TD Bank got itself into a little bit of hot water with regulators. However, it believes the problem will be largely behind it by the end of 2024.
Toronto-Dominion Bank (TD 0.08%), one of the largest banks in North America, has stumbled. There is no way around that fact. But the reaction on Wall Street has left the dividend yield at 4.7%, well above the 2.5% yield of the average bank, using the SPDR S&P Bank ETF as an industry proxy. Is this Canadian banking giant a buy, sell, or hold today?
Buy Toronto-Dominion Bank
The big reason to buy Toronto-Dominion Bank, usually just referred to as TD Bank, is its well above-average dividend yield. In other words, this is an income investor stock. Notably, TD Bank has paid a dividend each year since 1857, well over 100 years. You can most likely count on TD Bank to keep paying you. It also has an investment-grade-rated balance sheet, so it remains a rock-solid company.
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The foundation backing that dividend story is pretty compelling, too. TD Bank is the second-largest bank in Canada by assets and the sixth-largest in North America. Canadian banking regulations effectively protect that country’s largest banks from competition, giving TD Bank a rock-solid core. Within the U.S. market, TD Bank operates largely on the East Coast, so it also has material geographic expansion potential over the long term.
As for its actual business, TD Bank operates across multiple segments of the finance industry. That includes, but is not limited to, traditional banking, insurance, personal investments, and corporate finance. And it has room to grow in each segment. TD Bank is rarely exciting to own (more on this in a second) but has long been a reliable, slow-growing banking giant — which, when you add in the high yield, is a great reason to buy the stock.
Sell Toronto-Dominion Bank
Unfortunately, the last couple of years have actually been fairly “exciting” for TD Bank. That’s because it tried to buy a regional competitor in the U.S. market but had to call it off because of regulatory scrutiny. There was an information void around this decision for a long time until the company explained that its internal controls around money laundering had failed. There will be sizable fines related to this issue, with the bank already having set aside around $3 billion. And its U.S. growth plans will probably be on hold until it regains regulator trust.
TD data by YCharts.
To TD Bank’s credit, it has addressed this issue head-on. That not only included setting aside a huge sum of money for the legal and regulatory hit but also a swift effort to upgrade its internal controls. Still, it is a bad look for a bank to have problems of this nature. Some investors might want to avoid TD Bank for this reason alone. Those looking for growth, meanwhile, probably won’t find it interesting, either, since it will likely take time for TD Bank to get back on a stronger growth track.
Hold Toronto-Dominion Bank
Here’s the thing: TD Bank believes the money-laundering issue will be largely resolved by the end of 2024. That doesn’t mean growth will resume immediately. Management will still need to regain regulator trust for that to happen in a meaningful way. But it seems highly likely that the biggest risks are behind the company.
In other words, you can collect what appears to be a secure and well-above-average yield while you wait for TD Bank to start growing again. Selling now would be getting out after the worst had passed, which doesn’t seem to make much sense if you are an income investor.
Toronto-Dominion Bank offers a good risk/reward balance
Given the money-laundering issue, TD Bank is best viewed as a turnaround story. But it is a decidedly low-risk turnaround that even conservative income investors should be able to handle owning. Sure, there won’t be much growth for a little while, but considering its relatively high yield, you are getting paid well to wait for better days.