Canadian Imperial Bank of Commerce (TSE:CM) (NYSE:CM), also known as CIBC, is one of the “Big Six” banks in Canada. CM stock has been falling recently, unlike some of its stronger peers, leaving it with a high 6.2% dividend yield and a low valuation. It even has a 9 out of 10 Smart Score rating, meaning it’s likely to outperform the market from here.
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CIBC’s Dividend History Will Impress You
Canadian bank stocks are generally known for their reliable dividends, and CIBC is no exception. The company hasn’t missed a dividend payment since 1868 — yes, 1868. In addition, it has grown its dividend at a 6.1% compound annual growth rate (CAGR) in the past 10 years and a 5.5% CAGR in the past five years. Since its dividend is already high at 6.2%, its dividend growth rate is respectable.
Also, CIBC only paid out about 48% of its earnings as dividends in the past 12 months (with a 49% five-year average payout ratio), meaning that its payout is safe and has plenty of room for growth if the company chooses to grow it. A company with a similar dividend track record and yield that you may also be interested in is Bank of Nova Scotia (TSE:BNS) (NYSE:BNS), which we wrote about here.
CM Stock is Undervalued: Here’s the Proof
To value CM stock, we will use the excess returns model, which is more appropriate for financial companies because they tend to have volatile free cash flows.
As a result, trying to create forecasts for them doesn’t work well. The excess returns model allows us to use historical numbers instead, which are tangible. There are a few steps to follow for this valuation method.
First, you calculate a company’s excess return, meaning the spread between its return on equity (ROE) and its cost of equity; a higher ROE than the cost of equity is a good thing. Next, you calculate its terminal value. Add them up, and you get your valuation. Here’s the formula:
- Excess Return = (Average ROE – Cost of Equity) x Book Value Per Share
- Terminal Value = Excess Return / (Cost of Equity – Growth Rate)
- Fair Value = Book Value Per Share + Terminal Value
We will use the following assumptions for our calculations:
Average return on equity (ROE): 14% (five-year average)
Cost of equity: 8.4%
Book value per share: C$52.57
Growth rate: 3.26% (used 30-year Government of Canada bond yield as a proxy for long-term growth expectations)
Now that we have our assumptions, we’ll plug them into the formula highlighted above. The figures are in Canadian dollars:
- $2.944 = (0.14 – 0.084) x $52.57
- $57.27 = $2.944 / (0.084 – 0.0326)
- $109.85 = $52.57 + $57.28
Therefore, CM stock is currently worth about C$109.85 per this valuation method. Its current share price is near C$55, making it undervalued.
Is CM Stock a Buy, According to Analysts?
According to analysts, CM stock comes in as a Hold based on three Buys, seven Holds, and one Sell rating given in the past three months. Nonetheless, the average CM stock price target of C$66.28 implies 21% upside potential.
The Takeaway: Consider Buying CM Stock
CM stock looks undervalued based on the valuation method used above and its high dividend yield that has room to grow. While CIBC’s latest results didn’t meet expectations, the company has a solid track record of growing its earnings over time, making it worth considering amid its recent sell-off.
