2023-07-29 02:55:58 ET
Summary
- Canadian Imperial Bank of Commerce (CIBC) gets a strong buy rating.
- Positives: Near 6% dividend yield, valuation in line with sector, strong capital & liquidity, share price in line with 200-day SMA, positive net income YoY growth.
- Risks of commercial real estate exposure have only limited exposure to office properties.
Research Brief
In today's equities research article, I am figuratively heading north of the border to Canada to cover the Canadian Imperial Bank of Commerce ( CM ), also commonly known as CIBC .
Its next earnings results will be around August 31st, when it will report its fiscal Q3 results. For the purpose of this article, we will reference the Q2 results as needed.
Notable points to mention about this bank, from its company website : headquartered in Toronto, roots go back to 1867, market cap of $56B, total clients 13MM, total assets $943B.
It was also listed at #49 on Wikipedia's largest banks in the world .
Ratings Methodology
Our goal is to find undervalued stocks of companies with solid financial fundamentals, that pay competitive dividend yields. Our key industry focus is tech, financials, insurance, innovation.
To simplify my rating of an equity, I have broken it down into whether I would recommend or not recommend based on these individual factors:
- Valuation vs Sector Average.
- Dividend Yield vs Sector Average.
- Positive YoY Net Income Growth.
- Capital & Liquidity Strength
- Stock Price vs 200 Day SMA.
If I recommend on all 5 categories, it is a "strong buy", 4 categories is a "buy", 3 is a hold, and less than that is a sell rating. Then I compare my rating to the consensus ratings from Seeking Alpha & Wall Street.
Valuation vs Sector Average: Recommend
I like to start off these articles with talking about valuation, and the metrics of choice are the GAAP-based forward price-to-earnings (P/E) ratio and the forward price-to-book (P/B) ratios, which I then compare to the sector average for this company.
We can see below some of that valuation data from Seeking Alpha :
CIBC - P/E ratio (Seeking Alpha)
In the case of P/E, this stock is valued at 10.23, slightly over 10x earnings, but remaining lower than the sector average by almost 1%. It is not anything attention-grabbing, so I would consider it pretty much in line with the sector average.
CIBC - P/B ratio (Seeking Alpha)
The P/B of 1.08 puts it at close to 1.2x earnings, and almost 1% above the sector average. Again, nothing extraordinary either way.
My target range for a stock is that it is either close to or well below the sector median, so in this case the stock can be recommended in terms of valuation, since it is not overvalued compared to the sector average it is in.
Dividend Yield vs Sector Average: Recommend
I am looking for stocks for my readers that can take advantage of dividend income, so rather than just holding shares it is also investing in an existing income stream.
This stock had a most recent dividend yield of 5.79%. It being close to 6% already grabbed my attention, however I admit I have seen several in the banking & insurance sector that have been above 5% lately.
It has a nice steady quarterly payout that is dependable, but also notable is that its 5-year dividend growth is positive and steady, going from an annual dividend of $2.04 in 2018 to $2.52 in 2022, a 19% growth over 5 years, another sign it is continually in a solid cash position to return capital back to shareholders each year and not cut dividends.
Also importantly, I would mention that both the trailing 12 month and forward dividend yields surpass the sector average. For example, the forward yield is over 71% above average, with the sector average hovering around 3.5%.
CIBC - dividend yield vs sector avg (Seeking Alpha)
Based on the above data, I would recommend this stock for a dividend-oriented portfolio.
Positive YoY Net Income Growth: Recommend
From a high-level overview, in the Q2 results I see a positive YoY net income growth as well as a positive YoY earnings per share growth, as shown below in the table. I think positive trends in net income over a longer period show that a company manages expenses efficiently while also growing revenue.
Drilling into top-line revenue drivers of income, to make sense of what is driving the income tailwind, it is clear that the firm has benefited from the rate environment, having a 3% YoY growth in net interest income, however has also shown strength in non-interest income with a 10% YoY growth. I think this is a sign of good revenue diversification.
CIBC - top line revenue by source (CIBC - q2 presentation)
Notable to mention, considering that interest rate environments are heavily influenced by central bank rate decisions, is that CIBC has an interesting mix of non-interest income in its revenue portfolio as well, and I am impressed with the diversification of this mix:
CIBC - non interest income mix (CIBC)
Although it is technically a Canada-headquartered company, it also trades on the NYSE and has a large US business segment as well, adding to its global diversification.
One notable driver of income for this company is the commercial banking & wealth management segment in the US region.
According to its Q2 presentation, in this segment "net interest income up 19% YoY driven by volume growth." In addition, there were $3.5B in net flows from new clients over the prior 12 months.
I recommend this stock in terms of net income growth and I think it will do even better in the next quarterly results, as the banking sector overall seems to have stabilized since the March turbulence in this sector, but also additional tailwind forming from yet another Fed rate hike this month , which usually gets mirrored by other central banks as well.
