Toronto-Dominion Bank (TSX: TD) ended up being a surprise winner among Canadian stocks this year, delivering a 51% year-to-date total return. Part of the reason why the stock rose so much is that it had gotten beaten down badly the prior year. TD’s U.S. retail segment had been involved in an anti-money laundering (AML) scandal since 2023, and in November of 2024, the scandal was finally resolved when the Department of Justice (DoJ) imposed a sizable fine and a cap on the segment’s assets. The stock hit lows not seen in years when those measures were announced, falling all the way to $73.5.
TD stock’s recovery from its 2024 crash has been quick. The stock is up 51% from its beginning-of-the-year level and 57% from last year’s lows. On a total return basis, it’s up 63% from last year’s low!
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A good showing
So, this stock has been rising quickly — particularly for a “boring” sector like banking.
The question is, is TD stock still a buy? It’s a pressing question because bank stocks are not known for delivering stellar returns under “normal” market conditions. Well-run banks tend to be great buys during financial crises, because they sell off just like the poorly run banks, only to rise again later. However, the gains in such stocks tend to be made in the recovery; large banks don’t usually outperform during wider bull markets.
TD would seem to fit the description of a typical well-run bank. It has high capital and liquidity ratios; it has conservative lending standards; it does not pay out an excessive amount of earnings as dividends. So, there’s a lot on offer here. The trouble is that large gains have already been made, and it’s natural to wonder whether all the easy money has been made. A big part of the penalty that the DoJ imposed on TD was a $430 billion asset cap on the bank’s U.S. retail segment. U.S. retail was historically TD’s biggest growth driver, and now that segment can’t grow. So, buying TD expecting big earnings growth could set you up for disappointment. But does that mean the stock price still doesn’t have room to run? Possibly not.
Where returns can come from with TD
As mentioned previously, TD Bank’s earnings growth is unlikely to be extremely high going forward. The U.S. retail segment, which is unable to grow by law, is simply too high a percentage of the overall business. With that said, some growth is definitely possible. TD’s reported earnings turned positive last quarter, after having been negative a year before. Its adjusted earnings grew 7.3%. The U.S. business technically reported enormous growth last quarter, but only on a technicality: it took a massive fine-related charge in the same period a year before. TD’s Canadian retail business grew its earnings 4%.
So, basically, we’re seeing some growth here, but the U.S. asset cap would need to be removed for the company to really open the growth floodgates. There’s no indication of that happening any time soon, although Wells Fargo having its own asset cap removed recently provides cause for optimism. But the bottom line is you have to pay a sensible price for TD stock today; the low growth means that a high price-to-earnings ratio is unjustified.
Valuation
And on that note…
TD’s stock still trades at lower multiples than the broader market, going for about 14.6 times adjusted earnings and 9.5 times reported earnings. These multiples are low for the market, but not low for the banking sector. Basically, this is not the “deep value” opportunity it once was. However, TD still looks like a reasonably safe dividend play, assuming you’re content to not get much more than the dividend when you buy it. So, to answer the question in this article’s title: TD is somewhere between a buy and a hold today, depending on your risk tolerance and return objectives.
