Editor’s note: A previous version of this article misstated the CEO’s name. He is Raymond Chun. The article has been corrected.
While the broader markets are trading close to all-time highs, one Canadian dividend stock has underperformed in recent years. Down over 20% from record levels, Toronto-Dominion Bank (TSX: TD) is wrestling with a slew of regulatory and industry-related issues.
The Canadian bank faces a US$3 billion settlement with U.S. regulators over anti-money laundering violations, leading to an asset cap on its U.S. operations.
However, the ongoing pullback has also increased TD’s forward dividend yield to 5.1%, making it attractive to income-seeking investors. Let’s see why TD stock is a solid investment at the current valuation.
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TD Bank offloads Charles Schwab investment
Earlier this month, TD Bank announced it will sell its entire 10.1% stake in Charles Schwab, marking a significant shift in strategy as the Canadian lender looks to redeploy capital for organic growth opportunities.
The sale will generate net proceeds of US$13.9 billion and create approximately 247 basis points in CET1 (common equity tier-one) capital. TD plans to use US$8 billion of the proceeds to buy back up to 100 million shares through early 2026, subject to regulatory approval.
“The bank’s current share price valuation does not reflect management’s expectation for TD’s future performance,” TD chief executive officer (CEO) Ray Chun said during a conference call with analysts. “We have confidence in our strategy and in our ability to execute against it.”
The Schwab investment, which TD acquired in 2020 through the sale of TD Ameritrade, delivered a 23% internal rate of return. TD is selling the stake at approximately 19 times the estimated 2025 Schwab earnings. TD emphasized that the transaction does not affect its insured deposit agreement with Schwab, which runs until 2034.
The remaining proceeds will fund organic growth initiatives across TD’s Canadian banking and wholesale operations. TD plans to detail these investments on investor day in the second half of 2025.
“AML remediation remains the bank’s number one priority,” Chun added, noting that any potential acquisitions would take a back seat to strengthen infrastructure and organic growth opportunities.
A focus on its U.S. business
Chun affirmed the bank’s commitment to its U.S. franchise, explicitly rejecting speculation about a potential exit from the American market while outlining his priorities for his first year at the helm.
“We are 100% committed to our franchise in the United States. It is a terrific franchise,” he said at an industry conference. “In 20 years, we have built a top 10 bank in the United States.”
TD’s management emphasized that anti-money laundering (AML) remediation remains the bank’s “number one priority” following regulatory actions in October. Chun said TD expects to complete the majority of management actions by the end of 2025, and the bank will provide quarterly updates on milestone achievements.
The Toronto-based lender has already made significant progress in its remediation efforts, including hiring top talent from major U.S. banks and law enforcement agencies.
On the strategic front, TD plans to complete its U.S. balance sheet restructuring by the end of fiscal 2025 (ending in October), already executing US$6 billion in bond repositioning.
Is TD Bank stock undervalued?
Analysts tracking TD Bank expect revenue to fall from $56.8 billion in fiscal 2024 to $53.2 billion in 2025. Comparatively, adjusted earnings are forecast to narrow from $7.81 per share in 2024 to $7.83 per share in 2025.
However, earnings are forecast to rise to $8.42 in fiscal 2026. So, priced at 10 times forward earnings, TD Bank is relatively cheap. While the banking giant is part of a cyclical industry, its vast presence in North America has allowed it to increase dividends per share from $0.25 in 1996 to $4.2 in 2025. Its dividends have risen at an annual rate of 10% for almost three decades, which showcases the resiliency of TD’s cash flows.
Given consensus price targets, analysts remain bullish and expect TD stock to gain over 4% in the next 12 months. If we adjust for dividends, cumulative returns will be closer to 10%.
