The only time that Toronto-Dominion Bank's (TD -0.08%) yield has been higher than it is today was during periods of serious global distress -- namely, during the Great Recession and the COVID-19 pandemic. Is this an opportunity for income investors to lock in an attractive 4.9% yield, or is there something going on that should keep would-be shareholders away?
Here's a look at the buy, sell, and hold arguments for Toronto-Dominion Bank.
Sell Toronto-Dominion Bank
TD Bank, as the Canadian banking giant is commonly called, has two main headwinds it is dealing with right now. The first is an industrywide issue. Rising interest rates have put pressure on banks. Higher rates help in some ways because banks can charge more for loans. But they are also potentially detrimental because higher rates can increase the number of customers that fall behind on their loan payments (or worse, default) and reduce the number of customers looking to get new loans. This is an especially acute concern in Canada, where the housing market has been on something of a tear for many years. Investors are worried that a housing crash could lead to big losses for Canadian banks.
Image source: Getty Images.
The second problem for TD Bank right now is specific to the bank. It attempted to buy a regional U.S. bank last year but that acquisition was effectively stopped by U.S. regulators. There was concern over TD Bank's handling of money-laundering activities. The bank has worked with regulators to strengthen its money-laundering protocols, but it seems likely that there will be a fine. The longer-term issue, however, is that TD Bank's plan to grow in the United States via acquisition will have to be put on hold for a spell.
So, in short, there are questions about TD Bank's core Canadian operation and the growth prospects of its U.S. business. These are legitimate concerns, and for very conservative investors, that may be enough to keep them away from TD Bank or to get them to sell the stock if they own it.
Hold Toronto-Dominion Bank
If you step back and look at the two big challenges facing TD Bank today, however, neither appears likely to be a long-term problem. Rates go up and down all the time, and the bank, which traces its history back to 1855, has proven it can stand the test of time. Moreover, it has consistently paid dividends since 1857, suggesting that the dividend is a high priority. On that front, it is also worth noting that TD Bank didn't cut its dividend during the Great Recession, unlike many of the largest U.S. banks. Furthermore, TD Bank has one of the highest Tier 1 capital ratios, a measure of bank strength, in North America (higher is better), meaning that it is among the best prepared for adversity.
As for the regulatory issues in the United States, they will likely result in a fine and a span in which TD Bank doesn't make any acquisitions. However, it can still open new branches, which it is doing. So growth in the U.S. market won't stop, it will just be organic and happen more slowly. That said, you can't really predict acquisitions, so there's no way to know what could have been (other than the one deal that was called off). But it seems highly likely that, in time, TD Bank will regain the trust of regulators and be allowed to make bank acquisitions again at some point in the future.
If you own TD Bank and can sit through a period of uncertainty, it probably isn't appropriate to panic and sell.
Buy Toronto-Dominion Bank
The negatives mentioned above have sent TD Bank's shares lower. That has pushed the dividend yield, as previously noted, up toward the high end of its historical yield range. At a touch over 4.9%, the yield is very compelling. If you are a dividend-focused investor, you should at the very least consider buying TD Bank while it is out of favor.
The reasons to buy the stock are the same as the reasons to keep holding it if you already own it. There are problems, but they seem temporary. The bank is financially strong so it seems likely that it will deal with any challenges that do arise in relative stride. And while U.S. growth may be slow for a little while, it isn't stopping. If you think in decades and not days, TD Bank appears more like a fallen angel that will eventually rise again than the next bank that's likely to collapse and go out of business.
On that score, it is worth noting that banking regulations in Canada are extremely strict. That has not only led to a small number of entrenched giants, of which TD Bank is one, but also a very conservative ethos within Canadian banks more generally. If you have a safety-first mentality, TD Bank is the kind of bank you would like to have in your portfolio. This could be a unique opportunity to add it while it looks like it's on sale.
The bad news isn't so bad at TD Bank
While it wouldn't be fair to say TD Bank shares are out of favor on Wall Street for no reason at all, the headwinds seem unlikely to be long-term in nature. While you could sell it, or not buy it, because of interest rates (and associated economic concerns) or the U.S. regulatory issues, that seems like a highly conservative choice. Most investors would probably be better off holding the stock if they own it, or initiating a position while the yield is still near historical highs.
