TD Bank (TSX:TD) just reported fiscal fourth-quarter (Q4) earnings results that disappointed the market. Contrarian investors with a buy-and-hold strategy are wondering if TD stock is now 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 share price
TD is down about 12% in 2024 compared to gains on the year for its large Canadian peers. At the time of writing, the stock trades near $74.90. This isn’t far off the 12-month low and is way down from the $108 the stock reached in early 2022.
TD’s fiscal Q4 2024 results announcement triggered a 6% plunge in the share price. Adjusted net income came in at $3.2 billion compared to $3.5 billion in the same period last year, or $1.72 per share, compared to $1.82 in fiscal Q4 2023.
For the full year of fiscal 2024, TD reported an adjusted net income of $14.3 billion compared to $15 billion in fiscal 2023. Adjusted diluted earnings per share were $7.81 compared to $7.91.
On a segment basis, the results were mixed. Canadian personal and commercial banking net income rose 9% compared to fiscal Q4 2023, driven by record revenue. Wealth management and insurance saw net income drop 29% due to high insurance claims caused by severe weather events, particularly in Calgary and Quebec. Adjusted net income in the wholesale banking group jumped 68% to $299 million. The U.S. retail banking operations, excluding TD’s investment in Charles Schwab, saw adjusted net income drop 13% to US$689 million. Higher provisions for credit losses (PCL) and higher non-interest expenses, along with lower revenue, caused the decline.
Borrowers carrying too much debt continue to struggle despite the recent decline in interest rates in Canada and the United States. TD reported PCLs of $1.11 billion for fiscal Q4 2024. This is up from $1.07 billion in fiscal Q3 2024 and PCL of $878 million in fiscal Q4 2023.
TD maintains a solid capital position with a common equity tier-one (CET1) ratio of 13.1%. This gives the bank flexibility to ride out market turbulence and potentially make a strategic acquisition to drive growth.
Outlook
Growth is the main concern for investors. TD’s U.S. business is operating under an asset cap as a result of the penalties placed on the bank this year by U.S. regulators for not having proper systems in place to identify and stop money laundering at some of the American branches. TD was also hit with fines of roughly US$3 billion. The bank has abandoned its medium-term growth target due to the challenges in the American business.
A new chief executive officer will take control of TD in 2025. It will be a transition year for the bank as management works through a strategic review to find ways to make existing operations more efficient while identifying opportunities for growth.
Should you buy TD on the dip?
TD remains a very profitable bank. The core Canadian retail banking operations continue to perform well, and a new growth strategy will emerge at some point by the end of next year.
Investors should anticipate volatility in the near term, but those with a contrarian strategy might want to start nibbling at this level and look to add on further weakness. The current dividend yield is close to 5.5%, so you get paid well to wait for a recovery.
