Toronto-Dominion Bank (TSX:TD) has recently faced significant challenges, leading to an 11% drop from its 52-week high. Yet the company now offers a 5.32% dividend yield. And that 11% drop could be a good way to jump in on future growth.
But there are reasons for the drop. So, should investors take advantage of the recent decline or wait on the sidelines?
Buy
Despite recent challenges, TD presents compelling reasons for investors to consider buying its stock. In the second quarter (Q2) of 2024, TD Bank demonstrated strong financial performance, reporting an earnings per share (EPS) of $1.50, surpassing analyst estimates of $1.36. The bank also reported revenue of $10.19 billion, exceeding the forecasted $8.97 billion. This robust performance underscores TD’s resilience and ability to generate significant profits, even amid challenging environments.
Plus, one of the most appealing aspects of TD Bank stock is its attractive dividend yield, currently over 5%. For income-focused investors, this dividend yield offers a reliable income stream. Add to this that the current dip in TD Bank’s stock price, trading around $76, presents a potential buying opportunity. The stock is trading significantly below its 52-week high of $109, providing room for potential recovery and growth.
And there’s more. TD Bank’s recent partnership with Indian bank HDFC to attract international students underscores its strategic initiatives to expand its customer base. This partnership aims to make it easier for international students to comply with visa requirements, potentially increasing TD’s customer base and revenue stream.
All in all, TD Bank’s strong financial fundamentals, demonstrated by its impressive Q2 earnings report, highlight its ability to navigate challenges and deliver solid financial performance. The bank’s commitment to maintaining high standards of operation and compliance further strengthens its long-term prospects.
Don’t buy
The most pressing concern for TD stock is the ongoing investigation by the U.S. Department of Justice. The investigation involves allegations of the bank’s involvement in laundering approximately US$653 million linked to Chinese drug traffickers.
This scandal has already led to a $9.2 million fine from Canada’s financial crime watchdog, and potential fines from the U.S. could reach up to US$4 billion. This ongoing issue casts a shadow over the bank’s operations and future prospects. The stock has lost about $10 billion in market capitalization since the investigation news broke, reflecting investor concerns and market reaction.
In response to the investigation, TD Bank will likely face increased compliance costs. Analysts estimate that the bank might need to spend around $500 million annually on compliance measures over the next few years. These expenses are necessary to enhance internal controls but could significantly impact the bank’s profitability and growth potential.
The investigation could lead to non-monetary penalties and regulatory restrictions, potentially capping TD Bank’s growth. Regulators may impose stringent conditions on the bank, affecting its ability to expand and innovate. This could result in a prolonged period of increased scrutiny and operational constraints, further impacting investor confidence.
Although TD Bank currently offers an attractive dividend yield of over 5%, the long-term impact of the investigation could affect future dividend payouts. Investors relying on this income stream should consider the potential risks to the bank’s financial stability and its ability to maintain consistent dividend payments.
Bottom line
The choice is yours. Despite TD Bank’s strong earnings performance and attractive dividend yield, the ongoing money laundering investigation introduces significant risks and uncertainties. Yet, while TD Bank faces challenges due to the ongoing money laundering investigation, its strong earnings performance, attractive dividend yield, resilient market position, potential for growth, and strategic initiatives make it a compelling investment option.
