Contrarian investors seeking good dividends and a shot at decent capital gains are wondering which TSX stocks are now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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TD Bank stock
TD Bank (TSX:TD) is down nearly 30% from its 2022 peak. The weakness stands in contrast to some of the other large Canadian Banks, specifically Royal Bank (TSX:RY) and CIBC (TSX:CM), that have recovered substantial ground over the past year and even hit new record highs.
TD’s decline is due to troubles at its American business. The bank was recently fined US$3 billion and will face an asset cap in the U.S. market as penalties for not having adequate systems in place to identify and prevent money laundering. Investors were prepared for the $3 billion hit, as TD had already taken provisions in that range to cover the anticipated penalties. The asset cap, while rumoured, was still a bit of a shock for some pundits.
TD’s non-Canadian growth strategy over the past two decades focused heavily on the American market. The bank spent billions of dollars buying regional retail banks from Maine right down the east coast to Florida. In 2023, TD had a provisional agreement in place to buy First Horizon for US$25 per share, or roughly US$13.4 billion, but had to cancel the deal due to regulatory hurdles.
Management then planned to grow the U.S. business organically, but even that will be severely scaled back due to the asset cap. Ending the First Horizon deal forced TD to abandon its targets for earnings growth. Investors are wondering where TD will now focus on expanding the business.
Upside
TD is bringing in a new CEO in 2025 as part of its plan to get a fresh start after the challenges of the past two years. It will take time for the new boss to organize the management team and come up with a strategy to continue TD’s long track record of growth.
TD remains a very profitable bank, even with all the distractions. Fiscal Q3 2024 adjusted net income came in at $3.6 billion compared to $3.6 billion in the same period last year. Canadian personal and commercial banking operations generated record revenue and net income in the quarter, up 13% from fiscal Q3 2023. In the U.S., adjusted net income came in at $1.3 billion in Canadian funds, down just $77 million year-over-year. Wealth management and insurance operations delivered record revenue; net income of $430 million was essentially flat in the division compared to the previous year due to the impact from severe weather events. Adjusted net income in the wholesale banking group was also similar to the same period in 2023.
As such, the core business remains very solid and will give the new CEO a good base to build on in the coming years.
Dividends
TD is one of Canada’s best dividend stocks over the past 25 years. Investors might not see the double-digit annual increase they are used to in the near term, but dividend growth should continue and could accelerate again once the bank is back on track.
Investors who buy TD stock at the current level can get a dividend yield of 5.3%.
The bottom line on TD stock
Investors should anticipate some ongoing turbulence, but you get paid well to wait for the turnaround efforts to deliver results. Buying TD on big pullbacks has historically proven to be a profitable move for patient investors.
