TD Bank (TSX:TD) is down about 8% in 2024 compared to gains for most of its Canadian peers. 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 Saving Plan (RRSP) portfolio focused on dividends and total returns.
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TD Bank stock
TD trades near $78 per share at the time of writing. The stock was as low as $74 this year but is still way off the $108 it reached in early 2022 at the peak of the initial post-pandemic rally in bank stocks.
Bank stocks declined through most of 2022 and 2023 as investors worried that aggressive interest rate hikes would trigger a serious recession in Canada and the United States. The rebound in the share prices of many TSX bank stocks over the past year occurred as sentiment switched from fears of more rate increases to expectations of rate cuts. A resilient economy has also helped.
In recent months, the Bank of Canada and the U.S. Federal Reserve started to lower interest rates, providing an extra boost for the bank sector. As interest rates decline, pressure on borrowers with too much debt should ease. This should lead to lower defaults and a reduction of provisions for credit losses (PCL) at the banks in the coming quarters.
TD, however, largely sat out the rally this year. This is due to problems in the American operations where TD was recently hit with fines of roughly US$3 billion for not having adequate systems in place to detect and prevent money laundering. Regulators also put an asset cap on TD’s American business. This means the bank will have to effectively put its U.S. growth strategy on hold.
Opportunities
TD remains a very profitable bank despite the challenges it has faced in the past two years. The company will bring in a new chief executive officer in 2025 to reset the growth strategy and turn the page on the recent challenges. Eventually, TD should get back on track. In the meantime, investors can pick up a solid 5.2% dividend yield.
Risks
Investors in bank stocks are assuming that interest rates will continue to decline and that the economy is headed for a soft landing. The recent surge in bond yields, however, suggests that segments of the market expect rate cuts to slow down or go on pause. Higher inflation is still a risk, especially in the United States, where the incoming Trump administration is expected to implement widespread import tariffs.
In the event that interest rates stay elevated and the economy falters, loan losses could surge. This would put new pressure on bank stocks.
Should you buy TD stock now?
Existing holders of TD stocks should probably maintain the position at this point, now that the uncertainty surrounding the U.S. business has been cleared up. Contrarian investors who are in the soft landing camp might want to start taking a position at this level and look to add on any additional downside.
Near-term volatility should be expected, but buying TD stock on big pullbacks has historically proven to be a savvy move for patient investors.
