TD Bank (TSX:TD) is up more than 30% in 2025. Investors who missed the rally 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) portfolio focused on dividends and total returns.
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TD Bank share price
TD trades near $100 per share at the time of writing compared to $74 in December. The rally is a welcome relief for long-term investors who watched the share price plunge from $108 in early 2022 to the lows it hit late last year.
Soaring interest rates in Canada and the United States in 2022 and 2023 triggered the first leg of the extended pullback as investors worried that the Bank of Canada and the U.S. Federal Reserve would have to push the economy into a recession to get inflation under control.
The feared economic downturn didn’t materialize, however, likely due to all the excess savings that households and businesses had built up through the pandemic. In 2024, the central banks started to reduce interest rates after inflation dropped to the target range. This eased pressure on struggling borrowers with too much variable-rate debt, reducing risks of rising defaults.
Bank stocks broadly rallied through the end of last year, but TD missed that party due to issues with American regulators. TD’s systems for identifying and preventing money laundering at some branches in the United States came under investigation. Regulators eventually hit TD with fines of more than US$3 billion and placed an asset cap on TD’s American operations. This derailed the growth strategy, forcing TD to look for alternative options to expand the business. That process is ongoing.
TD put a new CEO in place in early 2025. Since then, the bank has sold its remaining holdings of Charles Schwab for proceeds of close to $21 billion. TD is allocating $8 billion for share buybacks and will use the remaining funds to pursue other initiatives. The rally in the stock in the first half of the year suggests investors believe the issues in the United States are now in the rearview mirror. At the same time, the economy is holding up well amid the trade uncertainties with the United States. Analysts expect interest rates to continue to trend lower later in 2025. That should provide extra support for households and companies that need to renew fixed-rate debt or are still struggling with the jump in interest charges on variable-rate loans.
Risks
New threats by the U.S. to implement higher tariffs on Canada, Mexico, and Europe in the coming weeks could lead to a recession in North America and Europe next year if the tariffs go through at the 30% to 35% levels. A recession in the U.S. would hurt TD’s American business. In Canada, a surge in unemployment caused by a recession could trigger a wave of defaults on mortgages as families that are already facing a big jump in interest costs on their mortgage renewals are no longer able to cover the costs.
Time to buy?
The broader market looks expensive right now and TD has had a big run over the past six months. As such, new investors might want to wait for a pullback to start a position. That being said, existing owners of TD stock with a buy-and-hold strategy should probably hold on and maybe look to add to the position on weakness. The current dividend yield of 4.2% is attractive for income investors and TD should still deliver solid long-term returns from this price point.
