Over the past few weeks, investors have been offered a view into the Canadian economy as the large banks have reported second-quarter earnings. The institution with the best handle on its own capital structure remains the best buy. Shares of Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM), CIBC for short, declined this Thursday as the company reported results which surpassed expectations.
Although there was an initial spike at the open, shares declined by close to 1.9% for the day and closed down by approximately 1% for the week. With a market capitalization of $46 billion, the bank increased the bottom line from $2.58 from the previous quarter to $2.60 for the current quarter. Halfway through the year the earnings per share are $5.18 — well on pace to beat last year’s total number of $10.70, which included some one-time items.
CIBC has recently undertaken two separate acquisitions and made the decision to cut ties with PC Financial and launch its own online bank.
Uniquely positioned to serve the Canadian public both online and via brick-and-mortar locations, the company’s share price remains undervalued at approximately eight times rolling earnings. The forward price-to-earnings multiple is about 8.6 times earnings assuming the return on equity continues to be 18%.
Although many other banks have continued to grow profits at a steady pace, the truth is that the return on equity has declined substantially as each company has built a higher amount of retained earnings as time has passed. Additionally, in many cases the dividends paid per share have increased each year in spite of not making a dent in the total payout ratio, as earnings have continued to increase substantially every year. For CIBC, which has aggressively undertaken a share-buyback program, the total float has been reduced by more than any other competitor.
As of the end of fiscal 2016, the average dividend-payout ratio for the big banks was close to 48% with CIBC coming in at the low end, paying out only 44% of earnings.
As shares of CIBC are currently trading at less expensive metrics than the industry average, it is important to understand why. Currently, the company has an excellent core of operations with recurring profit, but it has been forced to issue close to 35 million shares to fund recent acquisitions, which will pay off over time. Given the time to integrate these acquisitions into the bigger picture, investors are aggressively discounting this opportunity, as they are clearly seeking short-term gains over long-term investments.
With time on their side and a very stable sector, shareholders of CIBC may just get the last laugh in the coming years.
