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TD Bank (TSX:TD) has been on a downward trend for the better part of three years. Investors with a contrarian 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 long-term total returns.
TD Bank’s share price
TD trades near $79.50 at the time of writing. The stock price is close to where it was at this time last year, after a recent bounce, but remains well below the $108 it reached in early 2022 at the peak of the first rebound in bank stocks after the pandemic crash.
Over the past year, TD was as high as $88 and slipped as low as $73, so nimble traders have been able to make some good returns on the volatility.
Challenges
TD has a large American business that it built through a series of acquisitions over the past 20 years, with operations running down the East Coast from Maine to Florida. Unfortunately, TD ran into trouble with U.S. regulators for not having proper systems in place to identify and stop money laundering at some of its US. operations. In the fall of last year, TD received fines of more than US$3 billion and now has an asset cap placed on the U.S. business. This effectively puts the American growth strategy on hold, forcing TD to abandon its previous growth targets.
America’s largest banks just reported strong fourth-quarter (Q4) 2024 results, supported by improved net interest margins and good performances by the capital markets divisions. Falling interest rates are easing pressure on borrowers with variable-rate loans, and the big rally in the stock market helped the wealth management segments.
It will be interesting to see how TD’s U.S. division is doing when the fiscal Q1 2025 results are announced.
Outlook
A new chief executive officer will take charge of TD in the coming months to figure out a strategy shift for the bank. TD could decide to monetize the rest of its stake in Charles Schwab to fund acquisitions in new markets. The bank will also look for ways to leverage the strength of its Canadian business to drive better returns and find growth opportunities in the domestic market.
This will be a transition year for TD Bank, so investors will need to be patient. That being said, TD remains very profitable, and the American business should eventually be allowed to expand again once regulators are satisfied that TD has made the required changes to its operations.
Risks
Markets are betting on a soft landing for the economy and continued cuts to interest rates through 2025 in both Canada and the United States. Donald Trump’s plan to implement widespread tariffs on goods entering the United States from Canada could spoil the party.
If the U.S. goes ahead with 25% tariffs on all Canadian goods and keeps the tariffs in place for an extended period of time, the Canadian economy could slip into a deep recession. This would lead to a surge in unemployment, which would, in turn, trigger a jump in loan losses for Canadian banks. TD has a large residential mortgage portfolio with a wave of fixed-rate mortgages coming due in 2025 and 2026. These loans were taken out at record-low rates in 2020 and 2021, and renewal rates are currently much higher.
People are now able to extend amortizations to 30 years, so this will help offset the increase in the interest charges, but households will still struggle if unemployment jumps.
Should you buy TD stock now?
Near-term volatility should be expected. That being said, TD should be a solid pick at this level for a buy-and-hold contrarian portfolio. At the current share price, investors can get a dividend yield of 5.3%, so you get paid well to ride out the turbulence.
