TD Bank (TSX:TD) is enjoying a nice rally to start 2025, but the stock is still down considerably from its peak in early 2022. Investors who missed the bounce in recent months 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 total returns.
TD share price
TD trades near $90 per share at the time of writing, compared to $108 at the top of the post-pandemic rebound. The stock then went into an extended slump that saw it fall as low as $73 in the past year.
The first leg of the pullback in 2022 and 2023 was part of a broader decline in the bank sector caused by soaring interest rates in Canada and the United States as the central banks battled to get inflation under control. Higher interest rates are normally good news for banks as they enable the banks to generate better net interest margins. The steep increase in rates over such a short period of time, however, put borrowers with too much debt in a difficult position, and most banks had to book large increases in provisions for credit losses (PCL).
As soon as the Bank of Canada and the U.S. Federal Reserve indicated in late 2023 that they were done raising interest rates, most bank stocks started to recover. The rally picked up a new tailwind in the second half of 2024 when the central banks began to cut rates.
TD, unfortunately, missed that party due to company-specific issues. The bank ran into trouble with U.S. regulators for not having adequate systems in place to identify and prevent money laundering at some branches in the American operations. TD received a fine of more than US$3 billion. The U.S. regulator also put a cap on TD’s assets in the United States. TD spent much of the past 20 years investing billions of dollars on acquisitions in the United States to drive growth. The asset cap threw a wrench in TD’s growth strategy and forced the bank to abandon its earnings guidance.
Opportunity
A new CEO took control of TD in February this year. Since then, the bank sold off its remaining stake in Charles Schwab for proceeds of around $20 billion. TD is using $8 billion of the funds to buy back stock and will allocate the rest to organic growth opportunities and other initiatives.
At some point, the asset cap in the United States will be lifted. In the meantime, TD’s Canadian operations remain very profitable, and the bank has a large capital position to make alternative strategic investments to drive growth.
Dividends
TD has a good track record of raising the dividend. Investors who buy TD stock at the current level can get a dividend yield of nearly 4.7%.
The bottom line
Near-term volatility should be expected until there is clarity on the economic impact of the tariffs imposed by the United States. That being said, TD stock should still be a solid pick at this level for a buy-and-hold portfolio focused on dividends and total returns. Buying TD on big pullbacks has historically proven to be a savvy move for patient investors.
