Canadian banks are ideal anchor investments for Canadian portfolios. They have an impressive history of dividend growth and capital gains. Simply put, they’ve stood the test of time and they’ve created shareholder value. Here are two bank stocks to buy today, as they’re currently offering juicy dividend yields of over 6%.
CIBC stock is yielding 6.02%
Canadian Imperial Bank of Commerce (TSX:CM) is Canada’s fifth-largest bank, and it’s undervalued and offering a generous yield of 6.02%. There are certainly reasons for this, but that doesn’t change the fact that this is a great opportunity. The reasons include the fact that CIBC’s profitability metrics are below its peer group, and its margins continue to lag. For example, CIBC’s profit margin is a full eight percentage points lower than the group. Also, its return on equity (ROE) is a full four percentage points lower than the group.
So, it should come as no surprise then to hear that the bank lacks the confidence of investors, as it seems to perpetually have to prove itself. Today, its franchise is heavily weighted toward Canada, although its U.S. operations contribute over 20% to earnings. Loan growth is slowing, delinquencies are rising, and the Canadian real estate market is shaky at best.
It bears mentioning that CIBC has made great strides in improving its business in the last few years. This all came together with its record revenue growth in 2021. This was backed by some gains in market share. Also, its investment in technology has paid off in the form rising revenue as well as reduced costs.
So, despite CIBC’s shortcomings and challenges, there are some bright spots. For example, the following graph shows that CIBC’s stock price has been a strong performer over the long term.
Also, the market has ways of compensating investors for this extra risk. For CIBC, this comes in the form of a higher dividend yield. Canadian banks are pretty well sheltered due to government regulations, so I don’t think there’s a material risk to CIBC. Yet the extra yield that we can get from owning the stock is quite attractive. Thus, I think CIBC’s stock price is attractive and it’s a good risk/reward trade-off here.
Bank of Nova Scotia: The bank stock with international exposure
Bank of Nova Scotia (TSX:BNS) is an $80 billion Canadian bank with the largest international exposure among the group. In fact, roughly 20% of its earnings comes from international banking. Obviously, these earnings have a different risk/reward profile than traditional North American earnings.
Today, Bank of Nova Scotia (BNS) stock is yielding a generous 6.2% and its valuation is well below its banking peer group. Yet its profitability metrics are quite strong. For example, BNS’s profit margin of 29.37% is slightly higher than the group average.
It’s been rough for the bank and for BNS stock. In recent years, there have been major write-downs. These write-downs included losses from its operations in Argentina as well as a recent restructuring charge taken in 2021. While the risks that come with the bank’s international presence is higher, the growth from these parts of the world should also be higher.
But this is not always the case. And the bank has taken action to rebalance the risk/reward profile of its assets. In response to changing market dynamics, the bank dramatically reduced its risk profile recently. This was done by exiting the riskier international markets, such as Egypt and Turkey. Instead, the bank is focusing on Latin American countries — countries like Mexico, which has a growing middle class and banking penetration of only 35%.
At times, the relative risks of these international markets can be too high, but at other times — like today — this diversification is exactly what’s needed. Canada is a really strong banking market, but the looming economic risks will likely slash growth rates in the coming years. For example, mortgages, which have been a big driver of growth for the banking sector, are at risk in Canada, as rates have risen.
