TD Bank in Hot Water: An ‘Exceptional’ Opportunity

Is TD Bank stock a buy after its money-laundering regulatory problems?

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Prospects for TD Bank stock

TD Bank (TSX:TD) could face cash penalties of up to $2 billion for not complying with anti-money-laundering regulations.

In this five-minute video, Motley Fool Canada analysts talk about the prospects for TD Bank stock. (Prefer to read? There’s a transcript below.)


Nick Sciple: I’m Motley Fool Canada senior analyst, Nick Sciple, and this is “The 5-Minute Major,” here to make you a smarter investor in about five minutes. Today we’re discussing regulatory troubles at TD Bank. My guest today is Motley Fool Canada Chief investment Officer, Iain Butler. Iain, thanks for joining me once again.

Iain Butler: Indeed. Ready for some fun here, Nick. Let’s go.

TD Bank’s regulatory problems

Nick Sciple: Yeah. You know who’s not having fun? TD Bank executives. The company is in hot water as investors weigh potential penalties against the company for failure to comply with anti-money-laundering regulations. Some analysts estimate the bank could face cash penalties of up to $2 billion along with non-monetary penalties that could hamstring the bank in years to come. Iain, what does this latest news mean for TD Bank?

What it means for TD investors

Iain Butler: This is an interesting situation, and I’m sure there’s been some very awkward conversations within the walls of TD Bank across North America, whether it be at head office here in Toronto or wherever they may exist, right down at the branch level. So I think, for this latest news for TD investors in the here and now, it means they’re facing some uncertainty.

Generally speaking, the Canadian banks are meant for the safest, very safest corner of one’s portfolio. They are as blue chip as it gets in the Canadian market. And it’s somewhat rare that scandalous situations such as this occur with a Canadian bank. But here we are, and they have happened in the past for sure. I just think it means the stock price is likely to be volatile.

We’re likely in for some headline risk as we go. It’s an uncertain situation in that the eventual penalties are certainly uncertain.

You mentioned potential fines. There’s there’s no doubt going to be some sort of a regulatory slap on the wrist, whether it be in Canada, the U.S or both, potentially. It might limit TD’s ability to grow somewhat in the U.S for the next little bit, anyway. But I think this, too, shall pass, and then once again, TD will be quiet and and nicely growing in one’s portfolio.

Is TD Bank stock a buy now?

Nick Sciple: Yes, Iain, you talked about the uncertainty here and the role that Canadian banks traditionally play in a portfolio. Given the uncertainty and potential risk here for TD Bank, is this a stock you’d be avoiding right now in favor of other banks? Why or why not?

Iain Butler: I think I tipped my hand there in the initial passage! But I’m more drawn to TD right now than I potentially ever have been in my career. Frankly, I think a good rule of thumb for Canadian investors is that whenever a Canadian bank stubs its toe such as this — and I don’t think it’s any more than that — it creates a window of opportunity to pick up some shares, whether it be initiating a position or building on an existing position.

TD Bank valuation

Here we have TD trading at a price-to-book multiple of 1.28. That compares to a 10-year average of 1.68 and a 25-year average of 1.93, so it’s exceptionally cheap right now. This is only the third-cheapest it’s been in the past 25 years. The other two times were during the financial crisis and in the early days of the pandemic, and in both of those periods there was a very serious macro situation going on during both of those situations.

TD Bank’s dividend yield

Canadian banks are known for their dividend yield. TD Bank is offering its third-highest dividend yield in the past 25 years. We’re sitting at about 5.3% right now. The 25-year average for TD has been 3.4%. Now, interest rates are a little higher, so there’s some reason for that dividend yield to be higher than it has been. But again, this is an exceptional dividend yield.

And let’s say they are prevented from growing in the U.S., which has been their strategy. That just means this bank is gonna pile up capital, and it probably means they divert it towards share buybacks — taking advantage of this cheap stock — and higher dividends. In the years ahead, if indeed they are prevented from deploying that capital towards more business growth angles, it’s not a bad alternative for long-term shareholders. So I’m intrigued by TD. It’s not the cheapest Canadian bank. I believe that honor is bestowed upon Bank of Nova Scotia (TSX:BNS), which trades for right around book value right now. But TD is as good as it gets when it comes to Canadian banking, and here you are with an opportunity to buy at a historic discount.

Nick Sciple: Yeah, in the stock market, risk and opportunity are often intertwined, and you’re seeing some opportunity in the risk that TD Bank is facing today. Well, folks, this is all the time we have today for “The Five-Minute Major,” thank you for joining us, and we’ll see you next time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Iain Butler has positions in Bank Of Nova Scotia. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.

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