Summary: Investors often seek undervalued stocks within lists of underperforming shares, hoping to find potential turnaround opportunities. Two such stocks are New York Community Bancorp and Toronto-Dominion Bank (TD Bank). New York Community Bancorp has faced challenges due to rapid expansion and regulatory scrutiny, leading to a dividend cut and a long recovery timeline. In contrast, TD Bank, while also dealing with regulatory issues related to money-laundering controls, remains a stronger choice due to its substantial Canadian operations and solid dividend yield. This makes TD Bank a more appealing option for dividend-focused investors, whereas New York Community Bancorp presents a riskier turnaround play.
Investors frequently begin their search for undervalued stocks by examining lists of shares that have underperformed. Among these are New York Community Bancorp, with a drop of 8.45%, and Toronto-Dominion Bank, also known as TD Bank, with a 1.54% decline. While there’s potential to find intriguing stocks among Wall Street’s laggards, it’s crucial to focus on those that are well-positioned for recovery. For those interested in dividends, TD Bank emerges as the more favorable choice.
New York Community Bancorp’s Challenges
New York Community Bancorp expanded too rapidly, outgrowing its systems’ capacity. Two swift acquisitions increased its business size, prompting heightened regulatory scrutiny due to its growing economic significance. The bank lacked adequate systems to manage this scrutiny and also encountered issues with several large troubled loans in its portfolio.
The repercussions for investors were immediate and severe. The stock’s value plummeted, and dividends were slashed to a mere $0.01 per share each quarter. Despite these setbacks, the bank has been proactive in addressing these issues by restructuring its management team and securing a $1 billion bailout from institutional investors. While New York Community Bancorp is expected to weather these challenges, the recovery is not anticipated to be complete before the end of 2026. With negligible dividends, it’s advisable to wait for more substantial progress in the bank’s turnaround before considering investment.
TD Bank’s Regulatory Hurdles
Meanwhile, TD Bank has faced its own regulatory challenges. U.S. regulators halted an acquisition due to deficiencies in its anti-money laundering controls, revealing that employees were allegedly laundering money for drug dealers. The bank initially allocated $450 million to address this issue, later adding another $2.6 billion, as reported in its fiscal third-quarter 2024 earnings.
However, TD Bank’s robust structure sets it apart. Its operations in the U.S. are supported by its Canadian banking division, making it Canada’s second-largest bank by assets. The heavily regulated Canadian market offers protection from competition, and its U.S. retail operations account for only 12% of earnings. While the U.S. regulatory issues pose a challenge, they don’t threaten the bank’s overall survival. Notably, TD Bank plans to reduce its stake in Charles Schwab from 12.3% to 10.1%, with the proceeds likely covering the $2.6 billion earmarked for the money-laundering issue. Although this isn’t a trivial matter, TD Bank appears to have it under control and expects resolution by the calendar year’s end.
While growth may stagnate temporarily as TD Bank navigates these challenges and rebuilds regulatory trust, the bank is poised to endure and prosper in the long run. The risk to its attractive 5% dividend yield seems minimal. Despite anticipated challenges in quarterly earnings reports, especially following the significant $2.6 billion write-off, conservative and income-focused investors may find TD Bank more appealing than New York Community Bancorp.
Survival Prospects for Both Banks
In fairness, both banks are likely to overcome their regulatory challenges. However, New York Community Bancorp represents a riskier turnaround investment, suitable only for the most aggressive investors. TD Bank’s situation is less precarious, partly due to its strong Canadian operations. Coupled with its substantial dividend yield, TD Bank presents a better option for most investors.
