TD Bank (TSX: TD) investors have endured a rough ride over the past three years. Contrarians with an eye for value are wondering if TD stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends.
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TD Bank stock
TD trades near $78.50 at the time of writing. The stock was as high as $108 in early 2022 and touched a 12-month low of $73 late last year before staging a short rally that took the shares as high as $87 in recent weeks before the latest pullback.
TD ran into trouble last year with U.S. regulators who fined TD more than US$3 billion for not having adequate systems in place to protect against money laundering at some of its American operations. TD is a big player in the U.S. market with a presence that runs from Maine right down the east coast to Florida. Expanding the American footprint was a key driver of growth, both through acquisitions and organic expansion, over the past two decades. That strategy is now on hold due to an asset cap placed on TD in the U.S. market.
TD had to abandon its earnings growth guidance and has gone back to the drawing board to come up with a new strategy for expanding the business. A new chief executive officer took over this year and has already made some big changes. TD sold the rest of its stake in Charles Schwab for about US$14.6 billion. Proceeds are being used to buy back stock and pursue organic growth in other markets. TD is competing with its large Canadian peers to secure mortgage renewals as a wave of fixed-rate mortgages taken out in 2020 and 2021 renew in 2025 and 2026.
Upside
The worst of the U.S. problems should be in the rearview mirror. At some point, the asset cap should be lifted to allow TD to pursue growth again in the American market. The Canadian business remains very profitable, and TD has a solid capital position to make acquisitions in other markets if attractive opportunities emerge.
Risks
A global trade war could drive the Canadian and U.S. economies into a recession. Unemployment could surge even as interest rates remain high. That combination would likely force more households with too much debt to default on mortgages and other loans, triggering a jump in provisions for credit losses. At the same time, economic uncertainty will cause businesses to delay investments. This would cut into new loan creations for the banks.
If a recession occurs and lasts for an extended period of time, the banks could be in for a rough ride.
Time to buy TD stock?
Near-term volatility is expected until there is more clarity on how the whole tariff war will impact the economy. As such, I wouldn’t back up the truck just yet. That being said, income investors with a contrarian strategy might want to start nibbling on additional weakness. At the current share price, TD investors get a 5.3% dividend yield, so you are paid well to ride out the turbulence.
