What do you recommend people do with their Toronto-Dominion Bank (TD-T) shares now that it is facing more than US$3-billion of fines and
other penalties for its failure to combat money-laundering through its U.S. branches? And what do you expect will happen to its dividend?
First, let me tell you what I'm doing with my TD shares: nothing.,
True, the punishment TD is facing is severe. In addition to slapping TD with stiff financial penalties, regulators have imposed a cap on its U.S. retail banking assets,
which will likely constrain the bank's growth for years to come.
But the market understands this, which is why TD's shares have cratered about 10 per cent since the full extent of the penalties became public on Oct.9. One could
argue that the bad news is already baked into the stock price, and that the downside from here may be limited. More on that in a moment.
Another reason I'm not selling my TD shares is that my portfolio was built to withstand this <ind of shock. In both my personal portfolio and model Yield Hog
Dividend Growth Portfolio, 1 hold four of the Big Five banks: TD, Bank of Montreal (BMO-T), Canadian Imperial Bank of Commerce (CM-T) and Royal Bank (RY-T)
(Nothing against Bank of Nova Scotia (BNS-T); 1 just didn't feel the need to add yet another bank when four provides plenty of diversification.)
It's at times like these when diversification proves its worth. While TD's shares have been sinking, other banks have been going up. CIBC and Royal Bank, in particular,
have been standout performers, gaining about 75 per cent and 58 per cent, respectively, for the year through Oct. 17, including dividends.
If you hold only one or two banks, now might be a good time to spread your bets around. For those who prefer not to own individual stocks, a low-cost bank exchange
traded fund such as the BMO Equal Weight Banks Index ETF (ZEB) can provide all the exposure you need with a single purchase.
As severe as TD's penalties are, it's important to keep them in perspective.
The asset cap, for example applies only to TD's U.S, retail operations, The business accounts for an estimated 27 per cent of TD's cash earnings, Doug Young, an
analyst with Desjardins Capital Markets, said in a note.
Other business lines, including investment banking and TD's Canadian and global operations
are not affected.
"Outside U.S. retail banking, TD's other businesses are performing well And while the U.S. [anti-money laundering] issues remain a concern, we believe this is partially
reflected in TD's valuation,' Mr. Young said.
The shares are now
trading at about 9.6 times estimated fiscal 2025 earnings, compared with an average of about 11.4 times for the rest of the Big Five. Unless there are
more skeletons in TD's closet,its discounted valuation could indicate that the stock is nearing a bottom.
As for TD's dividend, analysts expect that it will continue to grow, albeit at a slower pace than before. Darko Mihelic of RBC Dominion Securities, for instance,
previously expected TD to boost its dividend by about 7 per cent. Now, he's projecting an increase of about 3 per cent. TD typically announces a dividend increase
when it releases fourth-quarter results, which are scheduled for Dec,
Finally, even at the current annual dividend rate of $4.08 a share, TD provides an attractive yield of about 5.2 r per cent, which is second-highest among the Big Five
pehind Scotia Bank's yield of about 5.7 per cent. So investors get paid to wait for TD to recover from its current mess, which is exactly what I plan to do