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Does Canadian Western Bank and its 3% Yield Belong in Your Portfolio?

Canadian Western Bank (TSX: CWB), Canada’s 10th largest bank in terms of total assets, announced first-quarter earnings results after the market closed on March 4, and its stock has responded by falling over 4.5% in the weeks since. The stock now sits more than 36% below its 52-week high, so let’s take a closer look at the quarterly results to determine if we should consider scaling in to long-term positions today.

Breaking down first-quarter results

Here’s a summary of CWB’s first-quarter earnings results compared to its results in the same period a year ago.

Metric Q1 2015 Q1 2014
Earnings Per Share $0.65 $0.61
Revenue $152.38 million $144.07 million

Source: Canadian Western Bank

CWB’s diluted earnings per share from continuing operations increased 6.6% and its revenue from continuing operations increased 5.8% compared to the first quarter of fiscal 2014. The company’s strong earnings-per-share growth can be attributed to its adjusted net income increasing 7% to $53.58 million and its solid revenue growth can be attributed to net interest income increasing 9.2% to $132.92 million.

Here’s a breakdown of 12 other important statistics and ratios from the report compared to the year ago period:

  1. Total assets increased 11.2% to $21.27 billion
  2. Total loans increased 12.4% to $18.14 billion
  3. Total deposits increased 10.3% to $17.92 billion
  4. Total debt increased 38.4% to $1.13 billion
  5. Total shareholders’ equity increased 5.5% to $1.73 billion
  6. Total assets under administration increased 9% to $9.22 billion
  7. Total assets under management increased 11% to $1.87 billion
  8. Net interest margin contracted five basis points to 2.59%
  9. Efficiency ratio expanded 240 basis points to 47.1%
  10. Return on common shareholders’ equity contracted 70 basis points to 13.1%
  11. Return on assets contracted four basis points to 1.01%
  12. Book value per share increased 11.4% to $19.99

CWB also reiterated its full year outlook on fiscal 2015, which calls for the following performance compared to fiscal 2014:

  • Earnings-per-share growth in the range of 5-8%
  • Loan growth in the range of 10-12%
  • Efficiency ratio of 47% or less
  • Return on equity in the range of 14-15%
  • Return on assets in the range of 1.07-1.12%

Should you be a buyer of CWB today?

I do not think the post-earnings drop in CWB’s stock is warranted and actually represents an attractive long-term buying opportunity because it trades at very low valuations and pays a generous dividend.

First, CWB’s stock trades at just 10.3 times fiscal 2015’s estimated earnings per share of $2.68 and only 9.7 times fiscal 2016’s estimated earnings per share of $2.86, both of which are inexpensive compared to its five-year average price-to-earnings multiple of 13.6. Also, it trades at a mere 1.38 times its book value per share of $19.99, which is very inexpensive compared to its market-to-book value of 2.03 at the conclusion of the first quarter of fiscal 2014.

Second, CWB pays a quarterly dividend of $0.21 per share, or $0.84 per share annually, which gives its stock a 3% yield at current levels, and I think this makes it qualify as both a value and dividend investment play today.

With all of the information provided above in mind, I think Canadian Western Bank represents one of the best long-term investment opportunities in the financial sector today. Foolish investors should take a closer look and strongly consider beginning to scale in to long-term positions.

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Fool contributor Joseph Solitro has no position in any stocks mentioned.

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