Contents
CIBC (CM) released Q2 2019 results May 22, 2019 which fell short of analyst estimates.
Summary
- CM’s Q2 2019 results released May 22nd fell short of analyst expectations.
- Results were negatively impacted by real estate market conditions in key urban areas (Toronto and Vancouver).
- YoY EPS growth will most likely be “relatively flat” for FY2019 due to mortgage market conditions to date and the bank’s plans to keep investing in its business.
- Senior management continues to be confident that it will be able to deliver on all of its financial targets, including the 5% - 10% medium-term EPS growth target.
- With a highly probable $0.03/share dividend increase in August 2019 and February 2020 I view CM’s forward dividend yield as being in excess of 5.3%.
- CM’s attractive valuation and appealing dividend yield has prompted me to acquire additional shares.
Introduction
During the December / January market swoon I acquired shares in high quality companies where I was of the opinion valuation had reached attractive levels. One such company was The Canadian Imperial Bank of Commerce (CM).
Subsequent to publishing my December 3, 2018 article in which I provided a high level overview of the bank and looked at FY2018 results I initiated a position in the FFJ Portfolio; I have owned CM shares in undisclosed accounts for well over a decade.
In recent months I have passed on acquiring shares in just about every company I have analyzed because I have viewed valuation levels as being somewhat elevated. Just recently, however, I wrote this article in which I indicated that I would be increasing my stake in Becton, Dickinson and Company (BDX).
I can now add CM to the very brief list of companies whose valuation has become sufficiently appealing to warrant share purchases; I acquired CM shares for undisclosed accounts and the FFJ Portfolio on May 22nd.
Q2 and YTD2019 Results
Referring back to my December 3, 2018 CM article I wrote:
‘My primary concern with CM at this stage is that it has the highest concentration of the Big 5 in Canadian retail loan exposure and in particular uninsured Canadian mortgages. I do not envision a housing crisis in Canada like that in the US in 2007 but if Canada encounters an economic downturn I think CM might be harder hit than its peers. Despite this, I am confident CM will be able to effectively manage its domestic mortgage portfolio so it does not incur significant losses.’
Given CM’s heavy exposure to the Toronto and Vancouver real estate markets it does not surprise me that CM’s Q2 adjusted EPS of $2.97 came in a bit shy of analyst estimates.
CM’s Q2 Report to Shareholders can be found here (includes CM’s Economic Outlook on page 10 of 67) and the accompanying detailed investor presentation can be found here.
Its Q2 2019 Investor fact Sheet can be found here.
The following provides some color to the recently released results.
CM’s head of personal and small business banking for Canada has indicated that a big part of the bank’s strategy over the past few years has been aimed at large urban centres, where booming housing and mortgage markets helped deliver considerable growth for the bank.
A real estate slowdown, however, was widely anticipated following interest-rate increases and new measures from governments and regulators, including stress tests for loans and foreign-buyer taxes. In addition, The Bank of Canada’s recent financial system review found that housing resales and price growth had “slowed significantly” in Toronto and Vancouver over the past two years.
Although the bank has witnessed some pick-up in mortgage activity across Canada, it has not been significant and its Canadian real estate secured lending portfolio declined 0.9% YoY to $223B as at the end of Q2.
While there has been an increase in activity through “third-party” channels, this is a channel through which CIBC no longer actively participates. In addition, there has been increased competition among lenders.
CM has specifically stated that it remains competitive but given its discipline on pricing it will not be pursuing mortgages at any cost. As such, if markets continue to perform as they have, CM has indicated it will likely take longer to converge to industry mortgage growth levels.
On the Q2 earnings call CM’s President and CEO indicated that given mortgage market conditions to date and the bank’s plans to keep investing in its business, YoY EPS growth will most likely be ‘relatively flat’ for FY2019. Over the long-term, however, the execution of CM’s strategy is expected to result in CM delivering on all of its financial targets, including the 5% - 10% medium-term EPS growth target.
In CM’s key Canadian personal and small business unit there was a ~2% drop in its earnings to $0.57B. Provision for credit losses for the unit rose $26 million from Q2 2018 to $0.229B. This was primarily due to an increase in allowance on performing loans, reflective of the impact of certain unfavourable changes to the bank’s economic outlook, as well as a model parameter update in the current quarter.
