Investors looking for attractively valued stocks often start by scanning through lists of underperforming shares. That's where you'll find both New York Community Bancorp(NYSE: NYCB) and Toronto-Dominion Bank(NYSE: TD), often referred to as TD Bank. While investors can find interesting stocks among Wall Street's laggards, you'll only want to buy the stocks that seem best positioned to turn things around.
For dividend investors, TD Bank looks like the better option here.
What happened to New York Community Bancorp?
From a big-picture perspective, New York Community Bancorp got too big too fast and wasn't ready for it. Two acquisitions in a short span pushed its business up in size, and that meant that regulators would be taking a harder look at the company's business because it was more economically important. The bank didn't have the systems in place to handle the scrutiny. Perhaps as a sign of potential regulatory issues, the bank also found that several large loans in its portfolio were troubled.
Image source: Getty Images.
The fallout was swift and painful for investors. Not only did the stock price plunge, but the dividend was cut to just a token $0.01 per share per quarter. To the bank's credit, it has worked quickly to address the issues, including bringing in a new management team and accepting a $1 billion bailout from institutional investors. Although New York Community Bancorp is probably going to survive the headwinds it faces, the turnaround won't be complete until the end of 2026, at the earliest. And with effectively no dividend to speak of, there's not much reason to buy the stock until more progress has been made on the turnaround effort.
What happened to Toronto-Dominion Bank?
TD Bank, meanwhile, has been dealing with regulatory issues of its own. The company's problems came to a head when U.S. regulators forced TD Bank to call off an acquisition because of weaknesses in its handling of money-laundering controls. As it turns out, bank employees appear to have been laundering money for drug dealers. The bank quickly set aside $450 million to deal with the issue but then announced that it would be putting another $2.6 billion aside when it reported fiscal third-quarter 2024 earnings.
However, TD Bank is a larger and stronger bank than New York Community Bancorp. For starters, TD Bank's U.S. operations rest on top of its Canadian banking business. TD Bank is the second-largest bank in Canada, based on assets. Canada is a country in which heavy regulation insulates industry giants from competition. Its U.S. retail operations only represent 12% of earnings.
In other words, the U.S. regulatory issues TD Bank faces are a problem but not likely a threat to its entire existence. Notably, the bank also announced that it would reduce its stake in Charles Schwab from 12.3% to 10.1%. The proceeds of the sale, which are likely to be close to the $2.6 billion it set aside during the quarter, will help it cover the cost of the money-laundering issue. This isn't a non-issue, but TD Bank seems to have the issue under control and, notably, expects the regulatory issues to be resolved by the end of the calendar year.
Growth will probably stall out for a while as TD Bank continues to work through the headwind and regains trust with regulators, but TD Bank seems likely to survive and continue to thrive over the long term. And, notably, the risk to the stock's hefty 5% dividend yield seems fairly low. Although quarterly earnings results will probably be tough to read for a few quarters (the fiscal third quarter was really bad given the $2.6 billion write-off), conservative investors and income investors looking for an opportunistic investment will probably prefer TD Bank over New York Community Bancorp.
Both are likely to survive
To be completely fair, both banks are likely to survive their regulatory headwinds. But New York Community Bancorp is a far riskier turnaround play. Investing in tough turnaround plays is a type of investing that only the most aggressive investors should try. TD Bank's situation isn't nearly as dire, at least partly thanks to its core Canadian operations. Add in the fat dividend yield, and it looks like the better option for most investors.
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Reuben Gregg Brewer has positions in Toronto-Dominion Bank. The Motley Fool has positions in and recommends Charles Schwab. The Motley Fool recommends the following options: short September 2024 $77.50 calls on Charles Schwab. The Motley Fool has a disclosure policy.
