While the broader TSX index is hovering near all-time highs, shares of Toronto-Dominion Bank (TSX:TD) are down 24% from record levels. Valued at a market cap of $144 billion, TD Bank is among the largest companies in Canada and has trailed its peers in the past year.
Over the last 12 months, TD Bank has faced multiple challenges, which include a US$3 billion fine for anti-money laundering violations and an asset cap imposed on its U.S. operations. The banking giant also suspended its financial guidance in December 2024 while conducting a strategic review, which added to investor uncertainty.
Despite the recent pullback, TD Bank stock has returned 616% to shareholders since January 2005 after adjusting for dividends. Comparatively, the TSX index has gained “just” 417% in this period. So, let’s see if TD Bank is a good stock to own at the current multiple.
Is the TSX bank stock a good buy?
TD Bank offers traditional banking services like deposits and loans, in addition to wealth management, insurance products, and capital markets services. The bank has established a strategic partnership with Canada Post, expanding its reach across Canadian communities. Through its retail and commercial banking operations, TD serves millions of personal and business customers with services ranging from everyday banking to complex investment and corporate banking solutions.
In the fiscal fourth quarter (Q4) of 2024 (ended in October), TD Bank reported revenue growth of 12% year over year. However, its earnings fell to $3.2 billion or $1.72 per share, down 5% year over year. TD’s performance reflected mixed results across its divisions and significant challenges, particularly in its U.S. operations.
TD emphasized it remains focused on addressing anti-money laundering (AML) remediation efforts, which the bank expects to continue through 2027. It has implemented new monitoring systems and enhanced training, with most remediation actions planned for completion by the end of 2025. Due to these ongoing challenges, TD has suspended its medium-term financial targets and plans to hold an Investor Day in late 2025 to provide an update on its strategic direction.
The Canadian Personal and Commercial Banking segment performed well in Q4, delivering record revenues and positive operating leverage. Comparatively, the U.S. Retail segment faced challenges, with net income declining 13% year over year due to higher provisions for credit losses and increased expenses.
TD Bank’s common equity tier-one ratio stood firm at 13.1%, bolstered by the sale of its investment in Charles Schwab. In August last year, TD reduced its stake in Schwab from 12.3% to 10.1%.
Is TD Bank stock undervalued?
Despite ongoing challenges, TD increased its quarterly dividend by $0.03 to $1.05 per share. The recent drawdown in TD stock has meant it offers shareholders a tasty dividend yield of 5.3%. Moreover, these payouts have tripled in the last 12 years, showcasing the resiliency of TD’s cash flow and earnings. Looking ahead to fiscal 2025, TD expects expense growth of 5-7% as it continues investing in risk controls and infrastructure while working to improve efficiency.
Bay Street expects TD Bank’s adjusted earnings to improve from $7.81 per share in 2024 to $8.41 per share in 2026. So, if the TSX bank stock is priced at 12 times trailing earnings, it will trade around $100 in early 2027, indicating an upside potential of over 20% from current levels. If we include dividends, cumulative returns could be closer to 30%.
