Should Investors Buy the Correction in TD Stock?

TD now offers a 5.4% dividend yield. Has the stock bottomed?

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TD Bank (TSX:TD) is down 11% in 2024 and off about 30% from the high the stock reached in early 2022. Investors who missed the rally after the 2020 market crash are wondering if TD stock is undervalued right now 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 share price

TD trades near $75 per share at the time of writing. The stock recently dipped as low as $74 hitting a level not seen in about three years. The high in early 2022 was above $108, so there is decent upside potential on a recovery.

When that rebound could occur, however, is the question that is on the minds of contrarian investors who don’t want to miss the next surge, but also don’t want to get burned by trying to catch a falling knife.

Risks

TD has historically made strong recoveries from big pullbacks. That should be the case again, but the reason for the current underperformance is more company-specific than an issue with the broader banking sector, as was the case in previous downturns witnessed in 2020 and during the Great Recession.

TD is working through some challenges in its American operations. Regulators in the United States are investigating TD’s systems for detecting and blocking money laundering. TD recently set aside US$450 million for potential fines connected to the issues. This is an initial provision and pundits have speculated the hit could run as high as US$2 billion before the process is complete.

The ultimate size of the potential penalties gets most of the media coverage, but the larger impact on the business could be restrictions placed on growth in the American market until TD can demonstrate that it has the situation fixed. TD operates more branches in the United States than it does in Canada after a 20-year buying spree that saw the bank acquire businesses along the east coast of the United States from Maine to Florida. TD abandoned another planned US$13.4 billion acquisition in the U.S. last year citing regulatory challenges. That decision forced management to cut earnings guidance.

In the near term, the investigations in the U.S. will be a distraction for senior management and will likely force the bank to incur heavy additional expenses as it invests to put systems in place to meet the requirements of American regulators. Analysts have also voiced concerns that the deep dive by investigators could uncover other issues.

Over the medium term, growth ambitions could be shelved. This would potentially lead to the market giving TD a lower multiple on the shares than in the past. As such, a dip toward a new 12-month low wouldn’t be a surprise on additional negative news.

Opportunity

Barring any major new skeletons emerging from the closet, TD should get through these challenges and will eventually resume its growth in the American market. The decline in the share price probably has the existing bad news built in, so there could be a meaningful bounce if the path to getting the issues fixed becomes clear and a maximum potential penalty is determined.

TD reported solid fiscal Q2 2024 financial results, despite the headwinds and distractions. Adjusted earnings came in at $3.8 billion for the quarter, up about 2% from the same period last year. The bank remains very profitable, has a strong capital position to ride out ongoing turbulence, and should see provisions for credit losses start to level off as soon as the Bank of Canada and the U.S. Federal Reserve start to cut interest rates.

Dividends

TD has a great track record of dividend growth over the past three decades with annual increases averaging better than 10% over the long term. Based on the stability of the earnings and strong capital position, investors should see the distribution continue to increase, although it will likely be by single digits in the near term.

At the current share price, TD stock provides a 5.4% dividend yield.

Should you buy TD stock now or wait?

There are risks that things could get worse before they get better, so I wouldn’t go all-in just yet. That being said, TD stock should eventually recover and you will get paid a good dividend yield right now to ride out the volatility. Investors might want to start nibbling at this level and look to add to the position on any additional downside.

As we witnessed last fall and during the rally after the 2020 crash, oversold bank stocks can rally significantly over a short period of time when sentiment shifts, so there is a risk to staying on the sidelines for too long.

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.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

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