Toronto-Dominion Bank (TSX:TD) has recently faced significant challenges, particularly with a staggering US$3 billion penalty stemming from a money-laundering case. This news led to a dip of approximately 8% in its stock price, creating a potential opportunity for long-term investors to consider adding TD shares to their portfolios. But where is TD stock headed in the next five years? Let's explore.

Navigating headwinds

Despite the headline risk and the hefty fine, TD Bank is well-positioned to manage this setback. With normalized annual earnings of around US$12.6 billion, the bank can absorb the financial hit without jeopardizing its stability. However, the situation is compounded by the U.S. regulator's asset cap, which limits TD's growth potential in the U.S. market following the incident.

Currently priced at approximately $78.30 per share, TD stock is trading at a price-to-earnings (P/E) ratio of about 9.9, which reflects a discount of around 14% from its long-term normal valuation. Analysts maintain a cautious outlook for the near term, projecting that the stock could rebound to $85.89 within the next 12 months, offering nearly 10% upside. This indicates that while the stock may be undervalued, the consensus is that it's fairly priced for the immediate future.

Growth trends and dividend stability

TD Bank has a commendable track record of growth, with revenue increasing at a compound annual growth rate (CAGR) of 11.9% over the past decade. However, this impressive revenue growth only translated to diluted earnings per share (EPS) growth of about 5% per year. This discrepancy highlights the complexities of bank earnings, which can be influenced by various factors, including operational efficiency, regulatory changes, and market conditions.

Notably, though, TD is committed to its shareholders. The bank has maintained a robust 10-year dividend-growth rate of 9%, showcasing its dedication to returning value to investors. While the current payout ratio is estimated at about 52% of adjusted earnings, it climbs to 77% based on diluted EPS estimates.

Although a higher payout ratio can raise concerns about sustainability, TD's dividend appears secure. If the bank announces a dividend hike in late November or early December — consistent with its historical pattern — it could bolster investor confidence and potentially drive the stock price higher.

Long-term potential and investor considerations

For investors contemplating TD stock, this is an opportune moment to evaluate its fit within their diversified portfolios. With a dividend yield of approximately 5.2%, TD offers an attractive income stream, particularly appealing to income-focused investors.

The bank could resume higher growth in the U.S. if it improves its anti-money laundering program. If the bank can achieve a valuation expansion to its long-term normal levels over the next three to five years, investors could anticipate annual returns of 12-14%.

This outlook positions TD as a solid candidate for those seeking reliable long-term growth in a blue-chip stock. As market dynamics continue to evolve, it's important for investors to keep a close eye on TD's performance, regulatory environment, and strategic initiatives.

The Foolish investor takeaway

While Toronto-Dominion Bank faces immediate challenges, its strong fundamentals and commitment to returning value to shareholders provide a solid case for long-term investment. With the potential for both income generation and capital appreciation, TD stock could be a wise addition to any investor's portfolio, especially for those looking to balance growth and stability in their investments.