Dividend Analysis - Canadian Imperial Bank of Commerce (TSE:CM)
13 September 2007Dividends Matter reader Louis suggested that we have a look at the Canadian Imperial Bank of Commerce. People are really loving their financials these days! This stock trades on both the NYSE and the TSE under the symbol CM.
Let’s see how it stacks up against the other Canadian banks that are members of our portfolio of superior dividend yielding stocks (Bank of Nova Scotia, Bank of Montreal and Royal Bank).
Note: The analysis will be performed using the Canadian data.
Company Profile:
From Yahoo Finance
Canadian Imperial Bank of Commerce (CIBC), together with its subsidiaries, provides various financial products and services to corporate, government, and institutional clients in North America. It operates in two segments, Retail Markets and World Markets. The Retail Markets segment engages in the retail and wealth management businesses. It provides various financial products and services to individual and small business clients, as well as investment management services to retail and institutional clients. This segment also offers personal and small business banking, imperial services, retail brokerage, cards, mortgages and personal lending, and asset management services, as well as deposits products, including non-interest-bearing deposits and interest-bearing deposits. The World Markets segment provides integrated credit and capital markets products, investment banking, and merchant banking services to wholesale and corporate clients in North America. It offers capital markets and treasury, investment banking and credit products, commercial banking, and merchant banking services.
Market capitalization is $31.95B.
Company Fundamentals:
As usual, we start with a look at management’s performance. The return on invested capital was 14.77% last year. The 5 year average ROIC was 8.9%. Although last year’s ROIC was decent, the 5 year average is well below the ROIC delivered by the management teams at BNS, BMO and RY.
Return on equity has been increasing over the last 10 years. The 10 year average ROE is 16.13%. The 5 year average ROE is 17.87%. And the last 2 years have produced ROE’s of 23.8% and 24.77% respectively.
Now, the equity growth rate was surprising. In fact, it has been almost non-existent! The 9 year equity growth rate is 3.51%. If that seems bad, the 5 year rate is a mere 1.48%! Last year’s equity growth rate was a healthy 18.36%. This stock has suffered through 2 negative equity growth rate years in 2002 and especially in 2005.
Now, what is even more surprising is the incredible earnings per share growth rates. The 9 year rate is 10.22%. The 5 year rate increases to 19.44%. The 3 year rate stays steady at 19.65% and last year’s EPS growth rate was 23.19%. So a company with basically no equity growth rate has had very nice EPS growth rates. Something doesn’t compute here.
Sales growth rates have not been impressive either. In fact, the 9 year sales growth rate is negative at -0.4%. The 5 year rate remains negative at -0.15%. The 3 year rate finally comes above water at 6.12% and last year’s sales growth rate was 10.21%.
From these fundamentals, I would definitely stick with my other 3 banks.
Dividend Fundamentals:
The current dividend yield on CM is 3.24%. That is above the dividend yield available from the S&P/TSX Composite index. And it is comparable to the other banks.
The dividend growth rate has been decent over the last 10 years, but there were individual years where the dividend growth was below par. For example, in 1999, there was no increase. In 2003, the growth rate was a mere 2.5%. And in 2006, the growth rate was 3.76%.
However, over the long term, the 9 year dividend growth rate is a very healthy 11.61%. The 5 year rate is 15.59%. And the 3 year rate improves to 19.14%. However, last year’s dividend growth rate was a mere 3.76%.
The dividend payout ratio has bounced around quite a bit and was at 37.65% last year. Fairly conservative payout ratio.
Cash flow growth rates have been improving. The 9 year rate is 8.66%. The 5 year rate improves to 13.83%. The 3 year rate climbs to 16.3% and last year’s cash flow growth rate was 19.1%.
Valuation Models:
Let’s try and determine a fair price to pay for this stock.
Using the average high dividend yield method, I had a look at the last 10 years of dividend yields. The 10 year average high dividend yield is 4.13%. The 5 year average high dividend yield is 4.09%. Pretty consistent yields. If I demand the 5 year average high dividend yield, then my model price works out to $75.31. At the current price of $94.94, Mr. Market is demanding a premium of 26%.
Benjamin Graham would agree that Mr. Market is a bit too euphoric. The Graham number works out to $65.43 which means a premium of 45%.
For my discounted present value method, I had to ‘fudge’ the numbers. As my regular readers know, I like to estimate the future EPS growth rate by studying the historical equity growth rates. In this case, the 5 year equity growth rate is a mere 1.48%! Although analysts have forecast 10.2%, I will normally use the more conservative number of the two.
However, if I use the 1.48%, then the highest future P/E I could expect would be twice that or 2.96! Why would any investor want a P/E of 13 or 14 when the future EPS growth rate is so low? Obviously with a future EPS growth rate and future P/E that low, this stock is going to be extravagantly overpriced.
So, I decided to use the analysts estimate of 10.2% for my future EPS growth rate and the 10 year average P/E of 13.26. Alongside these numbers, I also assumed a dividend yield of 4.09% (from the 5 year average high dividend yield) and I estimated that the dividend would grow at 3.76% (last year’s dividend growth rate). I definitely should have assumed a higher dividend growth rate, but it won’t really make a difference in this calculation.
With these numbers, my model price worked out to $85.71 or a mere 10.77% premium. But of course, that doesn’t make sense since the most I can pay in order to get that 4.09% dividend yield is $75.31. As you can see, if I had had a higher dividend growth rate, this model price would have been higher and further from the 4.09% dividend yield that I demand.
Here is my dividend analysis of CM.
Here is the 1 year stock price chart:
Conclusion:
From my analysis, I would not include Canadian Imperial Bank of Commerce in a portfolio of superior dividend yielding stocks. There may have been 1 time events such as the Enron scandal that may have skewed the results. But the wonky fundamentals and the inconsistent dividend growth rates make this one just not worth the effort.
In the end, I feel that there are better alternatives out there in the Canadian banking sector.
Full disclosure: I do own shares in CM.
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on September 17th, 2007 at 11:47 am
[…] presents Dividend Analysis - Canadian Imperial Bank of Commerce (TSE:CM) posted at Dividends Matter, saying, “A look at CIBC. However, I feel there are better […]
on September 17th, 2007 at 11:50 pm
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