The Toronto-Dominion Bank (TSX:TD) has been one of this year’s best-performing large-cap TSX stocks. The stock has risen 44% this year, and has delivered a 49.3% total return to investors who held it in a tax-free account and re-invested their dividends.
The question investors need to ask themselves now is, “Can TD keep up the momentum?” While the stock has gone on a mighty impressive run this year, the fact is that it is starting to get pricey by some metrics. Historically, North American bank stocks tended to trade between 8 and 12 times earnings.TD is currently trading at 14 times adjusted earnings (its reported earnings multiple is lower, but heavily influenced by non-recurring factors). So, the stock is arguably a little pricey using historical industry multiples as the basis for comparison.
In this article, I explore the question of whether TD Bank stock is worth the investment today, ultimately concluding that it will probably continue delivering positive returns, but at a slower pace than it did in the past.
How TD got here
A major reason why TD Bank stock has done so well this year is that it got beaten down so badly last year.
Near the end of 2024, TD took some fairly severe penalties after the U.S. Department of Justice (DoJ) found it had violated money laundering laws. The penalties included a $3 billion fine and a $434 billion asset cap. The fine was simply a one-time matter; it reduced the bank’s 2024 earnings. The asset cap, however, looked like a big deal. With its U.S. retail business capped at $434 billion in assets, TD was effectively prohibited from growing in the U.S., historically its biggest growth region.
Because of this cap, investors started selling TD stock in massive volume late last year. Eventually, it got to the point where some analysts said that the U.S. retail segment was being valued at $0! I don’t have the space to get into those analysts’ arguments here, but suffice it to say I found their claims compelling and heavily bought TD stock during its crash.
Why TD rose so quickly this year
The reason why TD Bank rose so quickly this year is that the stock got beaten down too much last year. The U.S. retail business was worth less than before as a result of the asset cap placed on it, but it was not worth $0. Yet $0 was what markets seemed to think it was worth.
Eventually, TD proved the enduring value of its U.S. retail business by using cash removed from the segment to fund a large buyback program, worth more than $10 billion. The buyback moved the stock price in its own right, and it probably increased investor interest as well.
Where do we go from here?
Clearly, TD has already made the majority of the progress it is going to make this year. The stock’s dividend yield has decreased from 5.5% to 3.9%, and its PE ratio has increased. It’s no longer a deep value opportunity, like it was at the start of the year. However, it remains fairly inexpensive compared to the TSX as a whole, despite growing at an above-average rate in its most recent quarter. Overall, I’d say TD could still rise a percent or two from here.
