TD Bank (TSX: TD) is down about 8% in 2024, making it the worst performer among the large TSX banks this year. Contrarian investors are wondering if TD stock is 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.
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TD stock price
TD trades near $78.50 at the time of writing. The stock slipped as low as $74 in the summer but is still way off the $108 it reached in early 2022 at the height of the first post-pandemic rally in bank stocks.
The broad-based decline in bank stocks in 2022 and through most of last year occurred as a result of the steep rise in interest rates in Canada and the United States. High inflation forced the Bank of Canada and the U.S. Federal Reserve to hike interest rates aggressively. Markets worried that the moves would trigger a severe recession, leading to rising unemployment and a wave of loan defaults. The economy has actually held up relatively well, and while provisions for credit losses (PCL) rose at the banks, including TD, the overall loan portfolios remain in good shape.
Over the past 12 months, sentiment shifted from fears of more rate increases to expectations for the rate cuts that have now materialized in Canada and the United States. This has led to a rebound in the bank sector, with some stocks hitting new record highs.
TD, however, hasn’t participated. The bank ran into trouble in its American operations, where regulators hit TD with fines of roughly US$3 billion for not having adequate systems in place to identify and prevent money laundering through TD’s branches. TD’s assets in the U.S. have also been capped, meaning the company’s growth ambitions in the American market have come to a halt. This is a challenge for TD, given the bank has invested billions of dollars over the past 20 years to build a large U.S. retail banking business through strategic acquisitions of regional banks that run from Maine right down the East Coast to Florida.
Investors should expect near-term headwinds to persist for the stock until TD’s new incoming chief executive officer comes up with a strategy to drive growth in other markets while the U.S. asset cap is in place.
Opportunity
TD remains a very profitable bank, even with all the distractions that have occurred over the past couple of years. The company also maintains a solid capital position that can be used to ride out economic turbulence or deployed to make strategic acquisitions in other markets.
TD should eventually get back on track in the U.S., as well. In the meantime, investors who buy TD stock at the current level can pick up a dividend yield of 5.2%.
The bottom line on TD stock
Investors who already own TD should probably continue to hold the shares. The stock is probably undervalued at this point, and the closure on the U.S. investigations enables management to refocus on finding growth opportunities for the coming years. New investors might want to start nibbling at this level and maybe look to add to the position on any weakness.
