TD (TSX:TD) is down 10% this year and significantly off the 2022 high. Contrarian investors are wondering if TD stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) targeting dividends and total returns.
Why TD stock is down
TD trades for close to $78 per share at the time of writing compared to $93 earlier this year and as high as $108 in 2022.
The drop is largely due to investors’ fears that rate hikes by the Bank of Canada and the United States Federal Reserve are going to cause a severe recession. An overheated economy and a very tight labour market have resulted in high inflation. The central banks are raising interest rates to slow down economic activity.
Higher borrowing costs usually impact growth initiatives at companies by making projects more expensive or not feasible. At the same time, consumers will have to divert discretionary spending to cover rising mortgage and loan expenses. Reduced consumer expenditures will cut demand for products and services. This should force businesses to lower the number of new employees they need as they adjust to weaker sales.
The target inflation rate is 2%. Inflation in Canada and the United States in September came in just under 4%, so interest rates are likely headed higher or will at least remain at current levels for some time.
The concern is that the central banks have been too aggressive. Rate hikes take time to work through the economy, and pundits are worried that a wave of loan defaults is on the way. This would hit bank profits and could also trigger a deep economic downturn.
TD stock upside potential
Economists widely anticipate a short and mild recession to occur in 2024 or 2025, rather than a total economic meltdown. In Canada, they point to high immigration levels and ongoing strength in the labour market, as reasons to expect stability in the housing market and a modest downturn in demand for products and services.
South of the border, the American economy is holding up well and the jobs market remains tight, even with interest rates at current levels.
TD has large operations in both Canada and the U.S., so investors need to watch both markets. The company abandoned a US$13.4 billion acquisition in the United States earlier this year. The decision led to a reduction in anticipated earnings growth but also left TD with a very strong capital position to ride out economic turbulence.
TD remains a very profitable business, even in the current market conditions. If the economy is headed for a soft landing, as is broadly expected, TD stock is likely oversold right now.
TD dividend
At the current share price, investors can get a 4.9% dividend yield from TD stock. The company has a great track record of raising distribution. Investors have enjoyed an average annual dividend-growth rate of about 10% since the 1990s.
Should you buy TD stock now?
Volatility should be expected until the Bank of Canada and the U.S. Federal Reserve declare an end to rate hikes. That being said, buying TD stock on big dips has historically proven to be a savvy move for patient investors. At the current dividend yield, you get paid well to wait for the rebound.
Investors who already own TD stock should probably hold on at this point. New investors might want to start nibbling while the stock is out of favour.
