Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) is a stock that has seen better days. After tanking during the Great Recession, it has barely managed to surpass its early 2008 prices, making it one of the worst-performing Canadian banks since then. The culprit seems to have been declining growth. Without much of an international presence, CIBC has little room to grow compared to a U.S.-focused bank like TD, which makes it vulnerable to weakness in the domestic economy.
On that note, in the first quarter, the Canadian economy grew at just 0.4% year over year. Although growth is estimated to hover around 2% for the full year, that’s still not quite keeping pace with U.S. GDP, which is growing at 2.3% or so.
All of the above points to CIBC having few opportunities for continued growth. Although it’s certainly not a shrinking business, its earnings are really crawling upward. At the same time, its stock is getting very cheap by conventional metrics, which may make it a good value play. Also, even with the stock’s tame growth metrics, CIBC’s management has been raising the dividend, which suggests that the bank’s “slow and steady” growth will continue — perhaps making its stock a solid income play. To see whether that’s the case, let’s take a peek at CIBC’s most recent earnings.
On a reported basis, CIBC earned $1.39 billion in the third quarter compared to $1.37 billion in the same quarter a year before. That’s a growth rate of only 2% year over year, although the growth over the prior quarter was higher at 4%. Also in the quarter, the bank grew its U.S. Commercial Banking and Wealth Management business by 6%. In less-positive news, the bank’s provision for credit losses grew by $50 million, or 21%, year over year, signalling that management believes that negative credit events (e.g., defaults) will rise going forward.
By most conventional metrics, CIBC shares are very cheap. The stock has a trailing P/E ratio of 9.59 based on the last 12 months of earnings, and a price-to-book ratio of 1.39. These figures are both extremely low, which would make CIBC a conventionally cheap stock. However, its PEG ratio (which is like a P/E ratio but with growth factored in) is 4.08, which makes it considerably more expensive relative to growth than other Canadian banks.
Dividend income potential
By far the most attractive thing about CIBC’s stock is its high and growing dividend. At current prices, the stock yields 5.26%, which is higher than most Canadian bank stocks. Additionally, the bank’s management has been raising the payout. In Q3, CIBC raised its payout from $1.4 to $1.44. That’s only a modest 2.85% increase; however, it’s bigger than the corresponding increase in earnings, so those will need to accelerate if CIBC is going to keep raising its payout as much as it has been.
There’s no denying that CIBC has been underperforming relative to its peers in recent quarters. However, this tepid performance has had one positive effect: making the stock cheap and its yield high. When you can earn 5.26% off a stock in dividends alone, that can compensate for fairly weak price appreciation. Also, as slow as CIBC’s earnings growth is, it’s at least not declining, which means the dividend can probably be maintained.