The economic outlook has been less than ideal since 2022 with relatively high inflation and interest rates. This has caused Canadian bank stocks like Bank of Montreal (TSX:BMO) and Canadian Imperial Bank of Commerce (TSX:CM) to be depressed. They both recently reported their fiscal third-quarter results. Let’s compare the two dividend stocks to see which is the better buy today.
Instead of focusing on the quarterly results, let’s take a look at the bigger picture via the fiscal year-to-date results. Bank of Montreal reported a revenue decline of 1.3% to $22.8 billion, provision for credit losses (PCL) of $1.7 billion, and non-interest expenses jumping 37% to $15.6 billion, leading to net income decline of 70% to $2,760 million. The return on equity (ROE) was 5.1% versus 21.1% a year ago. These numbers are based on generally accepted accounting principles (GAAP) standards.
To compare, Canadian Imperial Bank of Commerce reported revenue growth of 6.3% to $17.5 billion, PCL of $1.5 billion, and non-interest expenses jumped 17% to $10.9 billion. Ultimately, net income came in 30% lower at $3,550 million. The ROE was 9.7% versus 15.3% a year ago.
The above results suggest that BMO’s business performance could be more unpredictable through an economic cycle due to its unique business mix but could deliver more favourable results in an improving economy.
The adjusted results generally provide a clearer picture on the normal earnings power of a company. However, they are not useful for comparing between peers. BMO’s fiscal year-to-date adjusted earnings per share (EPS) declined 12.5% year over year to $8.93, while the adjusted ROE was 12.6% versus 16.0% a year ago. CIBC’s fiscal year-to-date adjusted EPS declined 9.0% year over year to $5.15, while the adjusted ROE was 13.8% versus 16.0% a year ago.
Valuation, growth, and total returns potential
Earnings growth is the key driver for long-term price appreciation, which can be supported by valuation expansion given the relatively cheap valuations of the bank stocks versus their historical levels.
BMO and CIBC Price to Book Value data by YCharts
In the past 10 years, BMO increased its adjusted EPS by 8.2%. It targets EPS growth of 7-10% over the medium term. At about $115 per share at writing, the bank stock trades at about 9.6 times earnings, a discount of roughly 13% from its normal valuation. Assuming an EPS growth rate of 8%, the stock would deliver total returns of about 13-17% over the next five years.
In the past 10 years, CIBC increased its adjusted EPS by 5.7%. It targets EPS growth of 7-10% over the next three to five years. At under $54 per share at writing, the bank stock trades at about 7.9 times earnings, a discount of roughly 20% from its normal valuation. Assuming an EPS growth rate of 5%, the stock would deliver total returns of about 11-16% over the next five years.
BMO and CIBC Total Return Level data by YCharts
Although CIBC offers a higher dividend yield of 6.5% versus BMO’s 5.1%, BMO stock demonstrated its ability to deliver higher total returns. If history is telling, investors should take a position in BMO, unless they need more current income.