Toronto-Dominion Bank (TSX:TD) is Canada’s second-largest bank. With 11 million customers, 103,000 employees and 1,060 branches, it is a true giant among Canadian financials. It also has a pretty appealing stock. TD stock trades at 12 times earnings and has a 4.45% dividend yield. This combination of cheapness and income potential makes TD stock appealing to many value fund managers. Before this year started, the investment bank Jefferies named TD Bank its top pick for 2025. It has since gone on to vastly outperform the market.
Future prospects
The question investors need to ask themselves about TD is, “How long can the strong performance continue?” A major contributor to TD’s return this year was a large buyback that was facilitated by selling assets in its U.S. retail business. Once the raised money is all spent, then it will likely become more difficult for TD to make gains.
A little background information is in order here. TD Bank sold its Charles Schwab stake as well as a collection of mortgages earlier this year. It was forced to do this because it had a $430 billion asset cap imposed on it by the U.S. Department of Justice (DoJ) due to money laundering violations. These sales created a massive inflow of cash, which TD mostly spent buying back stock. The DoJ’s penalty was transformed into a large one-time gain for investors!
The thing is, the asset cap really is a problem from a longer-term perspective. With its assets capped at $430 billion, TD’s U.S. retail segment can’t grow. U.S. retail was historically TD’s main growth driver. With growth from that segment out of the picture, it will be harder for the whole company to grow. So, TD’s future gains will probably not be as dramatic as the ones made early this year.
TD has options
That doesn’t mean that TD can’t grow at all, though. The bank can take money out of its U.S. retail segment and spend it in other segments. TD Bank’s investment banking segment is growing pretty quickly this year and is not subject to the U.S. retail segment’s asset cap. That’s one place where TD could invest the money it removes from its U.S. retail segment. It could also transfer the money to the Canadian banking or insurance segments and use it to issue more loans and policies. So, TD is not in that bad a place here, all things considered.
Foolish takeaway on TD Bank
Considering all the factors I’ve explored so far, I think that TD Bank stock will continue doing well this year. It’s harder to say where it will be in five years’ time — a lot can change in five years — but the stock’s price will likely be higher than it is today. I can’t put a specific number on it, but I’d say that TD will at least be over $100 five years from now. If the U.S. retail asset cap is removed, then it could go higher still. So, TD Bank stock probably still has room to run.
