This Blue Chip Canadian Stock Now Yields 4.2%

This company continues to defy the naysayers.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Ever since it started paying regular dividends in 1868, Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM) has been an income investor’s dream.

For 146 consecutive years the banking giant has managed to send a cheque to shareholders. Over the past decade alone, it has managed to increase that payout by 63%, much to the delight of income-hungry investors looking for alternatives to anemic bond yields.

However, many investors are skeptical as to whether CIBC will be able to maintain this growth pace. If you think this firm can’t keep up such a heady pace of dividend increases, though, you could be in for an unpleasant surprise. The bank continues to defy the naysayers with across-the-board strength in every segment of its operations.

During the second quarter, domestic retail remained a bright spot, with profits up 8% year over year after excluding the sale of its Aeroplan credit card business. Wealth management earnings were up 29% thanks to higher revenue from fees and commissions. Another bright spot was wholesale banking, where profits rose 11% on the back of strong revenue from equity derivatives and fixed income trading.

None of this hides the fact that profits declined 60% compared to the same period last year. But once you dig beneath the headline number, it’s apparent that CIBC is in fine shape. Most of this surprise decline was the result of a $420 million goodwill writedown of its Caribbean operations as well as other one-off items. After stripping out these non-cash items, CIBC made $887 million, or $2.17 per share.

CIBC has also cleaned up its balance sheet. Five years ago the company earned the reputation of the “Cowboys of Bay Street” for its involvement in some of the riskier products that started the financial crisis. Today, CIBC is now the best-capitalized of all the major banks, sporting a Tier 1 common equity ratio of 10%.

All of this means the bank has plenty of extra capital to grow the business or reward investors through dividends and share buybacks. We’ll likely see a combination of both.

Chief Executive Gerry McCaughey is particularly keen on expanding the wealth management division in the near future, with plans to have the unit contribute 15% or more of total earnings, up from 13% today. That target will likely be achieved through a mix of organic growth and acquisitions. CIBC is also considering a U.S. expansion.

Shareholders will likely be compensated too. Last week, CIBC hiked its quarterly dividend by $0.02 to $1.00 per share. Based on Thursday’s closing price, the new annual dividend yield tops a hearty 4.2% — the largest of Canada’s big five banks. Given that the bank is well capitalized, there’s still plenty of room for that payout to grow.

All of that said, CIBC, or any Canadian bank for that matter, is no slam dunk. In a great piece last week, Fool contributor Nelson Smith pointed out a number of headwinds facing the banking sector, including the country’s overheated housing market and growing competition in retail lending. And following the recent run-up in the stock market, valuations are also starting to look a little stretched.

But given the fact that the company is well capitalized, CIBC is the best positioned of its peers to ride out any turmoil. Thanks to the stock’s high yield and growing payout, it’s still a risk worth taking.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robert Baillieul has no positions in any of the stocks mentioned in this article. 

More on Investing

Hands holding trophy cup on sky background

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Here are three top TSX growth stocks that may be worth a look, given the significant valuation declines these stocks…

Read more »

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Why Real Estate Stocks Are a No-Brainer Addition to Your Portfolio

Real estate stocks, especially REITs, offer some distinct advantages over other types of stocks, making them must-have additions to most…

Read more »

Man data analyze
Stocks for Beginners

Beginners: 2 Market-Beating Stocks Just Getting Started

Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) and Constellation Software (TSX:CSU) are proven market beaters that could continue their ways.

Read more »

oil and natural gas
Energy Stocks

Small OPEC+ Oil-Output Hike: Buy More Energy Stocks?

Energy stocks could soar higher, because oil markets will remain tight due to the small production increase by OPEC+.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Top TSX Dividend Stocks to Buy for Monthly Passive Income

Top TSX stocks with monthly dividends now trade at cheap prices for investors seeking passive income.

Read more »

edit Person using calculator next to charts and graphs

Where to Invest $500 in the TSX Right Now

Long-term investors can look to buy stocks, including Suncor Energy and Shopify, as they are poised to outpace the broader…

Read more »

Canadian Dollars
Dividend Stocks

Create Free Passive Income and Turn it Into Thousands With 1 TSX Stock

If you can't afford to invest, you can certainly create passive income another way and use that to invest in…

Read more »

falling red arrow and lifting

2 Oversold TSX Stocks That Should Bounce Back

Stocks that are oversold without an external catalyst like a market crash or a weak sector might be risky buys,…

Read more »