TD Bank (TSX:TD) is down 12% in 2024 compared to gains of more than 20% for the TSX. Contrarian investors 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) focused on dividends and total returns.
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TD stock price
TD trades near $75.50 at the time of writing. The stock was as low as $73 in recent days and is way off the $108 it reached in early 2022 during the initial rebound in financial stocks after the pandemic crash.
TD ran into trouble with U.S. regulators over the past couple of years for not having adequate systems in place to detect and prevent money laundering. The bank recently received fines of roughly US$3 billion and has been hit with an asset cap on its American operations.
TD’s growth strategy over the past 20 years has largely focused on the U.S. market, where the company has spent billions of dollars on acquisitions of regional banks running from Maine right down the east coast to Florida. TD walked away from its US$13.4 billion deal to buy First Horizon in 2023 due to regulatory issues.
As a result, TD’s growth outlook over the medium term is unknown. A new chief executive officer will take charge of the bank in 2025, and the company will use next year as a transition period to identify ways to drive more efficiency into the existing operations and determine a new growth strategy.
TD’s latest share price plunge came on the heels of the fiscal fourth-quarter (Q4) 2024 earnings results that came in weaker than analysts had expected. The lack of guidance on a new strategic direction also upset the market.
Risks
Uncertainty on how long the U.S. asset cap could remain in place will likely be a headwind for TD stock. At the same time, markets are trying to figure out if banks are going to see provisions for credit losses (PCL) remain elevated next year.
Inflation in the United States came in at 2.7% for November, up 0.3%. This is in line with expectations, but it also means the U.S. Federal Reserve could slow down its plan for interest rate cuts in 2025. If Donald Trump puts his planned tariffs in place next year, inflation could surge south of the border, potentially forcing the central bank to put rate cuts on hold.
In Canada, unemployment rose to 6.8% in November, up 0.3%. At the same time, inflation in October rose to 2% from 1.6% in September. The Bank of Canada just announced a 0.5% cut to interest rates to try to keep the economy from sliding into a recession. This will immediately help borrowers with variable-rate loans, and it should lead to lower bond yields, which tend to drive the rates on fixed-rate mortgages. If the economy falters, however, and unemployment continues to rise, the drop in borrowing costs likely won’t offset the negative impact of job losses. This could lead to a wave of loan defaults in Canada in the next two years as millions of households face mortgage renewals that will be at higher rates than what they are currently paying.
The Bank of Canada can’t let the rate gap with the U.S. get too large, even if the economic slowdown justifies more aggressive cuts.
Is TD stock a buy now?
Additional downside is certainly possible. That being said, contrarian investors might want to start nibbling at this level and look to add on additional weakness. You will have to be patient, but TD should eventually get back on track. The stock currently offers a 5.6% dividend yield, so you get paid well to ride out the turbulence.
