Canadian Imperial Bank of Commerce, or as it is commonly known, CIBC (NYSE:CM) is one of the Big Five Canadian banks. CIBC is the smallest of the five and has most of its operations in Canada, with a small exposure to the US market.
Note: All numbers below are in CAD$ unless otherwise specified.
Corporate Profile (from Yahoo Finance):
Canadian Imperial Bank of Commerce, a diversified financial institution, provides various financial products and services to individuals and small businesses, and commercial, corporate, and institutional clients in Canada and internationally. It operates through three business units: Retail and Business Banking, Wealth Management, and Wholesale Banking. The Retail and Business Banking business unit offers financial advice, banking, investment, and insurance products and services through approximately 1,100 branches, as well as through advisors, ABMs, mobile sales force, telephone banking, and online and mobile banking. The Wealth Management business unit provides asset management, retail brokerage, and private wealth management services to institutional, retail, and high net worth clients through advisors. The Wholesale Banking business unit offers various credit and capital market products, investment banking advisory services, and research products and services to government, institutional, corporate, and retail clients. Canadian Imperial Bank of Commerce was founded in 1867 and is headquartered in Toronto, Canada.
A Closer Look
CIBC is the smallest of the Big Five Canadian banks. The company's peers include Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Bank of Nova Scotia (BNS), and Bank of Montreal (BMO).
(Source: Created by author. Data from Google Finance & Morningstar)
CIBC is also the least diversified of the Big Five banks. As per the 2014 annual reports, CIBC has 83.9% of its revenue generated in Canada, 5.5% in US, 7.8% in Caribbean, and 2.8% in Other International.
(Source: Created by author. Data from respective 2014 annual reports)
Outlook and Risks
The Canadian banks are regarded as some of the safest financial institutions in the world. The companies have a long track record of being conservative and focus on long-term stability and prosperity. Most of these institutions have existed and paid dividends for more than 150 years and make for great core positions in any investor's portfolio. However, there are some risks that also have to be considered before investing in them:
- The slump in the commodities market has pushed the Canadian economy to the brink of recession. This has caused the Bank of Canada (BoC) to reduce the overnight interest rates twice this year -- first in Jan 2015 and second in July 2015, each time with 25 basis points. The current overnight interest rates stand at 0.50%.
- There is a silver lining here for shareholders of the bank. The banks have decided to increase the spread between overnight interest rate set by BoC and the prime rate. The spread increased (see image below) to 2.1% in Jan 2015 and has now increased to 2.2%, giving them the possibility of higher and easier profits in the coming quarters.
- The Canadian housing market is in a bubble territory according to many economists. If the bubble pops, the banks, although protected by the taxpayer backstopped CMHC insurance, will still face some problems going forward. The BoC has in the past acknowledged that the housing market is overheated and is hoping for a soft landing.
- The depressed look on the Canadian economy has caused the Canadian dollar to take a dive -- now down almost 30% since its peak in 2011. The exposure to international, especially US market, may be advantageous for other banks which have a big exposure, but CIBC has a much smaller exposure to the US market.
(Source: Created by author. Data from Bank of Canada)
Dividend Stock Analysis
Financials
Expected: A growing revenue, earnings per share and free cash flow year-over-year looking at a 10-year trend.
(Source: Created by author. Data from Morningstar)
Actual: Financials are well in order -- with a growing revenue year over year after some stagnation a couple of years ago. Earnings have also increased steadily over the years except for a drop in 2014, but the trailing twelve months show a decent increase.
Dividends and Payout Ratios
Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut).
(Source: Created by author. Data from Morningstar)
Actual: CIBC has a long track record of paying dividends and has been paying them since 1868. The company froze dividend raises during the financial crisis (between 2008 and 2010), but has started raising them again since 2011. The current yield is 4.8% and is the highest dividend yield amongst the big Canadian banks. The current EPS payout ratio stands at 46%.
Outstanding Shares
Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble.
(Source: Created by author. Data from Morningstar)
Actual: The number of outstanding shares grew during the financial crisis, but has started shrinking after a peak in 2012. In August 2014, CIBC announced that it would repurchase a maximum of 8 million shares (approx 2% of outstanding shares).
Book Value and Book Value Growth
Expected: Growing book value per share.
(Source: Created by author. Data from Morningstar)
Actual: The book value at CIBC has grown steadily over the years after the weakness noticed during the financial crisis.
Valuation
To determine the valuation, I use the Graham Number, Average Price-to-Earnings, Average Yield, Average Price-to-Sales, Dividend Discount (Gordon Growth model) and Discounted Cash Flow. For details on the methodology, click here.
The Graham Number for CM with a book value per share of $47.08 and ttm EPS of $8.78 is $96.44. Based on last closing price, the stock is currently 6.28% undervalued.
CM's 5-year average P/E is 11.4 and the 10-year average P/E is 12.51. Based on the analyst earnings estimate of $9.31, we get a fair value of $106.13 (based on 5-year average) and $116.49 (based on 10-year average).
CM's average yield over the past five years was 4.79% and past ten years was 4.73%. Based on the current annual payout of $4.36, that gives us a fair value of $91.02 and $92.18 over the 5- and 10-year period, respectively.
The average 5-year P/S is 2.66 and average 10-year P/S is 2.8. Revenue estimates for next year stand at $35.75 per share, giving a fair value of $95.11 and $100.11 based on 5- and 10-year averages, respectively.
The Gordon Growth Model is a quick way to calculate the fair value of a company using the current dividend, the expected dividend growth rate, and our required rate of return or discount rate. Using an expected rate of return of 10%, and a dividend growth rate of 6%, we get a fair value of $110.50.
The consensus from analysts is that earnings will rise at 10% per year over the next five years. If we take a more conservative number at 6% (considering all the headwinds facing the Canadian economy currently) and assume that CM is growing its earnings by 5% thereafter, running the three-stage DCF analysis with a 10% discount rate (expected rate of return), we get a fair price of $144.66.
The following chart from F.A.S.T Graphs provides a perspective on how undervalued CM is. This page describes how to interpret the graphs.
(Source: F.A.S.T Graphs)
The Estimates section of F.A.S.T Graphs predicts that if the stock stays at P/E value of 10.5 a year from now, that would result in a 14.7% return.
(Source: F.A.S.T Graphs)
Conclusion
The Canadian banks are regarded as some of the safest financial institutions in the world. The companies have a long track record of being conservative and focused on long-term stability and prosperity. CIBC has existed as an institution since 1867 and paid dividends since 1868, and makes for a great core position in any investor's portfolio. There are plenty of headwinds facing the Canadian economy and the banks -- including a recession, weak Canadian dollar, possibility of a housing bubble and potential crash, which has lead to very attractive valuation levels for investors looking to initiate or add to their positions. Based on the valuation metrics used above, the average fair value is computed to be $105.61, indicating that the stock is currently 14.59% undervalued. I wrote in this article in February 2015 that the Canadian banks will face headwinds for the rest of the year and slow addition of shares was recommended. My recommendation still stands, as the headwinds are expected to continue and anyone looking for great long-term holdings in the financial sector should look at the Canadian banks over the coming months.
Full Disclosure: Long BNS, TD. My full list of holdings is available here.
Roadmap2Retire
I am a personal finance and investing blogger. A software designer by profession, I have a passion for economics, business, finance and investing. My personal financial goals are to generate enough passive income to fund my retirement, and along the journey - share my experiences and help the readers.
Analyst’s Disclosure: I am/we are long BNS, TD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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