We’ve all been told that now is the time to buy, buy, buy. Stocks are still undervalued thanks to the recent market crash, leaving plenty of deals to make quick returns. But there are a few problems with this theory, as is the case with the Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), better known as CIBC.
The first problem is a broad one. Analysts believe that the last market crash is only the first of a few over the next year, or even years. With the pandemic continuing, earnings reports will continue to drop.
Those results will mean businesses will lay off employees, or even close up all together, which should lead to further crashes as earnings reports come in.
While banking stocks are considered safe by most, especially if you’re holding long term, right now is a tricky time. The market crash already sent the Big Six Banks tanking, and now there’s the housing crisis to consider.
Housing sales fell 57% in April across Canada, which should only drop further as the COVID-19 pandemic continues. No bank will feel this more than CIBC.
The dud
In the short term, CIBC will be hit hard by the current market situation. The bank is the most exposed to the Canadian housing market, so as housing sales continue to drop, so too should its returns. But it’s not just housing.
The bank also has lots of exposure to Canadian energy. The oil and gas glut is still going strong and continues to fall across the markets within the energy sector, leaving CIBC especially at risk of suffering losses.
With the economy slowing, CIBC will also have trouble achieving loan growth. This holds true for all the Big Six Banks, but for CIBC what’s really difficult is it doesn’t have as much U.S. expansion as the other banks. As the U.S. should see a turnaround before Canada, that exposure will help the other banks — and keep CIBC behind.
The deal
CIBC could also be a huge deal. The bank still trades under fair value as of writing, and the points I’ve made aren’t long-term truths. Oil and gas will rebound. The housing market will rebound. Loans will come back in again, and CIBC will be strong once more.
That said, of course it could definitely use some more expansion into the U.S. and elsewhere to become the top bank in Canada. Right now it holds a solid fifth place by assets. But buying on the cheap means you’ll still see a rebound when the areas its invested in come around.
The best part of the deal, however, is the bank’s dividend. Right now it offers by far the largest dividend of any of the Big Six Banks, at $5.84, which means an investment of $10,000 would bring in $613.20 per year. By comparison, before the crash, that same investment would bring in about $500.
Bottom line
It’s a flip of the coin on this one, depending what you’re looking for. It’s always good to have dividends when the economy is down, making CIBC a great choice. While it’s not my first choice among the Big Six Banks, it certainly is if all I’m looking for are strong dividends for years.
However, if you’re looking for significant gains in the next few years alone, CIBC may not be for you. You’re probably better going with one of the top Canadian banks with more international exposure.
