Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) eventually opted to penetrate the U.S. wealth management business, starting with the acquisition less than five years ago of Atlantic Trust Group LLC.

It then bought in June 2017 the Chicago-based wealth management company PrivateBancorp and its subsidiary The PrivateBank. Rebranded the following September as CIBC Private Wealth Management, the U.S. business unit had garnered assets of US$52 billion by June through its 36 outlets in 19 cities. Canada’s fifth-largest bank now wants to grow the segment twofold over the next four years to $100 billion in assets under management.

Chief Executive Victor Dodig said earlier this month in a televised interview that “CIBC wants to be the bank of choice for Canadian companies doing business in the U.S.” Yet future capital and trade flows between the two nations could decline after the Trump administration struck a trade deal with Mexico before its northern partner. Negotiations continue as the three-nation NAFTA deal is set to be drastically overhauled.

Elusive U.S.-Canada trade deal

The Toronto-based lender forked out US$5 billion for PrivateBancorp, having agreed in July 2017 to pay more than US$180 million for Chicago-based private wealth management Geneva Advisors in a bet on the U.S. market. The company believes the acquisitions have met or exceeded earnings expectations over the last four quarters, helped by Trump’s tax cuts.

However, commercial banking and wealth management in the U.S. contributed a mere $200 million to the consolidated $4.7 billion in earnings last year, with PrivateBancorp being on the books for less than six months.

Management says the bank will grow organically in the future, although it might consider looking into acquisitions of less than US$400 million in the wealth management business. Through its 11 million clients, the 150-year-old bank seeks to generate growth of about 10% in deposits as well as loans. Personal and small business banking in Canada accounted for more than half of earnings in 2017, bringing in $2.4 billion. Corporate banking and wealth management generated $1.1 billion, on par with the capital markets segment.

Dividends, interest rates

As profits jumped 10% last year, the board of directors has so far this year voted twice to raise dividends, although for less than 2.4%. With the $1.36-per-share fourth-quarter dividend declared on Aug. 23, the stock is yielding 4.4%.

There are many reasons to believe that the stock will break through the resistance of $123.99 touched on Jan. 5. In addition to the increasing dividend, the bank has also committed on May 31 to a 12-month, nine-million shares stock-buyback plan starting June 4. The program replaces the one that lapsed March 13 and, of which, none of the eight million shares were bought back and cancelled.

On the economic front, the current environment seems to be conducive for bank stocks, with the central bank set to shift to a more restrictive monetary policy. CIBC has already raised its prime lending rate twice this year, adding 25 bps on Jan. 17 to the interest it charges the least-risky clients at 3.45%, before raising the benchmark again to 3.70% on July 11.

Next week, the shares will trade without the right to the dividend on Sept. 27. Will CIBC beat the Street when it reports on Nov. 29 earnings for the fourth-quarter ending Oct. 31? Based on its track record compiled by Zacks Investment Research of 11 consecutive beats, one cannot rule it out.

The post CIBC’S (TSX:CM) $6.6bn Bank Bet Faces Headwinds as Mexico Supersedes Canada appeared first on The Motley Fool Canada.

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Growth-stock investors who’d bought into Kinder Morgan Canada’s (TSX:KML) IPO last year are probably wishing they could turn back the hands of time. I know that’s too easy a statement to make ex post.

But in its 15-month trading history, the shares broke above the $18 mark only twice — briefly for about a week early in August 2017 and then for four more weeks starting Feb. 13. Texas-based parent Kinder Morgan Inc. sold on May 30, 2017, a 30% equity holding at $17 apiece. The stock did, however, return $0.65 in dividends over the last four quarters, yielding 3.9%. That compares with TransCanada’s 4.9% and Enbridge’s 6%.

On Aug. 31, when shareholders approved the sale of the 1,150-kilometre Edmonton-to-Burnaby Trans Mountain Pipeline to the government for $4.5 billion, the shares touched a four-month high of $17.18. Sale proceeds will help Kinder reduce leverage, as the company expects to end the year with little or no debt on its books.

Kinder makes money in western Canada from two segments: energy transportation pipelines ($201 million of the aggregate $388 million in 2017 EBITDA) and storage terminals. The company now says it expects $50 million in adjusted EBITDA in Q4 2018, the first full quarter without Trans Mountain earnings.

So, why would a company want to divest its main asset?

For starters, expansion of the oil sands pipeline from 300,000 bpd to 890,000 bpd, which is  supposed to allow Alberta’s crude access to markets other than the U.S., has been dogged for years by regulatory and environmental hurdles. So, the company gave up on the project to contain legal risks and reduce uncertainties.

On the same day shareholders approved the deal, a federal court quashed Ottawa’s November 2016 approval to expand the pipeline, which is expected to cost $7.4 billion.

