TD Bank (TSX:TD) had a rough ride in 2024, but the stock is up 12% so far in 2025. Investors who missed the bounce are wondering if TD stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and long-term capital gains.
TD Bank share price
TD trades near $86 per share at the time of writing. That’s up from the 12-month low of around $73 but is still way off the $108 the stock reached in early 2022 before things started to go south for TD investors.
The initial decline that occurred in 2022 and through much of 2023 can be attributed to aggressive rate hikes in Canada and the United States. TD has a large retail banking presence in both countries. The Bank of Canada and the U.S. Federal Reserve raised interest rates to get inflation under control by slowing down an over-heated post-pandemic economy.
Higher interest rates are usually positive for banks as they enable the banks to generate better net interest margins. When rates rise too much over too short a time period, however, borrowers with too much debt get put in a bad situation. This forced TD Bank and its peers to increase provisions for credit losses (PCL). The rate hikes also stoked fears that a meaningful recession was on the way, which would drive up unemployment and force businesses to shelve investment plans.
The recession didn’t materialize, and inflation fell to the point where the central banks announced in late 2023 that they were done raising interest rates. At that point, investors shifted back into the banking sector, sparking a nice rally for most bank stocks through 2024.
TD, however, didn’t participate in the recovery. The bank ran into trouble with U.S. regulators for not having adequate systems in place to prevent money laundering at some of the American branches. The resulting penalties included a fine of more than US$3 billion and a cap on assets in the United States. TD’s growth strategy over much of the past two decades focused on the U.S. market and that was expected to continue in the coming years. The asset cap has forced TD to step back and come up with a different growth plan. This drove investors to the sidelines.
Opportunity
Investors will have to be patient, but most of the bad news should already be priced into the stock. TD put a new chief executive officer in charge earlier this year. Since then, the bank has already made some big moves. TD sold its remaining position in Charles Schwab for the equivalent proceeds of about $20 billion. Management intends to use $8 billion to buy back stock. The remaining funds will go towards organic growth investments and other internal initiatives.
TD has a strong capital position, and the Canadian business remains very profitable. Eventually, the U.S. asset ban should be lifted, enabling TD to continue its expansion south of the border.
Should you buy now?
Market volatility is expected to continue until there is clarity on how all the tariff battles will be resolved. At the same time, there is a risk of a recession in Canada and the United States. If that occurs, bank stocks could face new headwinds.
I wouldn’t back up the truck, but contrarian investors with a buy-and-hold strategy might want to start nibbling on TD stock at this level and look to add to the position on weakness. You get paid a solid 4.9% dividend yield right now to ride out the turbulence. Buying TD on meaningful pullbacks has historically proven to be a profitable move over the long haul.
