Stock Up Sale
The Toronto-Dominion Bank (TSX:TD) is one of Canada’s most controversial stocks in 2025. On the one hand, the company is among the country’s largest and most respected financial institutions. On the other hand, it has been getting in trouble with US regulators.
Last year, TD Bank took a $3 billion fine and had its US assets capped at $430 billion as a result of a money laundering settlement with the US Department of Justice (DoJ). The stock took a massive beating as the DoJ’s investigation unfolded, as investors were uncertain as to the ultimate outcome of the investigation. When the settlement was announced, it was followed by further losses in TD stock. The $3 billion fine was about in line with expectations but the asset cap generated fears about the bank’s growth prospects- – the capped segment (US retail) was historically TD’s biggest growth driver.
In subsequent months, TD stock slowly climbed up, as investors realized that the money taken out of the bank’s US retail segment could be used to finance dividends and buybacks. Sure enough, TD announced plans to do just that, selling a $10 billion Charles Schwab stake and committing the money to share repurchases. TD stock climbed after that move was announced.
Which brings us to today. TD bank stock is currently trading for about $85, and it is up some 15% from its level when the DoJ investigation fears were at their peak. This rise has occurred in the span of just a few months. While TD stock is clearly not as risky as people thought it was when it crashed to $74, it isn’t so obvious that it’s a bargain at $85. In the ensuing paragraphs, I will explore TD’s prospects in 2025 and attempt to determine whether the stock is still a buy today.
TD’s prospects
TD Bank’s prospects in 2025 will be influenced by many factors, including interest rates in the US and Canada, and M&A activity. The Bank of Canada has been lowering interest rates at a rapid pace, while the US Fed has been keeping them mostly steady. Technically the Fed has cut rates, but the pace of cutting has been much slower than that observed in Canada. So TD stands to earn considerable interest income in the US this year, albeit limited by the $430 billion asset cap.
M&A activity in the US is expected to be strong this year; if things go as expected, it will have a positive effect on TD’s investment banking division. I’d say the probability of high growth in that segment this year is fairly high. The growth rate was already quite high last quarter, and it appears likely that the growth will persist this year.
Valuation
Having looked at TD’s performance prospects for this year, we can now turn to valuation.
TD Bank stock appears fairly cheap today, trading at 10.6 times adjusted earnings, 17.8 times reported earnings, 2.8 times sales, and 1.3 times book value. The adjusted earnings figure is the one that most accurately reflects what TD is likely to earn this year, as it excludes the fine that was paid last year. Apart from the P/E ratio based on reported earnings, all of TD’s multiples are below average for North American mega-banks. So, TD appears to be undervalued compared to its sector.
Final verdict: Still a buy
Taking everything into account, I think TD stock is still a bargain today. Obviously there are risks; for example, the asset cap could hit earnings more than I expect it to. But if you look at the assets that TD is cutting, such as Charles Schwab shares, you’ll see that many of them are fairly pricey anyway. So TD is allocating capital sensibly.
