The Toronto-Dominion Bank (TSX:TD) is one of Canada’s most popular bank stocks. It is widely held by Canadians and Americans alike, owing to the fact that it is a geographically diversified business with operations in both Canada and the US.
In 2023, TD Bank encountered some issues that temporarily made the stock less popular among investors than it had been previously. That year, some of the bank’s tellers in New Jersey, New York and Florida were caught laundering money for a drug trafficking ring. The people directly involved were only low level employees, but the scandal eventually implicated upper management, who were seen as having failed to prevent the money laundering that took place. Eventually, the US Department of Justice charged the bank with facilitating money laundering, resulting in TD receiving a $3 billion fine and a $430 billion asset cap.
TD stock was predictably volatile while all of this was going on. At one point it went below $74, at which point I pounced at the opportunity to buy TD stock. Today, TD is closer to $80, and the decision to invest in the stock is more complex than it had been. Nevertheless, TD has many things going for it that point to a future that is much brighter than the recent past.
Decent growth
One reason I’m still optimistic about TD Bank is the fact that the bank is actually still growing on the top line. In its most recent quarter, TD increased its revenue 10% year over year. This increase in revenue did not translate to a comparable increase in profit, as various fine-related provisions took a large bite out of TD’s reported earnings.
Nevertheless, the strong top line growth pointed to the potential for solid overall results in the future. Although TD’s US retail business will not be permitted to grow in scale going forward, TD has many alternative paths to growth, including its fast-growing investment banking segment and a stable Canadian retail business. Also, the cash that TD will be taking out of its US retail business can be used to finance dividends and buybacks. So, the asset cap that TD is under is not the end of the world.
A cheap valuation
Because of the challenges it has been enduring in recent years, TD Bank stock has gotten fairly cheap. At today’s price, the stock is just under 10 times adjusted earnings, which is cheaper than most of TD’s peer group. The bank also trades at low multiples to sales (2 times) and book value (1.2 times), making TD one of the cheapest large North American banks.
The big question mark
The question of course is how much will TD’s US retail asset cap hold back its growth going forward. Although TD was cheap enough at $74 to be worth the investment even with no growth assumed, the higher the stock price goes, the more future prosperity investors are implicitly betting on. TD’s US retail business will not be the big growth driver in the next few years, that it was in past years. So investors will want to be careful not to pay too high a price for TD Bank stock.
Foolish takeaway
Taking everything into account, I find it likely that TD Bank stock will be worth more in three years’ time than today. Exactly what price it will end up at, I can’t say. But the stock is still cheap enough to be worth the investment.
