Should CIBC (TSX:CM) Stock Be in Your RRSP in 2020?

CIBC appears cheap right now. Is the stock a buy?

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The big Canadian banks finished fiscal Q4 2019 with unimpressive results, which has investors who normally buy a bank stock for their self-directed RRSP wondering which one of the Big Five might be an attractive pick.

CIBC (TSX:CM)(NYSE:CM) currently has the lowest 12-month trailing price-to-earnings (PE) multiple. This means it is the cheapest pick among the largest Canadian banks based on that metric.

Cheap stocks, however, are not always good bets, as they tend to be out of favour for a reason.

In the case of CIBC, the company generally trades at a discount to its larger peers.

This is partly due to long memories, as investors have endured some serious pain as a result of big blunders by the bank. CIBC had to write down about $10 billion in bad bets on sub-prime mortgages during the financial crisis. It also got caught up in the Enron scandal, eventually resulting in an agreement to pay US$2.4 billion to settle lawsuits.

After the Great Recession, CIBC focused its efforts on driving growth in Canada, led by loans for home buyers. That strategy has proven to be very profitable as mortgage rates tanked and home prices rocketed higher. In the past couple of years, however, pundits have started to worry that CIBC has too many eggs in one basket.

Why?

The rise in interest rates through the second half of 2017 and 2018 started to pour some cold water on Canadian home buyers as mortgage rates began to squeeze out those who could previously sneak in under the wire.

Rising borrowing costs also risked setting off a wave of defaults in the event existing homeowners couldn’t afford to renew their mortgages.

Concerns of an impending housing crash might have pushed CIBC’s management to make a few big moves to diversify its revenue stream.

The company spent more than US$5 billion in the past two years on deals south of the border. The acquisition of Chicago-based PrivateBancorp was the largest.

Based on the 2019 numbers, it appears the acquisitions are serving their purpose. The U.S. operations accounted for 17% of adjusted net income in 2019 compared to 6% in 2016.

The diversification should provide a hedge against any potential downturn in Canada and investors could see additional deals in the United States in the coming years.

On the dividend front, CIBC offers investors an attractive payout. The board raised the distribution twice in 2019 and investors can pick up a yield that is above 5%. The distribution payout ratio is within the company’s 40-50% target and should be very safe even if the economy hits a rough patch.

Risks to watch

The Bank of Canada put rate hikes on hold in 2019 and the next move is expected to be to the downside. This is supporting the housing market and should remove some risk of a crash in house prices.

However, CIBC’s provisions for credit losses jumped from $870 million in fiscal 2018 to $1.29 billion in 2019, suggesting that companies and households are having trouble making their overall debt payments and could signal difficult times ahead.

In the event we have a recession and there is a wave of job losses, things could get ugly.

Should you buy?

CIBC isn’t without risk, but the stock is trading at such a low multiple that most of the concerns should be priced into the shares at this point.

Some volatility should be expected and we could see a better entry point in the coming months.

However, you get paid well to ride out the difficult times and the stock has solid upside potential in the event the economy regains its momentum. As a buy-and-hold RRSP pick, CIBC deserves to be on your radar.

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 Andrew Walker has no position in any stock mentioned.

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