TD Bank (TSX:TD) is trading near its lowest level in three years. Contrarian investors who missed the big rally after the 2020 market crash are wondering if TD stock is once again oversold and good to buy for a self-directed retirement portfolio focused on dividend income and total returns.
TD stock price
TD trades below $75 per share at the time of writing. The stock soared as high as $108 in early 2022 at the peak of the post-pandemic rally. Since then, the share price has drifted lower with some erratic moves along the way.
Rising interest rates in Canada and the United States, along with issues with U.S. regulators, have played a role in the decline.
On the rate front, the Bank of Canada and the U.S. Federal Reserve aggressively increased interest rates in 2022 and 2023 to cool off the economy in an effort to get inflation back down to the 2% target. Inflation in June 2022 was 9% in the U.S. and 8% in Canada. The May 2024 inflation report for the United States came in at 3.3%. Canada’s April 2024 inflation was 2.7%, giving the Bank of Canada confidence to cut its interest rate by 0.25%. The U.S. is now expected to cut its rate by a similar amount before the end of the year. In 2025, economists expect a series of cuts by both countries to avoid driving the economy into a recession.
Higher interest rates are normally positive for banks as they enable the financial institutions to generate better net interest margins. The steep increase in rates over such a short period of time, however, is putting pressure on businesses and households with too much debt. This is evident in TD’s provision for credit losses (PCL). The bank set aside $1 billion in the fiscal second quarter (Q2) of 2024 to cover potential loan losses. That’s up from $600 million in the same period last year. As interest rates decline, the quarterly PCL charges should level off and eventually start to decline, as long as there isn’t a deep recession that drives up unemployment.
TD’s problems with U.S. regulators have garnered a lot of media attention in recent weeks. The bank announced it has set aside an initial amount of US$450 million to cover potential fines related to ongoing investigations into TD’s systems for detecting and stopping money laundering in the American operations. TD has a significant presence in the United States, with branches running from Maine right down the East Coast to Florida, so the situation is serious. Pundits speculate the total amount of fines could reach US$4 billion before the process is complete. Penalties at the high end of these estimates would wipe out a good chunk of TD’s excess cash.
Analysts are also concerned that TD could be forced to shelve its U.S. growth plans until the bank can demonstrate to regulators that its anti-money-laundering systems are fixed. This could put a damper on earnings growth for some time.
Upside
TD remains a very profitable bank, and its capital position should be adequate to ride out the turbulence as long as the penalties are not too high. The bank will eventually get the mess sorted out and growth in the American market should continue over the long run. Declining interest rates in 2025 should ease pressure on over-leveraged borrowers. This should lead to falling PCL amounts and could even result in some PCL recovery once rates stabilize at lower levels.
TD’s dividend should, at the very least, be safe given the solid profitability of the bank. At the current share price, investors can get a 5.5% dividend yield.
Should you buy TD stock now?
Ongoing volatility should be expected, and the trend isn’t your friend right now, so I wouldn’t back up the truck just yet. The broader market is due for a pullback, and TD’s share price will likely remain under pressure until there is clarity on the outcome of the investigations in the United States.
That being said, buy-and-hold contrarian investors who are comfortable collecting a good dividend yield as they ride out the uncertainty might want to start a small position near this level and look to add on additional downside. As we saw last fall, sentiment in the bank sector can shift quickly, and TD’s share price could shoot meaningfully higher on any positive news connected to the U.S. investigations. We never know where the bottom lies until it is obviously in place after a significant rebound.
If you have some cash to put to work, this stock already looks undervalued and deserves to be on your radar.
