Contrarian investors often seize opportunities during moments of market uncertainty, and Toronto-Dominion Bank (TSX:TD), or TD Bank stock, presents such a moment. Trading below $76 and near a fresh 52-week low, TD Bank’s valuation offers a compelling case as the second-largest Canadian bank navigates temporary challenges.
With its single-digit forward price-to-earnings (P/E) multiple making it one of the most affordable Canadian bank stocks, could this be the right time to buy the dip on TD Bank stock?
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What went wrong?
Toronto-Dominion Bank’s recent quarterly earnings results brought unwelcome surprises, including the withdrawal of its medium-term financial targets for 2025. Management cited significant uncertainty during a transitional year, further dampening investor confidence.
The withdrawn guidance initially projected adjusted earnings per share (EPS) growth of 7-10%, a return on equity above 16%, and positive operating leverage. However, priorities have shifted, with the bank focusing on strengthening its anti-money laundering (AML) compliance and enhancing operational efficiency.
While this pivot creates short-term uncertainty, it also signals a prudent approach to navigating corporate challenges and positioning for long-term success.
4 Reasons to buy the dip on TD Bank stock
A generous dividend yield
TD Bank stock’s dividend yield of 5.6% is not only the highest among Canadian big banks but also signals management’s confidence in the bank’s future earnings-generating power. Even amid current headwinds, TD increased its quarterly dividend this month by 2.9% to $1.05 per share starting with the January 2025 payout.
With a payout ratio of just 54% based on expected 2025 normalized earnings per share of $7.83, the dividend remains both robust and sustainable.
Solid capital position
The bank’s capacity to absorb unexpected earnings shocks remains strong. TD Bank’s common equity tier-one (CET1) ratio of 13.1% ensures a substantial buffer to absorb potential losses. This financial strength bolsters investor confidence in the bank’s ability to weather challenges.
Growth opportunities in core segments
Despite U.S. banking setbacks, TD’s Canadian personal and commercial banking division continues to deliver strong results, with most recent quarterly revenue up 7% and earnings up 9% year over year. Stable loan and deposit growth positions the segment as a reliable earnings generator.
Moreover, wealth management and wholesale banking operations remain robust. TD Asset Management led Canadian banks in the exchange-traded funds (ETF) market share growth in 2024, a trend likely to persist. Wholesale banking also posted impressive results, with revenue up 19% and earnings surging over 1,200%, driven by higher investment banking fees.
TD Bank stock’s valuation advantage
TD Bank stock’s forward P/E ratio of approximately nine positions it as a bargain compared to peers. For investors seeking exposure to a top-tier North American bank with a $2.1 trillion asset base, TD offers a rare value opportunity today as shares exchange hands at quotes below $76 a share.
Risks to watch
TD Bank’s U.S. operations remain a concern. Normalized net earnings in the U.S. banking division fell 14% year-over-year in the fourth quarter, driven by higher provisions for credit losses and rising operating costs tied to AML compliance. These challenges, coupled with an asset cap, may limit earnings growth until at least 2028 or beyond.
Additionally, a softening economic outlook for Canadian banks, with rising delinquencies and competitive deposit markets, may potentially pressure earnings margins.
Investor takeaway: Buy TD Bank stock below $76?
TD Bank stock offers a compelling combination of dividend yield, valuation, and long-term growth potential. While near-term uncertainty persists, particularly in its U.S. operations, TD’s strong capital position and resilience in core Canadian banking operations may suggest a brighter future.
Investors with a contrarian mindset may find TD’s current depressed price an attractive entry point, with the potential for meaningful upside as the bank navigates its transition and updates its strategy in 2025.
