Yesterday, we delved into the smallest of the Big Six Canadian banks: National Bank of Canada. Today, we look at Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), the fifth-largest Canadian bank by market capitalization. It currently pays investors a dividend yield of almost 4.75%. Given the returns on Canadian financials over the past five years, it is completely understandable that this segment of the market has started to behave a little more calmly throughout the year.
Over the past five years, shares of the bank have increased by over 50%, while the YTD return has fallen short. Shares have been almost flat as of Friday’s closing prices. Currently trading at a price-to-earnings (P/E) multiple of close to nine times, shareholders are not having to pay a very large multiple to make this investment. From fiscal 2013 to fiscal 2016, the dividends paid per share have increased at a rate of 7.7% from $3.80 per share to $4.75 per share. For the first half of fiscal 2017, the dividends paid were $2.51 per share, which is an increase from the same period one year earlier.
From 2013 to 2016, the earnings per share (EPS) increased as well. What were EPS of $8.11 in 2013 grew to $10.70 for fiscal 2016. The compounded annual growth rate of earnings over this same period was 9.7%. As dividends increased by less than EPS, the dividend-payout ratio declined as well, falling from 46.9% to 44.4%.
Instead, with the excess cash, the company chose to repurchase shares in the open market, which brought the denominator down for the company to calculate the EPS number. Since there are fewer shares outstanding, there is going to be a higher amount of profit available on a per-share basis.
Getting down to the return on equity, the company, which made a profit of $3.352 billion during fiscal 2013, did so with a total amount of shareholders’ equity of $17.819 billion as of the end of the fiscal year. The return on equity, calculated as 3.352 divided by 17.819, was 18.8%. During the 2016 fiscal year, these amounts grew and earnings became $4.275 billion. Shareholders’ equity increased to $23.472 billion. The total return on equity has remained relatively steady at 18.2% for fiscal 2016. This is fabulous news!
Since one of the main drivers for investors to measure the performance of a financial company is the return on equity, it is important to understand exactly what this represents. When a business is created, it can be done either through the money put in by the owners or by raising debt. In the case of Canada’s banks, the return on equity shows investors the amount of return that the owners are getting for the capital they have contributed to the company.
Essentially, as the company takes on more debt, the returns can increase, but so does the cost to raise this money. In the case of Canadian Imperial Bank of Commerce, the return on equity has increased over a four-year period. Investors will surely take note of this increase.
