TD Bank (TSX:TD) is still down 20% from the 2022 high. The stock has recovered some ground in recent months, and investors who missed the rally are wondering if TD stock is still undervalued and good to buy for a portfolio focused on dividends and total returns.
TD Bank stock
TD trades near $86 per share at the time of writing compared to $108 at one point in early 2022. TD dipped as low as $74 this summer before rebounding to the current level.
The recovery since June has coincided with the start of rate cuts by the Bank of Canada and has been supported by the recent rate cut in the United States. Inflation is back at or near target levels. This gives the central banks some room to reduce rates in an effort to head off a potential recession.
In normal economic conditions, falling interest rates are typically negative for banks as they can reduce net interest margins. In the current situation, however, the market is anticipating a reduction in loan defaults as borrowers who are struggling to cover the big jump in interest charges finally get some relief. TD and its peers increased provisions for credit losses (PCL) considerably in recent quarters. Falling interest rates should lead to lower PCL heading into 2025.
TD’s share price performance still trails some of its peers. This is due to an investigation by regulators in the United States regarding TD’s lack of adequate anti-money-laundering systems in the American operations. TD built a large U.S. retail banking business over the past two decades through a series of acquisitions. Growth in the U.S. market has been a core strategy for the bank. The regulatory issues have put that plan on hold.
TD has already set aside more than US$3 billion to cover potential fines related to the investigations. The bank expects this will be enough to cover the total penalties that could come out of the process.
Opportunity
The regulatory issues will eventually be resolved. Once the situation is put to bed, TD should be able to refocus its efforts on growing the American business, either through acquisitions or by means of organic expansion. Any news of closure on the investigations could send TD stock soaring.
The bank remains very profitable and maintains a solid capital position to ride out ongoing headwinds. A new chief executive officer is set to take over next year, providing the bank with a fresh start on the leadership front.
Risks
Analysts remain concerned that TD could be hit with a ban on expanding its presence in the United States as part of the resolution of the current issues. That’s unlikely to happen, but any news that hints of a restriction on U.S. growth would be negative for the stock.
At the same time, the broader market is due for a pullback. If economic indicators start to show that a recession is underway and if unemployment continues to increase, banks could see defaults rise, even as rate pressures decline. This would lead to higher PCL in the coming quarters, reducing profits.
Inflation is also still a concern. Markets are treating the inflation battle as being won, but demands for large wage hikes remain a threat. Potential tariffs from a new Trump presidency could also drive up prices in the United States. Supply chain disruptions or a spike in energy prices due to geopolitical conflicts are possible next year. In a rising inflation scenario, the central banks would have to put rate cuts on hold. That would extend the pain for businesses and households that are carrying excess debt.
If things do go sideways, TD stock could revisit the 2024 lows.
Should you buy TD now?
Near-term threats remain, but TD is probably a solid pick at this level for buy-and-hold investors. At the current share price, investors get paid a decent 4.8% dividend yield. If you are concerned about near-term risks, it might be worthwhile to take a half position and look to add on weakness.
Past performance is no guarantee of future gains, but buying TD stock on material pullbacks has historically proven to be a profitable move for patient investors.
