If you’re a dividend investor, you might already own one of the Big Five Canadian bank stocks or even more than one. The average dividend yield for a typical bank in the Big Five is about 4%, and, as an investor who is value conscious, you might be wondering why you shouldn’t just buy the one with the highest yield and call it a day.
Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) currently has a 4.9% yield and is the cheapest bank with a price-to-earnings multiple of only 9.5. The stock is cheap, but it is cheap for a reason, and the reason is because it is overexposed domestically to the Canadian economy.
Other banks in the Big Five have some sort of international exposure to diversify risk, such as Toronto-Dominion Bank, which has a fantastic revenue stream coming from the U.S., and Bank of Nova Scotia, which has a terrific international exposure that continues to grow.
When looking at Canadian Imperial Bank of Commerce, it’s not hard to see that the bank almost entirely depends on Canada, which is very unstable most of the time because of its dependence on the prices of commodities that Canada exports. This is why if you own shares in this bank, it’s highly recommended that you also own shares in another Big Five bank; otherwise, you are putting all of your eggs in the domestic basket, and that’s never a good idea–especially if you’re a risk-adverse investor.
Canadian Imperial Bank of Commerce is also vulnerable to a Canadian housing-market crash, as the bank is the most exposed of any of its peers. If a housing crash occurs in the next five years, then you can bet that this bank will get crushed, while its peers won’t do nearly as bad due to their superior risk-management strategies.
The management team at Canadian Imperial Bank of Commerce realizes that its overexposure to Canada is a problem, and that’s why the company acquired PrivateBancorp in a $4.9 billion deal. PrivateBancorp will give Canadian Imperial Bank of Commerce that much-needed U.S. exposure, so is it a buy after the deal?
Not so fast. Canadian Imperial Bank of Commerce paid quite a hefty price for the acquisition, and it doesn’t appear like a great value given the price it paid. If you’re a value investor, this has to be concerning, but at least Canadian Imperial Bank of Commerce is diversified now and won’t be too dependent on the Canadian economy alone, right?
Hold your horses, once again. The acquisition will add considerable U.S. exposure, but not nearly enough in the short to medium term to mitigate the risk of its huge domestic exposure. It could take up to seven years for the PrivateBancorp acquisition to be fully utilized, where it would account for 25% of Canadian Imperial Bank of Commerce’s revenue stream.
There’s no question that Canadian Imperial Bank of Commerce is not an investment without risk. If you’re going to buy Canadian Imperial Bank of Commerce at current levels, you’d better be sure to pick up another bank because it won’t be properly diversified for many years to come, and the risk of a Canadian housing collapse will be around for the next five years.
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 Joey Frenette has no position in any stocks mentioned.