Capital gains from the sale are expected to trickle down to shareholders. About $1.2 billion, or $11.40 per share, will be returned to investors on Jan. 3. Because stocks tend to decline by the distributed amount on the day dividends are distributed, Kinder said it will do a reverse stock-split of one-for-three to restore the stock’s trading range. Going forward, the annual dividend will remain unchanged at $0.65 per share.

To me, asset sales, capital reduction, and downsizing suggest a company that’s been caught off guard, cornered, and is seeking a way out. Actually, that wouldn’t be such a bad idea if Kinder’s remaining assets are a perfect fit for a buyer out there that’s willing to pay a premium for them.

One thing is for sure: Canada will, sooner or later, expand the pipeline, as the nation cannot carry on selling its crude to the U.S. at a discount to market prices of more than US$30 per barrel. While Kinder may seem to have lacked patience, companies set to benefit from the prospective infrastructure include not only exploration and production players like Canadian Natural Resources and Encana, but also Kinder’s competitors positioned in the midstream segment such as Enbridge and TransCanada.

The post Pipeline Sale Fails to Impress Investors as Kinder (TSX:KML) Shares Dip Below IPO Price appeared first on The Motley Fool Canada.

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While the U.S. president says he’s the main force behind the rally in U.S. stocks because of his “America first” policy, he’s been accused of trampling on the shared economic interests of the nation’s closest allies. Heck, he’s even struck a free-trade deal with Mexico before Canada as the 24-year-old, three-nation NAFTA agreement looks increasingly doomed.

Trump the protectionist is not only imposing unilateral tariffs on trade partners, but he’s also accusing some of America’s most reliable allies of currency manipulation. If trade wars are bad for business, they’re even worse for companies that have production facilities across the globe, generating sales in a multitude of currencies and sourcing materials from five continents.

Geographical diversification vs global co.

That’s why Magna’s stock has been battered. Less than US$7 billion of its aggregate US$39 billion revenue last year was generated in Canada, with roughly US$13 billion of shipments to U.S. manufacturers—mainly the Big Three automakers—and about US$10 billion of European sales. The company, which employs 168,000 people, says it’s “one of the largest automotive suppliers with 335 manufacturing operations and 96 product development, engineering and sales centers in 28 countries.”

So, does the stock encompass any opportunities for value investors? First off, that June 16 level of $86.14 was an all-time high, so one could make the case for the stock getting ahead of itself. The stock on Friday was trading at 7.82 times last year’s earnings. Magna’s U.S. competitor Delphi Technologies has a trailing P/E of 7.25 times. In Europe, the likes of Valeo and Visteon Corp. are exchanged at 10.9 and 17.04 times, respectively.

At $68.62 a share last Friday, I’d wait a bit before getting in on the action. If the shares dip an additional 34% below the level touched on July 2, 2016, of $45.32, it would break a support that will send the stock sinking to a four-and-a-half-year low. The situation probably won’t deteriorate that much, though. However, I’d be looking to place a limit order of $55.

To be sure, Magna did slash on Aug. 8 its full-year earnings guidance by US$100 million to a range of US$2.3-2.5 billion, citing not only protectionism, but also the strong dollar and headwinds at its transmission JV.

Earnings, buybacks going strong

At the other end of the spectrum, what the Aurora-based company has going for it is its product and geographic diversification combined with management’s aggressive stock-repurchase plan.

While the manufacturer of products ranging from powertrains and lightings to seating systems ships goods to the four corners of the globe, it also has plants in many countries. In management textbooks, the strategy is referred to as “operational hedge,” meaning that revenue denominated in various currencies is partially matched by production expenses in different countries. But does that mean that global companies stand to lose the least in downturns because of their diversification?

So far, the team in charge headed by Don Walker has consistently beaten market growth, with the 7% increase in sales last year outpacing the 2% expansion in global light vehicle production. I think there are plenty of reasons to believe this trend will continue. Magna reached a deal in June with China’s BJEV to build an electric vehicles plant in one of the world’s fastest-growing regions.

And let’s not forget about the company’s ambitious stock-buyback program, which has significantly contributed to boosting share prices. Of the US$1.67 billion returned to shareholders last year, only US$400 million were dividends as dilution decreased, boosting earnings per share 14% year on year to US$5.96 after net income climbed to US$2.21 billion.

The pace seems to be accelerating in 2018, with a payout of US$233 million in the six months through June on earnings of US$1.29 billion, and buybacks of 13.5 million shares for a US$832 million consideration.

The post Trade War Talk Weighs on Magna (TSX:MG): Should You Buy the Stock? appeared first on The Motley Fool Canada.

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