The broader stock market fell into a quick bear market during the early days of the coronavirus pandemic. Toronto-Dominion Bank's (TD 0.19%) share price fell just like most other stocks during that period. And then the stock rallied strongly, just like many other stocks, hitting a peak of $85.
That's when the wheels fell off and TD Bank, as it is more commonly known, went into a funk. The stock now trades below $60 per share. Is this a buying opportunity? Maybe, but you need to know what you are getting into first.
It was bad, then good, and then really bad for TD Bank
The early days of the coronavirus pandemic were filled with fear and uncertainty. Add in the government pushing for social distancing and the closure of nonessential businesses, and you can understand why there was a recession.
That's bad for businesses across the board, and stocks, as a group, fell. TD Bank went along for the ride, even though its business remained fairly strong throughout the period.
Image source: Getty Images.
That's actually not too shocking. Banking is vital for everyday life, so it isn't like the industry could just stop operating. And, on top of that, TD Bank is one of the largest banks in Canada. Canadian banks are highly regulated, to the point where the largest banks effectively have protected market positions.
That heavy regulation has also resulted in generally conservative operating cultures, so TD Bank went into the coronavirus period in a strong position. Thus, it shouldn't be any surprise that TD Bank's shares rallied after the world got used to living with COVID-19.
To put some numbers on that, TD Bank's shares fell to a low of around $34 during the pandemic bear market. They then rocketed all the way up to $85 in roughly a year. That's an impressive rally! Only something happened in early 2022 that changed the way investors view TD Bank for the worse.
TD Bank misses the mark in the United States
Without getting into the details, TD Bank's internal controls in the United States failed to stop the bank from being used to launder money. That's more than bad -- it's really, really bad.
That news didn't roll out quickly, however; it started with U.S. regulators blocking a U.S. acquisition that TD Bank had lined up. While TD Bank is already a giant in Canada, it is still growing in the U.S. market. In fact, the United States is TD Bank's growth engine. When regulators blocked that acquisition, investors got very nervous about TD Bank's future.
As it slowly leaked out that money laundering controls were at issue, TD Bank's stock continued its descent. At this point, the shares are at roughly the same level they were at prior to the coronavirus pandemic. There's a good reason for that, too. Not only was the acquisition nixed, but TD Bank has had to pay regulators a large fine, it has had to make costly investments to upgrade its internal controls, and it is now working under an asset cap. The first two factors on that list are largely in the past, and the third is going to linger.
An asset cap effectively means that TD Bank cannot grow its U.S. business beyond a certain size. Regulators get to decide that size, and they aren't likely to permit TD Bank to grow beyond that point until the bank has regained their trust. That could take years to achieve. Given that the asset cap is set at about the current size of TD Bank's U.S. business, the company's growth engine has basically stalled out at this point.
Dead money or a long-term opportunity?
This is where things get interesting. Although TD Bank's Canadian operations are unaffected, it is pretty clear that the bank's growth is going to be slower than it has been in the past for an extended period of time. That's why investors are avoiding the stock.
But the price drop has pushed TD Bank's dividend yield up to a historically high 5.2%. That's more than twice as high as the average bank, which is yielding just 2.4%. TD Bank remains financially strong, so the dividend probably isn't at any risk of being cut.
TD Bank's isn't likely to see a quick business turnaround. In fact, 2025 is likely to be a difficult year as it adjusts to the U.S. asset cap. So this is not going to be a great option for growth investors, perhaps for many years into the future.
However, if you have a contrarian bent and an income focus, TD Bank's turnaround seems like it will be a pretty low-risk affair. It will just be drawn out, but you'll get to collect that above-average yield while you wait. So, for long-term dividend investors, TD Bank could very well be an attractive stock to buy while the shares are trading below $60.
