Toronto-Dominion Bank (TSX:TD) has been in the spotlight in 2024 by underperforming the broader market and other large Canadian bank stocks by a wide margin. On Thursday, TD stock took a big hit, dropping more than 6% to $81.76 per share, bringing its market cap down to $142.9 billion. This latest slide means the stock is now down 4.5% for the year against the TSX Composite’s solid 16% year-to-date rise.
The sell-off followed a major announcement from TD, wherein the bank acknowledged shortcomings in its U.S. anti-money laundering (AML) program and agreed to pay a large settlement. While TD has taken responsibility and outlined plans for remediation, the news has clearly put pressure on its share price. In this article, I’ll discuss whether these recent developments impact TD Bank’s growth outlook, and if the 5% dividend yield is reason enough for investors to consider adding it to their portfolios on the dip right now.
TD Bank’s U.S. AML probe and settlement
TD Bank’s U.S. AML compliance issues have been a major focus in recent years. After years of working with U.S. regulators, the bank reached a resolution on October 10, 2024, which included a settlement of about US$3.1 billion. The settlement agreement mainly focuses on addressing past shortcomings in its AML controls and requires the Canadian bank to strengthen its monitoring and compliance systems.
As part of this settlement, TD also faces new restrictions on the growth of its U.S. assets, which are now capped at US$434 billion. This cap limits the total assets of the Canadian lender’s U.S. banking subsidiaries and places restrictions on its ability to expand in the U.S. market until it meets the compliance conditions. While a large portion of these penalties have already been covered by TD Bank’s previous provisions, it placed a spotlight on the ongoing challenges in its U.S. operations, pressuring TD stock.
The impact of recent AML challenges on TD’s financials
Before the settlement was finalized, TD Bank’s third-quarter results already reflected the financial strain from preparing for these potential regulatory outcomes. For the quarter ending July 2024, the bank took a massive provision of about US$2.6 billion related to its AML investigations, leading to a reported net loss of $181 million. Nevertheless, TD’s core operations in the recent quarter remained strong after adjusting for this large provision and other one-time charges, with adjusted earnings of $2.05 per share.
However, the limitations on expanding U.S. assets mean TD will now have to focus on optimizing its current operations rather than relying on new growth opportunities in the short term.
Is TD Bank stock still a buy for its 5% dividend yield?
While TD Bank’s recent challenges, including the AML settlement and U.S. asset growth restrictions, are expected to keep its share prices volatile in the near term, they also could mark a turning point. With a clear path forward for addressing U.S. compliance issues, TD now has the opportunity to emerge stronger. Its focus on improving its risk management in the U.S. could enhance the bank’s reputation and operational stability over time, making it better prepared for future growth opportunities.
Moreover, TD’s core strengths, like its strong position in the Canadian banking sector and consistent profitability, remain intact. Considering all these fundamental factors, its juicy 5% annualized dividend yield looks attractive for investors seeking a reliable passive income, while the bank’s solid capital position could give it a cushion for any near-term challenges.
