Ruth Saldanha: Hi, I’m Ruth Saldanha with Morningstar. Dividend stocks have long been favourites for Canadian investors, mainly because companies that consistently grow dividends typically maintain competitive advantages and healthy balance sheets. Because of these features, dividend stocks tend to be attractive to investors who are willing to pay up for dependable dividend growth, and so oftentimes, these stocks trade at or above what they’re actually worth. But with bond yields higher than they have been in a while, investors have alternatives to equities, and as a result, we are seeing are some dividend stocks that are very cheap right now.
A High Dividend Paying Canadian Stock That is Cheap Right Now
Today, let’s look at one stock that is trading at a 25% discount to Morningstar’s fair value estimate, has a forward dividend yield of 7.14%, and boasts a narrow economic moat – the Canadian Imperial Bank of Commerce.
CIBC – ticker CM – is the fifth-largest bank in Canada by assets and one of six that collectively hold almost 90% of the nation's banking deposits. All the Canadian banks have been down for the quarter or so, but CIBC has been down the most.
Morningstar analyst Eric Compton says CIBC has had a history of not managing risk well in the past. Given that history, plus the current rising rate and increasingly unaffordable mortgage payments in Canada, he thinks the market is going to be spooked by any bank showing credit weakness, and especially will not be thrilled if it’s CIBC, which has the highest relative exposure to mortgages among the group.
Risks to the CIBC Stock
Compton points out that among its peers, CIBC has the highest concentration of uninsured Canadian mortgages relative to capital, meaning that a downturn in Canada could affect CIBC more than other Canadian banks. However, this isn’t an existential threat – just a threat to future growth.
He also thinks that CIBC may struggle a bit more than peers in 2023, mainly because of a lack of positive catalysts - It's hard to tell what catalyst will emerge for CIBC specifically that will lead to improved results over the short to medium term.
For dividend investors though, the dividend looks fine to Compton. Though the payout ratio is getting a bit higher, in the 65% range, it’s not unsustainable. For now, the stock is trading at a 25% discount to Compton’s $65 fair value estimate.
CIBC Stock Bulls Say
- CIBC has significantly improved multiple measures of core banking performance, such as customer perception surveys, promoter scores, and products per a customer. The bank is now operating at a higher level.
- CIBC is more Canada-focused than most of its peers. Its consolidated returns on tangible equity remain some of the highest in the industry.
- The government has kept the Canadian market attractive by placing barriers to entry, protecting high returns, and the government will continue to attempt to keep the housing market under control, limiting any future hits to profitability.
CIBC Stock Bears Say
- CIBC is the most exposed to a downturn in the Canadian housing market, and the Canadian housing market is under stress once again, increasing overall risks for the economy and the banking system.
- CIBC is investing a lot in multiple business lines, with expenses running higher than peers. The bank is counting on good execution and share gains, which may not happen.
- CIBC has a history of self-inflicted wounds and has not historically been one of the safer Canadian banking franchises. The bank's latest increase in credit costs and the current economic backdrop are not helping.
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