TD Bank: Is it time to buy shares?

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SD (TSX:TD)(NYSE:TD) just reported better-than-expected fiscal third quarter (Q3) 2022 earnings. Investors watching the stock price decline in recent months are wondering if TD stock is now undervalued and good for buying a tax-free savings account (TFSA) or registered retirement savings plan ( RRSP) focused on dividends and total returns.

TD Bank Overview

TD is the second largest bank in Canada with a current market capitalization of $157 billion. The bank is best known for its strong retail banking operations in Canada, but investors’ future focus will be on the growing US business.

TD has spent billions of dollars over the last 15 years to buy regional banks and build a significant presence in the United States along the East Coast. The current branch network stretches from Maine to Florida and is poised to grow to more than 400 locations. TD is in the process of buying first horizon for 13.4 billion dollars. The bank operates primarily in the southeastern part of the US, including Florida, so the deal makes sense. TD expects the purchase to close in the early part of next year and will make TD one of the top six banks in the US market.

TD also recently announced plans to buy Cowen, an investment bank, for $1.3 billion. Cowen will merge with TD Securities, making the group a stronger full-service player in the capital markets segment.

DT Earnings

TD reported fiscal third quarter (Q3) 2022 adjusted net income of $3.81 billion compared to $3.63 billion in the same period last year. In the first three quarters of fiscal 2022, TD generated adjusted net income of $11.36 billion compared to $10.78 billion in 2021. Barring a big negative surprise for the fourth fiscal quarter, TD is on track. to comfortably exceed the results of 2021.

TD ended the third quarter with a Common Equity Tier One (CET1) ratio of 14.9%. Banks are required to have a CET1 ratio of at least 10.5%. This means that TD has a substantial surplus of cash that will be used to finance US acquisitions.

risks

Investors have sold bank stocks in recent months on growing recession fears. High inflation is forcing households to spend more discretionary income on food, gas, and other essentials. This means less money is being spent on other purchases and that will eventually slow economic growth.

At the same time, the Bank of Canada and the US Federal Reserve are aggressively raising interest rates to cool down the economy and reduce inflation. Additional borrowing costs will be a second hit for mortgage holders and businesses with loans. Households will start tapping into savings to cover rising monthly expenses and highly leveraged homeowners could start to default.

If the economy goes through a deep contraction and job losses start to mount, the weakening housing market could turn into a bust. This would have widespread economic repercussions and could put TD and her peers in a tough spot.

For now, most economists expect a mild, short-lived recession in 2023 or 2024. Unemployment remains near an all-time low, so people still have jobs to pay their mounting bills.

Dividends

TD increased the dividend by 13% at the end of last year. Another double-digit increase is likely for fiscal 2023. TD has an excellent track record of distribution growth with a compound annual dividend growth rate of about 11% since the mid-1990s.

At time of writing, the stock offers a 4% dividend yield.

Should you buy TD stock now?

Historically, TD has proven to be a good stock to buy on major pullbacks. Shares are currently trading near $86.50 compared to a 12-month high of $109. TD shares have risen from July’s low around $78 but still look oversold.

Volatility is to be expected in the coming months, but buy-and-hold investors may want to buy TD shares for their TFSA or RRSP portfolios at this level. The additional handicap should be seen as a good opportunity to add to the position, and you are well paid to ride out the turbulence.

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