TD Bank (TSX:TD) picked up a new tailwind in recent days after drifting down to its lowest price in nearly six months. Contrarian investors who missed the latest bounce are wondering if TD stock is still 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 Bank’s share price
TD stock trades near $80.50 at the time of writing compared to a 12-month low of around $76. The shares were as high as $108 in early 2022 at the peak of the post-pandemic rally.
Investors worry that interest rate hikes in Canada and the United States will eventually drive the economy into a recession. This would potentially lead to a surge in unemployment and a jump in loan defaults by homeowners and businesses. Rate hikes have occurred as the Bank of Canada and the U.S. Federal Reserve battle to get inflation down to 2% from 8% and 9%, respectively, in June 2022.
Inflation for March 2024 came in at 3.5% in the U.S. and 2.9% in Canada, so there is still a ways to go before the central banks can meaningfully reduce interest rates. If inflation remains sticky at or above 3%, rates could remain at current levels into 2025. This would increase the risk of a recession.
TD has a large U.S. retail banking business. Pundits think rates will have to remain higher for longer in the U.S. than in Canada, so this could be one reason the shares are underperforming peers that are less exposed to the United States. TD is also dealing with some regulatory challenges in the United States that forced it to abandon a planned acquisition in the American market. The decision wiped out a good chunk of TD’s anticipated growth. TD now intends to expand the American business organically, which will take more time to deliver results.
Outlook
TD and the other large Canadian banks have increased provisions for loan losses over the past few quarters and that trend is expected to continue over the near term. The overall loan book, however, remains in good shape, and the economy is holding up well. TD is still a very profitable bank, even in the current challenging conditions. The company generated $3.5 billion in adjusted earnings in fiscal 2023.
Economists broadly expect the central banks to navigate a soft landing for the economy as inflation moves back to the 2% target. Assuming that scenario pans out, TD stock is likely oversold. The bank has a large capital surplus due to the cancelled acquisition in the United States. This will help TD ride out any turbulence, in the event there is a severe recession.
Is TD stock a buy today?
Investors should expect ongoing volatility until there is clear evidence that the central banks will begin to reduce interest rates. That being said, TD offers a 5% dividend yield at the current share price, so you get paid well to ride out any additional downside before the next recovery.
Buying TD on big pullbacks has historically been a profitable move for patient investors. If you have some cash to put to work, TD stock probably deserves to be on your radar today.