While CM’s Q2 results are disappointing and Canada certainly has its challenges, readers unfamiliar with the Canadian banking system need to consider that the major Canadian banks closely manage their risks and that they are extremely conservative relative to many of their international peers.
Credit Ratings and Common Equity Tier 1 (CET1) Ratio
CM's current ratings and outlook from Moody’s, S&P Global, Fitch, and DBRS meet my risk tolerance level.
I highly encourage you to review CM’s Q1 2019 Fixed Income Investors presentation if you wish to obtain more information on the following subject matter:
- CM’s Debt Programmes
- Canadian Economy & Consumer Profile
- Canadian Imperial Bank of Commerce (“CIBC”) Overview
- Canadian Bail-in Regime Update
- Canadian Mortgage Market
Valuation
Following the release of Q2 2019 earnings on May 22, 2019, CM’s share price retraced $4.91 (4.38%) to $107.21.
We know that CM’s medium-term EPS growth target is 5% - 10% and in FY2018 CM reported diluted EPS of $11.65 ($11.24 in FY2017) and adjusted diluted EPS of $12.21 ($11.11 in FY2017). This represented diluted EPS growth of ~3.65% and adjusted diluted EPS growth of ~10%.
If we increase CM’s FY2018 $11.65 diluted EPS by 5% - 10% we get a FY2019 target range of ~$12.23 - ~$12.82. Diluted EPS for the first half of FY2019 amounted to $5.55 meaning CM will need to generate ~$6.68 in the second half of FY2019 just to reach the lower level of the FY2019 target range.
Following the same process with adjusted diluted EPS, a 5% - 10% increase in FY2018’s adjusted diluted EPS of $12.21 gives us a FY2019 target range of ~$12.82 - ~$13.43. Adjusted diluted EPS for the first half of FY2019 was $5.98 meaning CM needs to generate ~$6.84 in the second half of FY2019 just to reach the lower level of the FY2019 target range.
Reaching the target ranges will certainly be a challenge but let’s give CM the benefit of the doubt that the lower level of each range will be attained.
With CM currently trading at $107.21 we get a forward diluted PE of ~8.77 using ~$12.23 in diluted EPS. The forward adjusted diluted PE is ~8.36 using ~$12.82 in adjusted diluted EPS.
In my December 3, 2018 article I indicated that CM’s historical PE level for 2011 – 2017 was 10.1, 10.2, 11.0, 12.7, 10.3, 10.2, and 10.9. Furthermore, at the time of that article, CM was trading at ~$110.83. Using the $12.23 projected diluted EPS I arrived at a forward diluted PE of ~9.06.
When I compare CM’s current valuation with historical levels I view shares as currently attractively valued.
Dividends
CM’s dividend history can be found here.
On May 22nd, CM announced the distribution of its second $1.40 quarterly dividend on July 29th to shareholders of record at the close of business on June 28th.
Stock screeners reflect CM’s annual dividend as being $5.60 ($1.40 x 4) and the current dividend yield as 5.22% (using the current $107.21 share price).
Investors should bear in mind that CM typically increases its quarterly dividend twice a year. Looking at the past several dividend increases I am of the opinion that we can realistically expect a $0.03/share increase to be declared toward the end of August and again in February 2020.
($1.40 + $1.43+$1.43+$1.46) = $5.72/$107.21
On this basis I am looking at my CM investment from the perspective that the forward dividend yield is ~5.34%.
Final Thoughts
Immediately following the pullback in CM’s share price after the release of Q2 results I acquired additional CM shares for the FFJ Portfolio and for accounts for which I do not disclose details.
While a further drop in CM’s share price is not out of the realm of possibility I view CM’s current valuation and current dividend yield as attractive.
Many investors seeking income invest in REITs (Real Estate Investment Trusts). In my opinion, investors would be well served by investing in CM as opposed to REITs for the following key reasons:
- REIT distributions typically include a return of capital while CM’s dividend is a return on capital;
- REITs often issue new units thus diluting an investor’s ownership interest. CM’s share count generally declines with the exception of recent years as a result of shares issued to finance the acquisition of PrivateBancorp in 2017 (rebranded to CIBC Bank USA);
- CM’s credit ratings are far superior to those of the vast majority of REITs;
- CM’s dividend growth potential is superior to that of REITs.
I view CM as an appropriate investment for investors primarily seeking income with capital gains potential being of secondary importance.
I hope you enjoyed this post and I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long CM.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
