Down 20% This stock is poised to rally in 2025 and beyond

TD Bank (TSX:TD) is still down 20% from its 2022 high. The stock has gained some ground in recent months, and investors who missed out on the rally are wondering whether TD stock is still undervalued and whether it’s worth buying for a portfolio focused on dividends and total returns.

TD bank shares

As of this writing, TD is trading at close to $86 per share compared to $108 at one point in early 2022. TD dropped to $74 this summer and then rebounded to its current level.

The recovery since June has coincided with the start of interest rate cuts by the Bank of Canada and has been boosted by the recent cut in interest rates in the United States. Inflation has returned to or near target levels. This gives central banks some room to cut interest rates to prevent a potential recession.

In normal economic conditions, falling interest rates are typically bad for banks because they can reduce net interest margins. However, as things stand, the market expects loan defaults to decline as borrowers struggling to cover a large jump in interest charges will finally see some relief. TD and its peers have significantly increased provisions for loan losses (PCL) in recent quarters. Falling interest rates should lead to a lower PCL in 2025.

TD’s stock price performance continues to lag behind some of its competitors. This follows an investigation by US regulators into the lack of adequate anti-money laundering systems in TD’s US operations. Over the past two decades, TD has built a large retail banking business in the U.S. through a series of acquisitions. The bank’s main strategy was development on the American market. Regulatory issues have put this plan on hold.

TD has already committed more than $3 billion to cover potential penalties related to the investigations. The bank expects that this will be enough to cover all penalties that may result from this process.

Possibility

Regulatory issues will be resolved eventually. Once the situation calms down, TD should be able to refocus its efforts on growing its U.S. business, either through acquisitions or organic expansion. Any news that the investigations are closed could send TD shares soaring.

The bank remains very profitable and maintains a solid capital position to overcome ongoing difficulties. The new CEO is expected to take over next year, giving the bank a fresh start on the leadership front.

Risk

Analysts remain concerned that TD could be banned from expanding its presence in the United States as part of a solution to ongoing problems. It’s unlikely, but any news indicating US growth is moderating would be negative for stocks.

At the same time, the broader market is facing a slowdown. If economic indicators begin to indicate that a recession is underway and unemployment continues to rise, banks may see an increase in defaults even as pressure on interest rates declines. This would lead to an increase in PCL in subsequent quarters, limiting profits.

Inflation is also still a problem. Markets see the battle for inflation as a win, but demands for large wage increases remain a threat. Potential tariffs imposed by the new Trump presidency could also push up prices in the United States. Disruptions in supply chains or a sharp increase in energy prices due to geopolitical conflicts are possible next year. In a scenario of rising inflation, central banks would have to refrain from cutting interest rates. This would prolong the suffering of businesses and households that are over-indebted.

If the situation worsens, TD stock could return to its 2024 lows.

Is it worth buying TD now?

Near-term risks remain, but TD is likely a solid choice at this level for buy-and-hold investors. At the current share price, investors are getting a decent dividend yield of 4.8%. If you are concerned about short-term risk, it is worth taking a half-hearted position and looking for weaknesses.

Past performance is no guarantee of future profits, but historically, purchasing TD stock on significant declines has proven to be a profitable move for patient investors.