There aren’t many large-cap TSX stocks down 20% from their all-time highs these days. A massive bull market has lifted stocks higher in recent years, and while Canadian equities haven’t been lifted quite as much as their U.S. counterparts, they’re definitely up over the last few years. So, bargains have gotten harder to find.
Nevertheless, a few can be found. If you’re willing to look at companies that suffered temporary setbacks, you sometimes find depressed stock prices that are likely to bounce back in short order. In this article, I’ll explore one large Canadian bank that I think is likely to do just that.
Source: Getty Images
TD Bank
Toronto-Dominion Bank (TSX: TD) is a TSX bank stock I’ve been covering extensively here on Motley Fool for some time now. I first bought a position in TD many years ago, only to sell it years later. This year, when the stock fell to $74 during the fallout from the bank’s money laundering settlement, I bought shares again. So far, they have been out-performing the TSX, yet the stock is still down 20% from its all-time high.
My basic opinion on TD Bank is largely the same as it was when the stock was $74: the bank is cheap, highly profitable, and being undervalued by the market. I still think these things about it today, although obviously, at $85, it isn’t as cheap as it was before. However, there is one unambiguously positive development from TD on the investment front that I think materially improves its situation.
Charles Schwab sale
Last year, TD Bank agreed to settle its money laundering charges with the U.S. Department of Justice (DoJ) for $3 billion in fines and $430 billion in asset caps. The $430 cap was about how much TD had in U.S. retail assets at the time, so the bank was forced to sell assets in the segment lest value changes push it over the edge.
One of the assets that TD held in U.S. retail at the time was a $9 billion stake in Charles Schwab (NYSE: SCHW) stock. The bank acquired that stake by selling TD Ameritrade to Schwab. At the time of this writing, Schwab was trading at about 20 times earnings while TD Bank was at around 11. Schwab is a U.S. financial similar to TD’s U.S. segment, with presumably similar growth prospects. TD sold the entire Schwab position to comply with the US asset cap. It is spending the money raised by buying TD Bank stock at a far cheaper valuation than Schwab was trading at. So, it appears TD is making a wise capital allocation decision and will be returning wealth to shareholders.
U.S. mortgages
A similar asset sale that TD is considering is a $9 billion portfolio of U.S. mortgages. The plan, as of the most recent reports, is to sell these to Bank of America. Being U.S. mortgages, they probably yield somewhere around 5% to 6% on average. So, TD may be able to re-invest the proceeds from selling those at a higher rate of return by buying back stock as well.
Foolish takeaway
I’ve been bullish on TD Bank shares for a while now but the latest news about asset sales and buybacks has me more convinced than ever before. I think TD will return more wealth to shareholders than any other TSX bank this year. For my money, it’s a buy.
