TD Bank Stock: Buy, Sell, or Hold at the 12-Month Low?

TD is near its 12-month low. Is more downside on the way?

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TD Bank (TSX:TD) trades close to its lowest point in the past year. Investors who missed the big rally after the 2020 market crash are wondering if TD stock is now undervalued and good to buy or if more downside is on the way.

TD stock price

TD Bank trades near $75 on the TSX at the time of writing. This is slightly above the 12-month low of around $74, which is also the lowest the stock has traded since early 2021 and takes it back to where TD sat before the pandemic rout.

At its peak in early 2022, TD was above $108. This has contrarian investors eyeing the stock for big potential gains.

Risks

A quick look at the long-term chart of TD’s share price suggests that buying TD stock on big dips should prove to be a profitable move for patient investors. The current challenges that face the stock, however, are largely company-specific rather than industry-wide, as has been the case in previous downturns.

Regulators in the United States are investigating TD for weak systems and processes designed to detect and stop money laundering. TD has a large American retail banking operation that runs from Maine down the East Coast to Florida. After a string of acquisitions over the past 20 years, the bank actually has more branches south of the border than it does in the Canadian market, so the situation is serious.

TD recently announced it will initially set aside US$450 million to cover potential fines. Analysts have speculated that the final amount of penalties could be US$2 billion to US$4 billion by the time the entire process runs its course.

TD has excess cash on the balance sheet after it abandoned plans last year to make an acquisition in the United States. At the time, management cited regulatory hurdles as the reason to step back from the deal. TD has enough extra capital to ride out the turbulence, but fines of US$4 billion would be a heavy hit and would deplete the capital reserves in a meaningful way. If penalties top that amount, TD might potentially decide to sell stock to raise funds, which could put more pressure on the share price.

Analysts are also concerned that TD could face growth restrictions in the U.S. market until it can prove to regulators that it has its house in order. That will require heavy investments and could take longer than some investors might expect.

In the near term, investors shouldn’t be surprised if TD slips back to $74 or even takes a run at $70 on any additional unfavourable news.

Upside

TD remains very profitable despite the headwinds. The bank generated adjusted net income of $3.8 billion in the fiscal second quarter (Q2) of 2024 compared to $3.7 billion in the same period last year. Provisions for credit losses (PCL) rose to $1.07 billion in the quarter compared to $600 million in the same period last year, reflecting ongoing challenges for borrowers with too much debt who are struggling to cover the rise in interest charges. On this front, the Bank of Canada just cut interest rates and the U.S. Federal Reserve is expected to begin reducing rates later this year or in early 2025, so PCL should start to flatten out or decline as long as there isn’t a severe recession that leads to a large jump in unemployment.

TD will eventually get its anti-money-laundering systems fixed. Once that happens, growth should resume in the American market to help drive higher earnings for the bank. In the meantime, investors can currently get a 5.4% dividend yield on TD stock, so you get paid well to ride out the volatility.

Is this the right time to buy TD shares?

Ongoing volatility should be expected in the near term, and more bad news can’t be ruled out, so investors need to be comfortable with that scenario. At this point, however, current owners of the stock should probably hold onto the shares. Most of the negative outlook should be priced into the stock.

Contrarian investors who like TD’s long-term prospects and have a buy-and-hold investing strategy might want to start nibbling near this level and treat pullbacks as a chance to average down the cost of the position. The high dividend yield makes it easier to ride out the turbulence.

New investors who are convinced there is more weakness on the way should wait for a better entry point, or look for other opportunities, but there is always a risk of missing a big surge on any positive news on the U.S. challenges. As soon as there is clarity on the final amount of any fines or restrictions on growth, TD’s share price could soar.

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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