Andrew has an MBA and has been writing for The Motley Fool Canada since 2014. As a contrarian investor, Andrew seeks out dividend opportunities the market is missing. He is a big fan of harnessing the power of compounding to grow a portfolio for retirement.
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TD Bank (TSX:TD) is down about 25% from its all-time high. Contrarian investors seeking good dividends and a shot at decent capital gains 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 passive income and total returns.
TD stock
TD trades near $80.50 per share at the time of writing, compared to more than $108 at the height of the post-pandemic rally. The stock picked up a bit of a tailwind over the past couple of weeks, but it still isn’t far off the 12-month low of around $76.
TD is best known to Canadian investors for its domestic retail business, But the bank actually operates more branches in the United States. The company built the American operations over the past 20 years largely through strategic acquisitions focused on the east coast of the country running from Maine down to Florida.
Challenges
Last year, TD abandoned its US$13.4 billion plan to acquire First Horizon, a U.S. regional bank with about 400 branches in the southeastern states. The deal would have made TD a top-six bank in the American market.
Management cited regulatory hurdles as the reason for terminating the deal. TD just announced it is setting aside an initial $450 million to cover a potential fine connected to an anti-money-laundering probe by U.S. regulators.
The issue is one reason TD’s stock is out of favour. Investors might be sitting on the sidelines until there is clarity on the result of the investigations. In addition, the termination of the First Horizon takeover forced TD to scale back its guidance for earnings growth.
TD is sitting on a large capital cushion that will enable it to ride out any economic turbulence that could be on the way if interest rates remain at elevated levels. TD and its peers have increased provisions for credit losses in recent quarters as more borrowers have run into trouble making payments.
The Bank of Canada and the U.S. Federal Reserve raised interest rates aggressively over the past two years in an effort to cool off the economy and bring inflation under control. Economists broadly expect the central banks to start cutting rates in the back half of this year to avoid pushing the economy into a recession, but inflation remains at 3.5% and 2.9% in the U.S. and Canada, respectively, as of the March 2024 reports. This is above the 2% inflation target.
If the central banks can reduce rates and orchestrate a soft landing for the economy, TD and the other banks would benefit as fewer borrowers would likely default. In that scenario, TD stock is probably oversold right now.
Persistent inflation could force the central banks to keep interest rates higher for longer than anticipated. The risk is that rates will be high at the same time the economy starts to tank. This could lead to a wave of bankruptcies.
Dividends
TD has a great track record of dividend growth. Investors who buy the stock at the current level can get a 5% dividend yield.
Should you buy TD now?
Investors should expect ongoing volatility until there is more clarity on the outcome of the investigation by regulators in the United States. Bank stocks in general could see more turbulence if inflation remains near 3%.
That being said, a quick look at the long-term chart of TD’s share price suggests that buying the stock when it is out of favour tends to be a winning move for patient contrarian investors. I wouldn’t back up the truck today, but investors who are comfortable with a 5% yield might want to start nibbling and look to add to the position on any additional downside. The surge in bank stocks that occurred in the fourth quarter last year is a reminder that sentiment can change quickly.
Bank stocks in general could see more turbulence if inflation remains near 3%. That being said, a quick look at the long-term chart of TD's share price suggests that buying the stock when it is out of favour tends to be a winning move for patient contrarian investors.
Based on analyst ratings, Toronto Dominion Bank's 12-month average price target is C$90.56. Toronto Dominion Bank has 15.69% upside potential, based on the analysts' average price target. Toronto Dominion Bank has a consensus rating of Moderate Buy which is based on 6 buy ratings, 5 hold ratings and 1 sell ratings.
Shares of Toronto-Dominion Bank TD declined 2.2% as the company incurred a loss on a GAAP basis in the third quarter of fiscal 2024 (ended Jul 31). The quarterly loss was primarily due to provisions for the penalties related to investigations concerning its anti-money laundering (AML) practices by the U.S. regulators.
TD Bank (TSX:TD) is down more than 12% in 2024 and is off about 30% from the all-time high. 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) portfolio.
Based on short-term price targets offered by 14 analysts, the average price target for Toronto-Dominion Bank comes to $64.18. The forecasts range from a low of $54.72 to a high of $74.00. The average price target represents an increase of 9.67% from the last closing price of $58.52.
Toronto-Dominion Is Managing Difficult Economic Conditions Well; Shares Modestly Undervalued. Toronto-Dominion is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation's banking deposits.
After all, Canadian banks, including TD, are traditionally considered blue-chip stocks and are often perceived as safe investments. Despite the current regulatory troubles, TD stock remains a strong and well-established institution in the Canadian banking sector.
Customers who invest in the TD Canadian Banks GIC can earn up to 35% over five years. However, this depends on the performance of the Canadian banks in which the investment is tied. Available in three-year and five-year terms, this GIC is an ideal option for long-term planning.
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S&P Global Ratings revised its outlook on TD Bank to negative from stable and affirmed its 'AA-/A-1+' long- and short-term issuer credit ratings on the bank and its subsidiaries.
Based on the latest financial disclosure, Toronto Dominion Bank has a Probability Of Bankruptcy of 4.0%. This is 91.99% lower than that of the Banks sector and significantly higher than that of the Financials industry. The probability of bankruptcy for all Canada stocks is 89.96% higher than that of the company.
According to the latest TipRanks data, approximately 85.38% of Toronto Dominion Bank (TD) stock is held by retail investors. Who owns the most shares of Toronto Dominion Bank (TD)? iShares owns the most shares of Toronto Dominion Bank (TD).
TD Bank has been a subsidiary of TD Bank Group since 2008, and it is the 14th-largest credit card issuer in the United States, with 7.8 million cards in circulation. For more information, check out TD Bank's credit card reviews.
TD implied volatility (IV) is 19.0, which is in the 77% percentile rank. This means that 77% of the time the IV was lower in the last year than the current level. The current IV (19.0) is 4.8% above its 20 day moving average (18.1) indicating implied volatility is trending higher.
Right now, TD is weathering this storm well. Though it's hard to know what will happen once the governing bodies in the U.S. issue their judgments. For a contrarian investor like me, I'm looking at TD as a long-term investment with a potential return to its $109 stock price of February 2022.
Toronto-Dominion Bank (TSX:TD) is one of Canada's most popular dividend stocks. With a $130 billion market cap, it is the second-biggest company in the country. TD Bank stock has a 5.5% yield and has increased its dividend at a rate of 7.6% per year over the last five years (compounded annual growth).
TD has exhibited a strong track record of well-monitored and conservative risk appetite despite its moderately higher structural interest rate sensitivity, which is commensurate with its retail focus and deposit-rich balance sheet.
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