TD Bank (TSX:TD) has underperformed some of its Canadian banking peers in the past two years. 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) portfolio focused on dividends and total returns.
TD Bank Stock
TD trades near $85 per share at the time of writing. The stock slipped as low as $74 in June, so investors who jumped in at that time are already sitting on some nice gains. More upside could be on the way. TD was as high as $108 in early 2022.
TD is under investigation by regulators in the United States for not having adequate systems in place to detect and prevent money laundering in the American operations. TD built the U.S. business over the past two decades through a string of acquisitions. The American retail banking group runs from Maine right down the east coast of the U.S. to Florida and actually has more branches than the retail operations in Canada.
Investors now have an idea about the size of the expected penalties. TD already took provisions of more than $3 billion to cover anticipated fines related to the U.S. issues and says this should cover the overall hit. Whether or not TD will be subjected to growth restrictions in the American market is still a concern for investors.
Opportunity
TD is turning the page as a new CEO is set to take over in 2025. The bank will eventually get the problems sorted out south of the border, and growth in some form is expected to continue in the American market, either through acquisitions or organic expansion.
TD remains a very profitable bank and has a solid capital position to ride out the turbulence.
Risks
An outright ban on expanding in the U.S., while unlikely, would be a big hit. Investors also need to consider the potential for either a resurgence in inflation that would slow down cuts to interest rates or a possible recession next year. TD and its peers have raised provisions for credit losses (PCL) in recent quarters as interest rate hikes put pressure on borrowers with too much debt. Slower rate cuts could keep provisions elevated. A recession that leads to a spike in unemployment could push overstretched households into default, even if rates decline.
Dividend
TD has a long track record of dividend growth. The current distribution, at the very least, should be safe. Investors who buy TD stock at the current level can get a yield of 4.8%.
Should you buy TD now?
Existing shareholders should probably hold on at this point. You get paid well to ride out the turbulence. New investors might consider taking a half position and look to add on any new weakness. The broader market is due for a pullback, so there could be a better entry point in the coming months.
That being said, TD looks attractive at this level over the long run, and any news related to closure on the U.S. issues could send the stock considerably higher.
