TD Bank (TSX:TD) is underperforming its Canadian peers in 2024. Contrarian investors 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
TD trades near $75 per share at the time of writing. That’s down 12% so far in 2024 and the stock is not far off the 12-month low. The share price was as high as $108 in early 2022 at the top of the rally that occurred after the 2020 market crash, so there is decent upside potential when things improve.
The challenge for investors is to determine if the stock has bottomed, or if more downside is on the way.
Risks
TD is under investigation in the United States for not having strong enough systems and processes in place to protect against money laundering. The bank recently announced it will book an initial charge of US$450 million to cover potential fines related to the issues. Pundits speculate the final penalty amount could be as high as US$2 billion. That sounds like a big hit, and it certainly isn’t chump change, but TD has excess capital on hand and can cover the fines if they go that high. The bigger concern for investors is the risk that TD might be forced to shelve all of its planned growth projects in the United States until it can prove that the anti-money laundering systems are fixed. This could take years and would likely require extensive investments while being a major distraction for senior management.
TD is known for its extensive Canadian retail banking business, but the company actually has more branches in the United States as a result of an aggressive acquisition strategy over the past two decades that added operations running from Maine all the way down the U.S. East Coast to Florida. Last year, TD abandoned its planned US$13.4 billion takeover of First Horizon, a regional bank in the southeastern part of the country. At the time, TD cited regulatory challenges as the reason for walking away from the deal. As a result of that decision, TD cuts its guidance for earnings growth.
Bank investors could continue to shun the stock in favour of other names with better near-term growth prospects.
Opportunity
TD will eventually get things sorted out in the American business. The bank remains very profitable, despite the headwinds. TD reported fiscal Q1 2024 adjusted earnings of $3.8 billion, up about 2% from the same period last year.
TD set aside about $1 billion in Q2 2024 for potential bad loans as high interest rates hit over-leveraged clients. That’s up from Q2 last year, but is still a small amount compared to the overall loan book. Provisions for credit losses (PCL) should start to level off in the next few quarters. The Bank of Canada and the U.S. Federal Reserve are expected to start cutting interest rates in the coming months to avoid driving the economy into a recession. Reduced borrowing costs will help ease the uptick in customers facing defaults on their loans and mortgages.
As soon as the central banks start to cut rates, TD and the other banks could pick up a new tailwind.
TD’s dividend currently offers a 5.4% yield. The bank is one of the best dividend-growth stocks on the TSX over the past three decades and more gains in the payout should be on the way, supported by solid profits and the large capital position.
Should you buy TD stock today or wait?
I wouldn’t back up the truck just yet. The broader equity market is due for a pullback and TD’s share price will likely remain under pressure until there is more clarity on the impact of the U.S. investigations.
That being said, the stock already looks oversold and you get paid well to ride out any additional turbulence. Contrarian investors might want to start nibbling near this level to pick up the good dividend yield and be positioned to benefit on any surprise move to the upside. Further declines should be viewed as an opportunity to add to the holdings. Investors will need to be patient, but buying TD on big pullbacks has historically proven to be a profitable move over the long haul.
If you don’t like the risk profile, there are other top TSX stocks that also look undervalued right now.
