Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) is the cheapest bank with the highest dividend yield of the Big Five, and for these reasons it’s a core holding by many income investors who want a great deal to go with a terrific payout. Just because the company is the cheapest of the group doesn’t mean it’s the best value, and it doesn’t necessarily mean that you’ll get the highest return in the long run.
Cheapest bank and highest dividend yield of the Big Five–must be the best pick, right?
It’s a common misconception that since Canadian Imperial Bank of Commerce is the cheapest bank, it has the largest margin of safety because of its low price and is therefore the least risky pick with the most long-term upside. Canadian Imperial Bank of Commerce has always traded at a discount to its peers in the Big Five, and for good reason. The bank is the riskiest because of its huge domestic exposure and its lack of international diversification, which its peers have more of.
Since Canadian Imperial Bank of Commerce has such a large domestic exposure, the stock tends to underperform when the Canadian economy, which is sensitive to commodity prices, experiences rough patches when commodities like oil are facing routs. It’s no mystery that the Canadian economy is not well diversified, as most of the companies on the TSX are directly related to commodities. So investors in Canadian Imperial Bank of Commerce aren’t getting the international exposure they need for a financial holding.
If you do hold shares in Canadian Imperial Bank of Commerce, then you’d better make sure you own another one or more of the Big Five Canadian banks to get that much-needed diversification out of Canada; Canada is much more volatile than the American economy, which is very solid.
Another big reason why Canadian Imperial Bank of Commerce is so cheap is that the company has gigantic exposure to the mortgage market. Many pundits believe that the Canadian housing market is in a bubble, and if this bubble pops in the next few years, then this could be detrimental for shares of Canadian Imperial Bank of Commerce.
Despite the impressive quarter that the company reported, I believe the stock has gone up to levels where it’s overvalued considering the large amount of risk involved with the lack of international exposure and the high exposure to the mortgage market.
Given the risks, the stock is not cheap at all
Jim Shanahan, an analyst at Edward Jones, stated that Canadian Imperial Bank of Commerce has a portfolio of uninsured mortgage and home equity loans that is 5.4 times its regulatory capital, which is up from last year when it was 4.7 times.
This is very alarming and means that Canadian Imperial Bank of Commerce has a much bigger risk of having a huge correction than its peers in the Big Five, all of which have superior risk-management strategies.
Although the stock seems cheap at a 10.1 price-to-book multiple, I would not touch shares at current levels, as it’s way too expensive given the very large amount of risk involved with this holding. I would only consider taking on this much risk if the company yielded over 5.2%.
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Fool contributor Joey Frenette has no position in any stocks mentioned.