Great companies sometimes hit a rough patch, giving investors a chance to buy the stocks at cheap prices. It takes courage to buy when a top stock is out of favour, but the long-term gains can be significant when management get the turnaround strategy right.
TD Bank stock price
TD Bank (TSX:TD) trades near $88 per share at the time of writing. The stock is up 15% in 2025, but remains way off the $108 it reached in early 2022.
The initial decline in 2022 and through much of 2023 can be attributed to the steep rise in interest rates in Canada and the United States. This impacted the bank sector as a whole, with most stocks falling from their post-pandemic peaks reached in Q1 2022.
Rising interest rates are often beneficial for TD and its peers as the banks can generate better net interest margins. The extent of the increase in rates over such a short period of time, however, had other consequences. Households and businesses with too much variable-rate debt were put in a bad situation. This forced TD and the other banks to raise provisions for credit losses (PCL). That puts pressure on earnings. At the same time, markets worried that the rate hikes would trigger a recession.
By the fall of 2023 it was apparent that the central banks were done raising interest rates as inflation subsided. The feared recession also didn’t materialize. This put a new tailwind behind most bank stocks in 2024, especially when the Bank of Canada and the U.S. Federal Reserve started to cut rates in the second half of last year.
TD, however, missed the party. The bank ran into trouble with American regulators for not having adequate systems in place to identify and prevent money laundering. As penalties, the U.S. authorities fined TD more than US$3 billion and placed an asset cap on TD’s American business.
The asset cap is a larger problem than the hefty fine. TD’s growth strategy over the past two decades focused heavily on expanding its US presence. While the ban remains in place, TD needs to identify new opportunities for growth.
Upside?
A new CEO took control earlier this year. TD sold its remaining position in Charles Schwab in the U.S. for proceeds of about CAD $20 billion. The bank is allocating about $8 billion to buy back stock and will use the rest of the funds for organic growth and other initiatives.
The worst should be over for the American business and the asset cap should eventually get lifted. TD has significant capital on hand to ride out a potential economic downturn later this year if trade wars escalate, and is in a good position to compete for the wave of nearly two million Canadian households that will see their fixed-rate mortgages come due in 2025 and 2026.
In the meantime, investors can pick up a dividend yield of 4.8% on TD stock right now, so you get paid well to wait for the next leg of the rebound.
Should you buy TD now?
Near-term volatility should be expected, but TD already looks attractive at the current levels for buy-and-hold dividend investors. If you have some cash to put to work this stock deserves to be on your radar.
