Canadian Western Bank (TSX: CWB) is a mid-cap TSX bank that offers shareholders a tasty dividend yield of 4.8%. In the last 20 years, CWB stock has returned 160% to shareholders. However, after adjusting for dividends, cumulative returns are much higher at 352%.
However, CWB has trailed the TSX index, which has gained 378% since March 2004. Additionally, CWB has failed to outpace the big Canadian banks, such as Royal Bank of Canada, Toronto-Dominion Bank, National Bank of Canada, and Canadian Imperial Bank of Commerce, which have returned 802%, 630%, 1,003%, and 410%, respectively.
As past returns don’t matter much, let’s see if Canadian Western Bank can deliver outsized gains to shareholders in 2024 and beyond.
Is CWB stock a good buy right now?
Rising interest rates in the last two years have led to a tepid lending environment. Canadian banks have to wrestle with slowing demand for loans and higher delinquency rates, which negatively impact sales and profit margins.
Due to these macro headwinds, Canadian Western Bank stock is down over 35% from all-time highs, allowing you to buy the dip.
In the fiscal first quarter (Q1) of 2024, Canadian Western Bank increased net income by 14% sequentially due to lower non-interest expenses. However, compared to the year-ago period, adjusted earnings per share fell by $0.01 to $0.93 as lower non-interest expenses were offset by an increase in provision for credit losses.
Despite an uncertain macro environment, Canadian Western Bank increased net interest income by 7% year over year due to an eight basis point increase in net interest margins and annual loan growth of 1%. The increase in net interest margin reflected the benefit of increased yields on fixed-term assets from higher rates that offset the increase in deposit costs.
Is CWB stock undervalued?
Analysts tracking Canadian Western Bank expect adjusted earnings per share to expand from $3.58 per share in fiscal 2023 to $3.64 per share in fiscal 2024 and $3.93 per share in fiscal 2025. So, priced at 7.7 times forward earnings, CWB stock is very cheap, given that adjusted earnings are forecast to rise by 10% in the next two fiscal years.
The steady expansion of its earnings base should translate to higher dividends for shareholders. In Q1, CWB reported a free cash flow of $477 million and paid shareholders a quarterly dividend of $0.34 per share, reflecting a payout of $33 million. It suggests CWB has a payout ratio of less than 10%, providing it with enough flexibility to invest in growth projects and target accretive acquisitions.
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A low payout ratio provides CWB the room to raise dividends. Canadian Western Bank has more than doubled its dividends in the last 10 years, enhancing the effective yield significantly.
What is the target price for CWB stock?
Its cheap valuation and high dividend make Canadian Western Bank a top investment choice right now. Out of the 13 analysts tracking CWB stock, four recommend “buy” and nine recommend “hold.” The average target price for the TSX bank stock is $33.91, indicating an upside potential of 21.6% from current levels. After adjusting for dividends, total returns will be closer to 26%.
