TD Bank (TSX:TD) is up 10% in recent weeks, but the stock is more than 20% below the 2022 peak. Investors who missed the recent bounce are wondering if TD stock is still cheap and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
TD trades for close to $84 at the time of writing compared to $76 in late October and $108 early last year.
The slide from the 2022 high is largely due to rising interest rates in Canada and the United States. Central banks are using rate hikes to cool off the economy and drive inflation back down to the 2% target. Inflation in the United States came in at 3.2% for October. That is down from 3.7% the previous month.
Rate hikes normally benefit banks as the higher rates tend to boost net interest margins. Basically, the banks charge more interest on loans but don’t raise the rate they offer on deposits by the same amount. Markets are concerned, however, that the rate hikes by the Bank of Canada and the U.S. Federal Reserve have been too aggressive and will remain in place for too long. Instead of simply slowing down the economy, the full impact of the rate hikes could cause a deep recession.
TD and its peers are already setting more cash aside to cover potential loan losses as businesses and households struggle to cover the increase in their borrowing costs. In the worst-case scenario, there would be a wave of loan defaults and bankruptcies. If asset prices plunge below the value of the mortgages held on the buildings, the banks could be in for some painful times.
Economists broadly expect the economy to go through a short and mild recession. The recent surge in TD’s share price is a bet by bargain hunters that rates have peaked and could come down sharply in 2024.
TD had to walk back its guidance for revenue and earnings growth this year after it abandoned its planned US$13.4 billion acquisition of First Horizon, an American regional bank. Investors are probably relieved the deal didn’t go through. TD had originally agreed to pay US$25 per share for the business. First Horizon traded for US$17.50 before TD announced it would not complete the deal. At the time of writing, First Horizon stock trades for US$12.50.
TD now intends to grow its American business organically over the next several years. In the meantime, the bank is sitting on significant excess cash that will help TD ride out some challenging times. Management might also decide to use the war chest of funds to make another acquisition in a different market while bank valuations remain under pressure.
TD is still a very profitable bank. The company generated fiscal third-quarter (Q3) 2023 adjusted net income of $3.7 billion compared to $3.8 billion in the same period the previous year.
TD’s compound average annual dividend-growth rate has been better than 10% since the mid-1990s. The payout should be very safe and currently offers an annualized yield of about 4.6%.
Should you buy TD now or wait?
Ongoing volatility should be expected until there is clarity on when the Bank of Canada and the U.S. Federal Reserve will start reducing rates. At the current multiple of 10.9 times trailing 12-month earnings TD stock is probably not a screaming buy.
That being said, buying TD on big pullbacks has historically proven to be a savvy move. Investors who already own TD stock should probably maintain the position at this point. Investors with a buy-and-hold strategy might want to start nibbling and look to add to the position on additional downside.
The bottom might already have occurred if predictions for a modest economic slowdown turn out to be correct, but there is still downside risk for TD stock if the economy falls off a cliff next year.