Capital & Liquidity Strength of Company: Recommend
First off, to keep it simple, let's look at two key metrics for a bank like this, and particularly a Canada-based bank, and that is CET1 and Liquidity Coverage Ratios. In this case, their CET1 is at 11.9% and the liquidity coverage ratio stands at 124%. Both are well above regulatory standard baselines, and the Canadian regulatory arm requires at least a 100% liquidity coverage:
CIBC - CET1 and LCR Ratios (CIBC - q2 presentation)
Further to mention, this bank has a massive asset side of its balance sheet and most of those assets are earning income for the company.
Consider the following chart:
CIBC - assets and avg yield (CIBC - q2 presentation)
The chart shows a steady growth in interest-earning assets, but also a YoY growth in the yield being earned on those assets. This steady rise in average yields seems to also correlate with the steady rate hikes from central banks since 2022Q2. Since one of them, the Fed, just raised rates again, I expect the chart above to reflect a similar upward trend in the next quarter.
Based on the data, I recommend this stock in terms of capital & liquidity.
Stock Price vs 200 Day SMA: Recommend
Just after market open on Friday July 28th the shares of CIBC were trading at $43.84, or just over 1% above its 200-day simple moving average:
My investing idea, as in recent articles, calls for tracking the 200 day SMA and trading within a range of 5% below / above the SMA. Based on the current SMA of $43.36, that would be a target trading range of $41.19 to $45.52. This stock is currently within that buffer zone, so I would recommend it as a buying opportunity at this price.
I have created the following spreadsheet to illustrate my investing idea for this article.
In the above investing idea, I am simulating a trade buying a nice even block of 100 shares at the current price of $43.84, holding for 1 year to earn the full dividend income, and selling at 5% above the current 200-day SMA. Earning both a capital gain and dividend income, my total return on capital invested would be 9.85%.
The risk to this idea is that the moving average takes a downward trend for a longer period after I buy the shares, which could lead to unrealized capital losses on this test portfolio. Some of this risk can be offset by selling covered call options and earning premiums from that, however the topic of options is not covered in this article due to its complexity, and assuming many of my readers are already experienced investors & familiar with covered calls.
Ratings Score: Strong Buy
Today, this stock won all 5 of my 5 rating categories, earning a strong buy rating from me. My rating is slightly more bullish than the consensus from both the SA quant system and SA analysts, and considerably more bullish than the Wall Street consensus.
CIBC - ratings consensus (Seeking Alpha)
Risks to my Outlook: Real Estate Exposure
A risk to my bullish outlook on this stock would be this bank's exposure to commercial real estate, and especially office property, since I know this is something both analysts and investors have been asking about and keeping track of. It is a worthy concern, especially after media stories this year about headwinds in this space.
For instance, adding fuel to this topic are stories like the June article in Marketplace.org , which highlighted the recent difficulties with office property:
More owners of office properties are delinquent on their loans, according to new data from the real estate analytics firm Trepp. The company reports that in May, more than 3.38% of commercial office loans are seriously delinquent - that's up from a year ago.
Now, let's take a look at CIBC and its CRE portfolio diversification:
As we can see, the Canadian CRE portfolio has about 10% exposure to office, while the US portfolio is slightly more at 21%. The rest of their CRE mix looks highly diversified, with the largest chunk going to multi-family properties.
Specifically within its office portfolio, the company says that in the US, for example, "over 50% is class A, average LTV was 60%, 10% of portfolio is higher risk class B."
Additionally, the office portfolio in the US seems to be spread across over 10+ metro areas.
To counter the argument about office exposure risk, I don't think "offices" will completely disappear just because of remote work nor will the majority of those properties default, even though a certain percent may. With that said, since offices are only a smaller part of CIBC's larger portfolio, it may not have as much negative impact as though, so I remain positive on this topic for now.
Analysis Wrap Up
To wrap up today's stock analysis, here are key points we discussed:
This stock earned a strong buy rating today, slightly more bullish than the consensus from Seeking Alpha and Wall Street.
Positives: dividend yield vs sector average, share price vs 200-day SMA, valuation vs sector avg, capital & liquidity.
A risk to my outlook is exposure to commercial real estate, and this has been addressed already.
In closing, so far I have come across several hidden gems among Canadian banks recently, and this is one of them. I believe its size, scale, and position as a market leader will benefit it but so will the continually high interest rate environment. It beat 3 out of the last 4 earnings estimates, so my prediction is that for Q3 it will beat analyst estimates again by somewhere between $0.03 and $0.20.
CIBC - earnings beats (Seeking Alpha)
For further details see:
Canadian Imperial Bank Of Commerce: Betting On This Bank With 6% Dividend Yield And Strong Liquidity