CIBC (TSX:CM) surged more than 30% in recent weeks. Investors who missed the rally are wondering if CM stock is still undervalued and is good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
CIBC trades for close to $63 per share at the time of writing compared to $48 in late October. Despite the big move, the stock is still way off the $83 it reached in early 2022.
The strong rally has surprised many investors who thought weakness in Canadian banks stocks would continue into 2024, as high interest rates put more pressure on businesses and households with too much debt.
Bargain hunters are betting that the Bank of Canada and the U.S. Federal Reserve are done raising rates in their battle to get inflation under control. The concern in the markets up until the end of October was that additional rate increases could push the economy into a severe recession in 2024. Higher interest rates take time to work their way through the system, and while rates will likely remain at current levels through the first few months of 2024, there is now increasing expectation that the central banks will start to cut rates by the middle of 2024 to navigate a soft landing for the economy.
CIBC has a large Canadian residential mortgage portfolio relative to its size. Any indication that homeowners could get relief in 2024 would help reduce defaults and bankruptcies. CIBC increased its provision for loan losses (PCL) when it reported fiscal fourth-quarter (Q4) 2023 results, but the money it set aside is still very small compared to the overall loan book, so the loan portfolio on the whole remains in good shape.
CIBC has a solid capital cushion to ride out market volatility. The central banks are not out of the woods yet, and persistent inflation could force them to keep rates elevated through 2024. In November, inflation in Canada came in at 3.1%, which was unchanged from the previous month. The target is 2%, so there is still work to be done.
CIBC announced two dividend increases in 2023. This suggests the board doesn’t appear to be overly concerned about the profit outlook in 2024 or beyond. Investors who buy CM stock at the current level can get a 5.7% dividend yield.
Is CIBC still a buy?
The big surge in such a short period of time is a good reminder that it is important to take a long-term approach when investing in top dividend stocks. Investors who already own CM stock should probably continue to maintain the position.
New investors get paid well to wait out any additional turbulence. While the rally could potentially continue through the first part of next year, a pullback should be expected in the near term. With this in mind, it might make sense to take a half position at the current level and look to add to the holdings on the next dip.