The big Canadian banks have delivered steady returns to long-term shareholders. Compared to their counterparts in the U.S., Canadian banks are relatively conservative, allowing them to maintain healthy financials even during economic downturns. This approach allowed TSX banks to pay and even increase dividend payouts during the Great Recession of 2008. Moreover, a highly regulated environment has enabled the big banks to benefit from entrenched positions due to high entry barriers.
In the last 20 years, Canadian Imperial Bank of Commerce (TSX:CM), or CIBC, has returned 138% to shareholders. However, after we adjust for dividend reinvestments, cumulative returns are closer to 525%. Comparatively, the TSX index has returned 408% in dividend-adjusted gains to investors since October 2004.
Valued at a market cap of $83 billion, CIBC pays shareholders an annual dividend of $3.60 per share, translating to a forward yield of 4.1%. Let’s see if the TSX bank stock remains a good investment right now.
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Is CIBC stock a good buy?
In the fiscal third quarter (Q3) of 2024 (ended in July), CIBC reported net income of $1.9 billion, or $1.93 per share. Its record earnings in the quarter were supported by resilient credit performance and strong liquidity positions. It ended Q3 with a common equity tier-one ratio of 13.3% and a liquidity coverage ratio of 126%, which is higher than peers. The company’s adjusted return on equity in Q3 improved to 14% due to momentum in core businesses, which enhances the overall return profile over time.
CIBC is among the largest banks in North America, adding 640,000 net new personal clients in the last 12 months. In the U.S., it is focusing on improving client engagement, resulting in above-market growth in deposits and commercial and industrial loans, improving the credit quality for its portfolio south of the border.
While tighter monetary policy has slowed demand for loans across verticals, multiple interest rate cuts in the next 12 months should improve the business environment for lending companies.
A strong equity market has helped CIBC grow its higher-margin wealth management business. Its assets under administration rose by 20% year over year as the bank continued to dominate the retail mutual fund segment in the country.
CIBC recently launched an investment-grade bond portfolio, which has already attracted net flows of $1.6 billion in fiscal Q3.
According to CIBC, its investments in customer relationship management technology are paying off with improving client net promoter scores and higher cross-business referral volumes from the wealth business in the U.S. Its capital markets sales in the U.S. were up 24% due to higher cross-business referral activity.
Is CIBC stock undervalued?
In fiscal Q3, CIBC increased its adjusted net income by 28% year over year. Its pre-provision, pre-tax income of $2.9 billion grew by 13%, while sales rose by 12% due to improved spread income and growth across fee-based businesses.
CIBC continues to manage expenses, and Bay Street expects its adjusted earnings to grow from $6.72 per share in fiscal 2023 to $7.52 per share in 2025. Priced at 11.7 times forward earnings, CIBC is fairly valued, given its strong earnings growth and a tasty dividend yield. Moreover, the company has raised its annual dividends by 7.6% over the last 27 years, enhancing the yield at cost significantly.
