TD Bank (TSX:TD) is currently the worst-performing stock among the large Canadian banks over the past five years. Contrarian investors are wondering if TD stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on dividends and total returns.

TD stock price

TD trades below $78 at the time of writing. The stock is down about 9% in the past 12 months and is way off the $108 it reached in early 2022.

This is in contrast to the other members of the top six Canadian banks that have seen their share prices increase between 15% and 50% over the past year.

TD's woes lie in the troubles it has faced in the American operations. The bank was recently given a fine of roughly US$3 billion for not having adequate systems in place to detect and prevent money laundering through the American branches. In addition, regulators have placed an asset cap on TD's U.S. business. This will effectively halt TD's growth ambitions in the U.S. market until the restriction is removed. TD has expanded significantly in the U.S. over the past two decades by making large acquisitions of American regional banks, running from Maine right down the east coast to Florida.

Near-term growth headwinds will persist. TD is bringing in a new chief executive officer in 2025 to help turn things around. It will take time for a new growth strategy to get sorted out, but TD will eventually get back on track. The bank remains very profitable and still has a solid capital position to pursue opportunities in other markets.

Investors who buy TD stock at the current level can get a dividend yield near 5.25%.

Risks

Banks raised provisions for credit losses as interest rates soared in 2022 and 2023. Higher interest rates are normally good for banks due to the larger net interest margins they can generate. However, the significant increase in rates over such a short period of time has put businesses and households with too much debt in a difficult situation. The reductions in interest rates that have occurred in Canada and the United States in recent months have eased the pressure, but the banks are not out of the woods.

Inflation could rebound in 2025 in the United States if the Trump administration implements broad tariffs on imported goods. This could force the U.S. Federal Reserve to halt rate cuts or even start to raise rates again. In Canada, the economy is weaker than it is south of the border, and unemployment is higher. The Bank of Canada wants to cut rates to avoid pushing the economy into a recession, but it can't let the spread between U.S. and Canadian rates get too wide.

As such, rates might not come down as much as needed in Canada and an economic downturn could drive up job losses. In that scenario, households that are facing mortgage renewals in the next two years might not be able to cover the jump in interest charges. This could lead to defaults and another surge in provisions for credit losses (PCL) at Canadian banks.

Is TD a good pick now?

Near-term turbulence should be expected. That being said, contrarian investors have historically done well buying TD on large pullbacks, and you get paid a good dividend yield right now to wait for the recovery. If you have some cash to put to work in a contrarian portfolio, this stock deserves to be on your radar.