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Should Investors Buy the Correction in TD Stock?

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Written by Andrew Walker at The Motley Fool Canada

TD (TSX:TD) is down more than 25% from where it traded in early 2022. Bargain hunters started buying the stock after the latest plunge in early May, and dividend investors who missed the latest bounce are wondering if TD stock is undervalued and good to buy right now for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.

TD Bank stock price

TD trades near $78 at the time of writing. This is up from the 12-month low of around $74 but is still way off the $108 the stock fetched in February 2022 at the height of the post-pandemic rally.

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TD has large retail banking operations in both Canada and the United States. The pullback in the share price initially occurred as part of a broad-based decline in bank stocks due to investor concerns that rising interest rates would cause a deep recession and drive up loan losses. TD and its Canadian peers have increased provisions for credit losses (PCL) in recent quarters as borrowers with too much debt get caught renewing loans and mortgages at much higher rates. This trend is expected to continue while interest rates in Canada and the United States stay at elevated levels. The overall loan book, however, remains in good shape, and TD has a large capital position to help it ride out any economic turbulence.

TD is also dealing with challenges specific to the American operations. This is why the stock has underperformed its large Canadian peers so far this year. TD recently announced it is setting US$450 million aside to cover potential fines connected to ongoing regulatory investigations in the United States regarding the bank’s anti-money laundering systems. TD is working with U.S. regulators to sort out the problems, but it will take time and could be expensive. Analysts estimate the total hit could be as high as US$2 billion, and TD might be forced to cap its growth in the American market until it can demonstrate that it has fixed the issues that regulators are targeting.

As a result, the upside potential for the share price could be limited over the medium term until there is more clarity on the final costs and possible penalties.

Opportunity

The bank should eventually overcome the current challenges in the American business. TD’s large cash position ensures it can ride out the process, and its overall operations remain very profitable.

TD has a good track record of dividend growth. Investors who buy the stock at the current level can get a solid 5.2% dividend yield, so you get paid well to wait for the recovery.

Time to buy TD shares?

Ongoing volatility should be expected. Any major negative news for the U.S. operations or a broad-based pullback in the market could easily send the stock back to the 12-month low, so investors need to be careful.

That being said, buying TD stock on big pullbacks has historically turned out to be a savvy move for patient investors. If you have a contrarian investing style and some cash to put to work, it might be worthwhile to take a half position now and look to add to the holdings if there is another swing to the downside.

The post Should Investors Buy the Correction in TD Stock? appeared first on The Motley Fool Canada.

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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

2024