Money-Laundering Investigation: Is TD Bank Stock in Trouble?

Some legal challenges faced by publicly traded companies should be perceived as opportunities by investors since they can discount the stock and boost its yield.

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Almost all publicly traded companies are vulnerable to regulatory challenges and legal problems, but financial institutions are more vulnerable due to the nature of their business. This is evident from the money-laundering allegations and investigation TD Bank (TSX:TD) is currently dealing with in the U.S.

It’s one of the top stocks trading on the TSX and one of Canada’s largest publicly traded companies, which has taken a significant dive while battling regulatory issues and a money-laundering investigation.

The money-laundering investigation

Earlier this month, the Department of Justice (DOJ) in the U.S. initiated a probe into TD Bank after it came to light that millions of dollars connected to the Fentanyl trade in the U.S., particularly in New York and New Jersey, came through TD Bank. This drug connection and the investigation it triggered caused the stock to dip quite a bit in a handful of days.

It has recovered from the original dip, but the money-laundering investigation in the U.S. and the regulatory concerns it’s raising back home in Canada are keeping the stock grounded as the financial sector goes up.

The amount of money allegedly laundered through TD is enormous — over US$653 million. The bank is already taking steps to resolve the vulnerabilities and exposure it has and has also reportedly set aside around $500 million for penalties after this investigation.

However, the most significant factor to take into account here is that the investigation isn’t over yet. If, in addition to the significant financial penalties, the bank also experiences some deregulation or is forced to invest an exuberant amount in its anti-money-laundering systems, the stock might dip significantly harder than it did at the beginning of this probe.

Is the TD Bank stock in trouble?

In a word, yes. While most Canadian bank stocks have started to slump recently, TD has been going down for weeks. It’s trading at a discount of about 30% from its 2022 peak. This discount has resulted in a decent bump in the yield, making it 5.4%. The valuation is also healthy, but the uncertainty is unsuitable for the stock’s prospects.

While the chances of it seem relatively slim, if the bank is acquitted of these charges and gets no penalty, it may spike. However, even though it may recover investor confidence, the erosion of consumer confidence, especially in the U.S. (if it’s reflected in the bank’s earnings reports), may impact its long-term growth.

Foolish takeaway

From a dividend investor perspective, TD Bank may seem very lucrative, especially considering its history as an aristocrat. You can buy now or wait for the verdict of the investigation. If it’s negative, the stock may dip further, and you might have a chance to lock in an even more compelling yield.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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