Canadian Imperial Bank of Commerce (TSE: CM) (CM), commonly known as CIBC, is a financial institution, which provides banking and wealth management services to personal, business, public sector, and institutional clients.
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It operates through the following segments: Canadian Personal and Business Banking, Canadian Commercial Banking and Wealth Management, U.S. Commercial Banking and Wealth Management, and Capital Markets.
The company recently reported earnings, which beat expectations. Adjusted earnings per share came in at C$1.77, above analysts’ expectations of C$1.72. Revenue was C$5.5 billion, which also beat the consensus of C$5.32B.
CM’s share price is down roughly 6% year-to-date and down approximately 1% in the past year. This is despite the fact that its book value has been increasing steadily. As a result, the stock may be attractively priced at the moment.
Valuation
To value CM, we will use the excess returns model. This approach is more appropriate for financial companies because they tend to have volatile free cash flows.
As a result, trying to create forecasts for them is futile. The excess returns model allows us to use historical numbers instead, which are actual results. The formula, which requires multiple calculations, is as follows:
- 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 ROE: 14.9% (five-year average)
- Cost of Equity: 7.9%
- Book Value: C$48.12
- Growth Rate: 2.79% (used 30-year Government of Canada yield as a proxy for long-term growth expectations)
Now that we have our assumptions, let’s plug them into the formulas:
C$3.37 = (0.149 – 0.079) x C$48.12
C$65.95 = C$3.37 / (0.079 – 0.0279)
C$114.07 = C$48.12 + C$65.95
As a result, our valuation suggests that CM is currently worth C$114.07 per share under current market conditions. With a share price just above $69, that offers a large margin of safety.
Dividends
The Canadian Imperial Bank of Commerce also increased its dividend to C$0.82 per share. On an annualized basis, this equates to a dividend yield of 4.8%. When taking a look at CM’s historical dividend yield, you can see that it has trended slightly downwards:
At 4.8%, the current dividend is on the low end of the range, indicating that income-oriented investors are paying a slight premium relative to yields they have been able to receive in the past.
Analyst Recommendations
The Canadian Imperial Bank of Commerce has a Moderate Buy consensus rating based on eight Buys, three Holds, and one Sell assigned in the past three months. The average Canadian Imperial Bank of Commerce price target of $89.71 implies 30% upside potential.
Final Thoughts
CM had a solid quarter that beat analyst expectations, allowing it to raise its dividend. Despite the company’s increase in book value over the past year, the stock price is still slightly down. As a result, CM stock appears to be attractively priced.
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