Toronto-Dominion Bank (TSX: TD) is a stock I’ve held for a long time. Long admiring its vast and growing U.S. retail business — the ninth-largest bank in the United States — I’ve held its shares since 2018. I bought the stock progressively over several years. Eventually, I bought up so much that TD became my second-largest holding after Bank of America. In fact, it was my top holding before I started diversifying into the U.S. in 2019.
Sadly, I had to sell the bulk of my TD Bank stock this year. That was not due to a margin call or anything like that, but rather the fact that I read some alarming news about the company. Specifically, I read that a New Jersey employee of the bank was accused of having helped drug dealers launder money. This was far from a company-wide infraction, but the whole company wound up being investigated by the U.S. Department of Justice (DOJ) for lacking proper anti-money laundering procedures, the theory being that the NJ-based employee could do what they did because of inadequate company-wide checks.
Remembering how Warren Buffett sold his Wells Fargo (NYSE: WFC) stock when that company got investigated, I dumped 80% of my TD Bank stock. It was a good call, too, because I invested the proceeds into Brookfield, Brookfield Asset Management and Oaktree Specialty Lending, and those stocks have since outperformed TD. Nevertheless, I would buy my TD Bank stock back if it got cheap enough. In this article, I will explain why I might build my TD position back up if it falls significantly below $80.
Why I sold the majority of my TD Bank stock
I basically sold my TD Bank stock out of fear that the DOJ investigation would lead to a multi-billion-dollar lawsuit. That was what happened to Wells Fargo when it got caught charging customers for products they didn’t want back in the 2010s. It got sued by various customer groups and fined by the Feds. It ended up paying over $10 billion in settlements related to its infractions.
When I heard about TD Bank being investigated by the DOJ for facilitating money laundering, I immediately thought of Wells Fargo. “Could TD Bank have $10 billion in fines coming its way?” I wondered. I was not sure that such a thing would happen. But I figured such a scenario was plausible, so I reduced my exposure to TD Bank.
Why I’d buy below $80
Despite these concerns about TD Bank’s legal risk, I’d nevertheless buy it if it fell below $80 in price. $79 is around the level where TD dips below 10 times earnings. At that price, it would be cheaper than Bank of America is now. Very frequently, people who buy North American banks below 10 times earnings enjoy excellent results. At a valuation of, say, eight times earnings, a company only needs to pay you eight years’ worth of profit to pay back your investment. So, I’d be interested in TD at $80 and would definitely buy it below $75. At that level, any future lawsuits would be fully priced in.
