Opinions
Greg Newman
Toronto Dominion
TD-T
DON'T BUY
Jan 23, 2025
Stock price when the opinion was issued
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Held up fairly well all things considered, as money's rotated out of large-cap financials. Support is around $74 with the December retest. Bumping up against resistance close to $86. That's the range, and we're waiting to see if it goes through. Financials have started to struggle, so this could go either way.
The big banks face challenges, because the homes bought during Covid, when interest rates were rock-bottom, are and will pay much higher rates. TD is very tied to home mortgages, so be careful. Also, they're restricted from growing their business in the US for 4-5 years. He sold it, because the future didn't look great. He bought more Royal instead.
Likes TD a lot. Very undervalued at 10x PE. Potential for multiple to rerate in medium term. More upside as it distances itself from the overhang of regulatory infractions. All that should give you a better total return. He'd pick TD.
For BAC, even with deregulation in US, the big banks are already so large, it's hard to imagine they'd be allowed to get even bigger.
Asset cap in US will be in place for a number of years; once it's eventually lifted, that will be an avenue for growth. US accounts for about 25-30% of earnings. Bank feels it can still grow in Canada. Valuation still quite attractive at 10x PE. Path back to growth will take a while. Yield is quite attractive too.
Q1 was a much-needed low-drama quarter. Schwab sale. Market appreciated the quicker CEO transition. Wealth management good, strong capital markets. Still trading at a premium to the group, and that's not warranted because of growth limits in US.
All banks are at risk if economy darkens. But if economic environment is OK, he thinks BMO has the best upside.
Yes, very safe. Payout ratio is ~53%, in line with the bank average around 54%, so put away that worry. The better question is do you want to put new $$ to work here right now? It'll go higher if Canadian banks go higher, and they will grind higher under friendlier regulations. If banks go up over the next year, TD will participate but move up less.
Relative to the group, this one's going to be in the penalty box for quite a while. Growth will slow due to extra compliance. M&A seriously challenged due to lack of targets in Canada and regulatory constraints in US. You're better with US banks here, or BMO in Canada.
If you own it already, you'll be fine to hold and collect your dividend. If it goes to $78-79, write some puts and oblige yourself to own it.
Board changes and accelerated CEO start date are steps in the right direction. Gave investors the right message about being serious and changing the guard. Market cheered that, but stock probably got ahead of itself.