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TD Bank (TSX:TD), one of the prominent TSX financial stocks, has seen a decline of 11% in 2024 and is down about 30% from its high in early 2022. Investors who missed the post-2020 market crash rally might be wondering if now is a good time to buy TD stock for a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.
TD Share Price Analysis
Currently trading near $75 per share, TSX:TD recently dipped as low as $74, hitting a three-year low. With its high in early 2022 above $108, there's considerable upside potential on a recovery. However, the timing of such a rebound remains uncertain, posing a dilemma for contrarian investors.
Risks Facing TD Bank
Historically, TD Bank has rebounded well from significant pullbacks, and it is likely to do so again. However, the current underperformance is due more to company-specific issues rather than broader banking sector challenges.
U.S. Operations Challenges: TD is facing regulatory scrutiny in the United States over its systems for detecting and blocking money laundering, with a US$450 million provision already set aside for potential fines. Speculation suggests that penalties could reach as high as US$2 billion. The larger impact might be restrictions on growth in the U.S. market until the issues are resolved. TD's extensive U.S. branch network, built over two decades, and the recent abandonment of a US$13.4 billion acquisition due to regulatory challenges, have added to the bank's headwinds.
Management Distraction and Costs: Addressing these regulatory issues will likely distract senior management and incur significant additional expenses. Analysts worry that deeper investigations might uncover further problems. In the medium term, growth ambitions in the U.S. might be put on hold, potentially resulting in a lower market multiple for TD shares. Therefore, additional negative news could push the stock toward a new 12-month low.
Opportunity for Investors
Assuming no new major issues arise, TD should eventually navigate these challenges and resume growth in the American market. The current share price likely reflects the existing bad news, suggesting potential for a significant bounce if a clear resolution path emerges and maximum penalties are defined.
Financial Performance: Despite the headwinds, TD reported solid fiscal Q2 2024 results, with adjusted earnings of $3.8 billion, a 2% increase from the same period last year. The bank remains profitable, with a strong capital position to weather ongoing turbulence. Provisions for credit losses should start to level off once the Bank of Canada and the U.S. Federal Reserve begin cutting interest rates.
Dividends and Long-Term Prospects
TD has an impressive track record of dividend growth, averaging better than 10% annually over the long term. Given the stability of earnings and a strong capital position, dividend increases are expected to continue, albeit likely at single-digit rates in the near term.
For long-term investors focused on dividends and total returns, TD Bank's current dip presents a potential buying opportunity for a TFSA or RRSP. While short-term risks and uncertainties remain, the bank's historical resilience, solid financial performance, and strong dividend growth track record make it an attractive option for those willing to ride out the current challenges.
