The narrative around Toronto-Dominion Bank (NYSE: TD) isn’t great today, thanks to concerns from the market about reports of shortfalls in the company’s money-laundering controls. It is a big deal in the near term, but it is not going to alter the Canadian banking giant’s long-term trajectory.
Here’s why this bad short-term news that led to a 33% decline in TD Bank’s share price could create a great buying opportunity for long-term income investors.
What’s gone wrong at TD Bank?
TD Bank had a deal lined up to buy a regional U.S. bank, a move that would have expanded its reach in the country. As a giant in the highly protected Canadian market, growth has largely come from TD Bank’s U.S. arm. It seemed like a slam dunk, but, somewhat strangely, it seemed to attract extra attention from regulators. Eventually, the deal was called off.
As it turns out, regulators were digging into TD Bank’s money-laundering controls, and what they found wasn’t good. Some TD Bank employees appear to have been taking bribes from drug dealers which resulted in the bank being used to handle dirty money. That’s not a good look for a bank, and TD has been working with regulators to solve the issue. It has already set aside $450 million for the fines it expects to come, though it is highly likely that the ultimate cost will be much higher.
That said, investors don’t like uncertainty, and uncertainty is high around TD Bank today. That’s why the stock has lost roughly a third of its value since a recent peak in 2022. That huge drop has pushed the dividend yield up to a historically attractive 5.2%.
It’s time for income investors to look at TD Bank
Given the problems TD Bank is facing, it is understandable that some investors would be worried about the future. But the truth is that it is a generally well-respected and well-run financial institution. It seems highly likely that it will persevere through this headwind and eventually get back on the growth track.
Some foundational positives to consider include the fact that TD Bank has an investment-grade balance sheet. It also has the strongest Tier 1 capital ratio — a measure of a bank’s ability to withstand adversity — in Canada and the third strongest in North America. And it has paid uninterrupted dividends since 1857. That consistency shouldn’t be overlooked. TD Bank continued to pay dividends through both the Great Depression and the Great Recession. Many of the largest banks in the United States ended up cutting their dividends during the Great Recession.
A vital factor here is that TD Bank hails from Canada. Canadian banking regulations are extremely strict. That provides the largest banks with regulatory-protected market positions, so TD Bank is likely to remain a top dog in its home market. That regulation has also instilled a conservative ethos in Canadian banks that permeates their entire business, including their foreign operations. There is no question that TD Bank made mistakes, but given the history here, it seems likely that the bank will fix this and continue to move forward.
TD Bank’s growth is likely to slow dramatically
If you have a long time horizon, TD Bank’s current troubles are likely to be just a minor hiccup when you look back a decade or more from today. But there will be near-term repercussions that investors need to accept if they buy this high-yield bank stock. Most notably, TD Bank’s growth is likely to slow to a crawl until it gains back the trust of U.S. regulators, so the depressed share price could linger.
But if you think in decades and not days, that just means you can reinvest the dividends at an attractive rate for longer. At a time when the average bank yields just 2.9%, high-yield TD Bank is a contrarian stock that should probably be on every dividend investor’s shortlist.
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Reuben Gregg Brewer has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
1 Magnificent High-Yield Stock Down 33% to Buy and Hold Forever was originally published by The Motley Fool
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