TD Bank (TSX:TD) is down about 8% in 2024. Investors who missed the fourth-quarter (Q4) 2023 rally in TSX bank stocks are wondering if TD stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
TD stock price
The shares trade below $79 at the time of writing compared to $86 in January. The 12-month low is around $76. TD stock was as high as $108 in early 2022, so there is decent upside potential on a rebound.
The steep rise in interest rates in Canada and the United States through 2022 and most of 2023 drove the bulk of the drop in bank stocks. Investors worried that high rates would push up defaults and potentially send the economy into a deep recession.
The Bank of Canada and the U.S. Federal Reserve have raised rates to try to get inflation under control by cooling off the economy. Inflation in the United States came in at 3.5% in March 2024 compared to about 9% in June 2022. Canada’s February 2024 inflation was 2.8%. The 2022 peak was about 8%. Canada’s March inflation result might follow the U.S. trend higher. Ideally, the central banks want to see inflation headed to around 2% before cutting interest rates.
The rally in bank stocks through the end of 2023 occurred as investors started to bet on rate cuts in 2024. Economists still broadly anticipate rate reductions before the end of the year, but sticky inflation could force the central banks to hold rates at current levels into 2025.
TD and its peers have increased provisions for credit losses in recent quarters. This means the number of borrowers who are having difficulty making payments is rising. The longer interest rates remain at elevated levels, the more likely it is that banks will see a jump in defaults. If the economy slides into a severe recession and unemployment surges, the banks could be in for a rough ride.
That being said, economists expect the central banks to deliver a soft landing for the economy. Loan losses are rising, but the amounts are very small relative to the overall loan books at the big Canadian banks. TD has a large capital cushion to help it ride out tough times, and the bank remains very profitable, even with the current headwinds.
Dividend
TD has a great track record of dividend growth. Investors who buy the stock at the current level can get a 5.2% dividend yield.
Is TD stock a buy now?
Ongoing volatility should be expected for bank stocks over the coming months until there is clear evidence the central banks will start cutting interest rates. If inflation stays at 3.5% in the United States or moves back towards 4% the Federal Reserve might decide to shelve plans for rate cuts this year. In that situation TD’s share price could retest the 12-month low. The bank has large retail banking operations in the United States.
On the positive side, buying TD on meaningful pullbacks has historically proven to be a savvy move for patient investors. The rally through late 2023 shows how quickly the market’s mood can change on interest rates, so staying on the sidelines can result in missed gains.
TD stock is probably okay to buy right now for the long term and you get paid a decent yield to wait for the recovery. Investors with some cash to put to work might want to take a half position near the current price and look to add to the holding on any additional downside.
