When it comes to Big Six banks, there aren’t many bigger than Toronto-Dominion Bank (TSX:TD). In fact, TD stock is tied for first when it comes to assets under management. Yet shares of TD stock have been dropping as of late, and Bay Street analysts are wondering what might be going on, as have investors.
So let’s look at what’s been going on, and where TD stock could be in the next five years?
A bit about TD stock
Let’s first discuss a bit about what TD stock has been up to in the last few years. The bank currently brings in about 55% of its revenue from Canada with 35% from the United States. The rest is from other countries, but it’s the U.S. that the company has seen great success with, especially with its 12% stake in Charles Schwab.
TD stock is now one of the top 10 banks in the country, and continues to expand, especially online. The bank holds $400 billion in Canadian assets under management, and is the number-one card issuer in Canada. It should therefore continue to be in a top spot for years to come. Especially as it continues to be a lower-cost alternative compared to its Canadian peers.
The issue, however, is that growth may be slowing for TD stock. Since the company will no longer acquire First Horizon bank, some believe there could be fewer opportunities. While still others believed there wasn’t enough value added through the deal. Add with a troublesome earnings outlook for the next year, it’s unclear what investors should do next. So let’s get into it.
What’s next?
The biggest issue for analysts these days is the growth outlook for TD stock. After acquisitions fell through, it’s unclear what TD stock will do next to keep investors coming back for more. But then it got worse.
TD stock went through an anti-money laundering probe that revealed a significant issue, attracting attention from the United States Department of Justice. This resulted in a huge penalty, which could amount to between US$500 million and US$1 billion.
Now, it looks like things are starting to circle the drain. One executive stepped down recently, who was once discussed as a top succession option for the chief executive officer role. Instead, this executive is heading to an American company that has a fraction of TD stock’s market value.
But enough with the drama
That’s all the drama swirling around the stock, but let’s get into the actual fundamentals. While there might be some issues, investor confidence is still quite strong. TD stock is trading at 15.3 times earnings. That’s even better value at 10.6 times earnings for the next year, showing investors believe things will only improve.
But again, the biggest issue is going to be growth. Its peers have already seen a lot of growth, with more expected, such as the purchase of HSBC Canada. While there isn’t reason to panic quite yet, investors will want to see more growth if they’re going to make long-term investments.
So in the short term, there is enough cash on hand from the tried-and-failed acquisition to help the stock out. In fact, there could be buy backs. But they are going to be eaten up in the next few years. So with uncertain growth, especially in the U.S., and succession issues in the air, it’s not as clear a buy as it once was.
