TD Bank (TSX:TD) stock slipped after reporting fourth-quarter 2024 earnings. In this five-minute video, Motley Fool Canada Chief Investment Officer Iain Butler shares his take on whether TD stock is an investment worth buying today.
Prefer to read? There’s a transcript below.
Transcript
Nick Sciple: I’m Motley Fool Canada Senior Analyst Nick Sciple, and this is the 5-Minute Major, here to make you a smarter investor in about five minutes.
Today, we’re discussing TD Bank’s fourth-quarter 2024 earnings release. My guest today is Motley Fool Canada Chief Investment Officer Iain Butler. Iain, thanks for joining me.
Iain Butler: Great to be here, Nick, as always.
Nick: Great to have you with me as always, Iain. TD Bank are shares not having a great year. They fell more than 5% to three-year lows after releasing earnings on December 5. What’s got the market down on this earnings report?
Iain: Yeah, it’s been a bad one for TD. That’s for sure. We’ve seen this before with Canadian banks. This is our third Canadian bank profile in this series after this recent round of earnings. The first two being RBC and Scotia. Fools can find those videos on the YouTube channel.
We followed a similar format for those first two profiles, zeroing in on their profitability and valuation.
And we’ll do the same here. But in this case, there is certainly more to the story, and we’ll get into that as well.
TD Bank’s profitability and valuation
First, though, to put our blinders on, let’s pretend that there isn’t more to the story. Let’s just consider the TD book to return on equity for 2024 of 7.8%. And just a refresher, return on equity is a measure of bank profitability.
TD booked 7.8%. That’s materially lower than what we saw for Scotia and especially RBC and well below TD’s 10-year average return on equity of 13.3%.
So that indicates that indeed something is clearly amiss here. As for valuation, TD currently trades with a price to book multiple of 1.12, according to S&P Global Market Intelligence.
Similarly, that’s below the other two banks that we’ve looked at thus far and well below the 10-year average price to book multiple for TD of 1.64.
TD’s dividend yield
And what we’ve done with the other two as well is a bit of valuation double checks. So by comparing current dividend yield to historic yield.
So TD’s current dividend yield looks pretty good, frankly, at 5.55%. That’s against a 10-year average yield of 4.1%.
And I say pretty good, meaning that’s a pretty juicy yield, but it does indicate that the stock’s been under pressure.
4.1% 10-year average and it’s approaching where this dividend yield spiked to right at the onset of the pandemic when it went over 6%.
Put this together. TD looks cheap, but that return on equity figure certainly suggests that TD is cheap for a reason.
Nick: Yeah, and I’ll share that reason with folks who have been following TD Bank this year. We actually did a video on our YouTube channel earlier this year on this. TD Bank has been under the specter of a money-laundering investigation and was fined US$3.1 billion dollars. It was ordered to cap the expansion of its retail banking business back in October by the U.S. Department of Justice and other regulators. The market had expected that fine, but didn’t expect that cap the on growth of the business, which obviously factors into valuation. Management really admitted those issues with growth when they reported earnings last week. Suspended medium-term financial targets, which had called for 7% to 10% earnings per share growth and 16% return on equity. We’re expecting the bank to update its targets in the second half of 2025. Management has said, though, 2025 is going to be a transition year. They’re going to be selling assets in the U.S., trying to get the business under their feet. But the real question is with this cap on growth in the US and the weight that this company is under — TD Bank is the worst performing Canadian bank here so far in 2024 — do you think this regulatory environment is going to permanently impair the business? Or do you think there’s potential for the company to turn it around? The stock could be of value here?
Is TD Bank stock a good buy?
Iain: So that’s the big question. It’s always the big question. And it’s especially tough during these uncertain times. So long term, I am of the mind that the current situation will probably look like a pretty decent opportunity to pick up some shares of TD.
There’s plenty of precedent. Canadian banks have stumbled in the past, some more than others.
CIBC.
And the ship has always been righted. These are wonderful businesses with enduring competitive advantages, especially in the domestic market.
And TD is certainly no exception there. However, this is a company that is very much in the wilderness right now, especially with its U.S. operations, as you mentioned, Nick.
There’s a change at the top. The CEO, long-term CEO is out. A new CEO is coming in next in 2025.
And I just think there’s a pile of uncertainty ahead of this company, directly ahead of this company.
For me, I kind of want to get some direction, get some of that uncertainty out of the way before I become more interested. So I wouldn’t sell a position. I would collect the dividend and on we go. But I’d be certainly hesitant to strike up a new position or even add here. Just based on the clouds that exist.
Nick: Yeah, difficult in the banking industry. Cultural issues really can weigh on a business. However, really established as one of those big five, six Canadian banks, it’s unlikely to be disrupted from that position. We’re going to continue to wait and see. And perhaps this company looks more attractive as we enter 2025 and get more certainty on the future growth of this business. Until then, Iain, thank you so much for joining me for this edition of “The Five-Minute Major.” We hope we’ll see everybody next time.
Iain: Thanks, Nick.
