to consider buying.
