Investors tend to add bank stocks to their portfolios for a wide range of reasons. For one, financial institutions generally spit off a tremendous amount of cash flow and return a great deal of capital to shareholders in the form of dividends. The two companies I’m going to discuss today certainly are dividend stocks to consider in their own right, but that’s not why I’m highlighting these particular banks.
Rather, these companies are among the most undervalued in the Canadian banking sector, at least in my view. Here’s why that’s the case, and why investors may want to consider these companies right now.
National Bank of Canada
National Bank of Canada (TSX:NA) is the sixth largest bank in Canada, often overlooked for the bigger banks such as RBC and TD. Its focus is mainly on Quebec, though lately, it has expanded its footprint across Canada and internationally. National Bank has steadily increased its revenue and earnings despite the economic challenges it faces.
Over the years, the impetus to provide leading performance has been supported by prudent lending practices, efficient cost management, and a diversified business model. The organization has maintained a healthy balance sheet with a low loan default rate, helping it ride over economic challenges better than other market groups.
National Bank has invested heavily in digital banking, greatly boosted customer engagement, and reduced operational expenses. The bank has launched multiple innovative digital tools to assist customers and ensure safer transactions. With the novelty of technology, National Bank has managed to take an edge over competitors in attracting younger clients and customer loyalty.
Although National Bank still bases its operations more prominently in Quebec, the company has been pushing its presence further across other regions in Canada and abroad. International expansion into more fast-growing economies could give more upside for revenue, especially as the bank continues to diversify its source of revenues from the relatively more mature Quebec market.
At just 13 times earnings and with a dividend yield of 3.3% (and one of the best growth rates in this space), I think this is a Canadian bank stock to consider right now.
Canadian Imperial Bank of Commerce
Canadian Imperial Bank of Commerce (TSX:CM) is one of the “Big Five” banks in Canada and has a long history in the country. It is most famous for its retail banking and has made investments in the United States. In addition, CIBC has made enormous investments in digital innovations that further enhance the efficiency of its operations while bringing a better customer experience.
One of CIBC’s strategic moves during the last two years must have been an effort to extend itself into the U.S. The strategy was incorporated into an effort to deconcentrate CIBC away from Canadian dependency and give it a higher level of exposure to a much larger and diversified market.
It maintains one of the highest dividend yield histories among the major Canadian banks, with a regular yield normally over 4%. It is a fair attraction for income-oriented investors, reinforced by the financial solidity. Furthermore, CIBC holds an excellent dividend-paying history, which constitute a reliable source of income from earnings for income-seeking investors.
Like National Bank, CIBC has also focused progressively on investing in digital banking. The bank aims to improve efficiency and customer engagement across service segments. From this viewpoint, digital transformation in the case of CIBC has improved its operational processes, curtailed costs, and enhanced client experience.
Currently, CIBC trades at less than 13 times earnings and has a dividend yield above 4%. For those looking to lock in a top stock with a decent yield, this is a great option in my book.
