Contrarian Investors: Is Canadian Imperial Bank of Commerce (TSX:CM) Stock on Sale?

Canadian Imperial Bank of Commerce (TSX:CM) (NYSE:CM) is trading at a steep discount to Canada’s largest banks. Is the negative view justified?

| More on:

The rally in the equity market over the past four months has wiped out a good number of the deals that were available heading into the 2018 holiday season.

However, investors can still find top-quality TSX Index stocks that are trading at reasonable prices and pay attractive dividends.

Let’s take a look at Canadian Imperial Bank of Commerce (TSX:CM) (NYSE:CM) to see if it deserves to be on your buy list today.

Unloved

Every time market sentiment shifts against the Canadian financial sector CIBC tends to get hit harder than its larger peers.

Why?

Part of the fear lies in the company’s track record of making big blunders. CIBC had to write off roughly $10 billion in bad bets on U.S. subprime mortgages during the Great Recession. And those who have followed the stock for a long time are well aware that CIBC got caught up in the whole Enron debacle. The company came under fire for allegedly helping Enron hide its misdeeds and agreed to pay a US$2.4 billion settlement in 2005, without admitting any wrongdoing. CIBC recently settled a disagreement with the CRA connected to its claiming of the settlements as deductions from income.

In addition, CIBC is widely viewed as being the most exposed of the Big Five Canadian banks to a potential meltdown in the Canadian residential housing market. It’s true that CIBC holds a significant mortgage portfolio relative to its size and if house prices tank over a short period of time, CIBC would likely take a more significant hit than its larger peers.

Fears overblown

Investors should focus on the company that exists today, rather than the one that ran into all the trouble in the past. Surprises could still come up, but it’s unlikely that CIBC’s next stumble will be on the same magnitude.

Regarding housing, Canadian homeowners have managed to ride out the past two years of rate hikes in pretty good shape. The housing market has cooled off and more settling should be expected, but the government appears to be achieving its goal of a soft landing.

With the Bank of Canada and the U.S. Federal Reserve currently sitting on their hands, additional rate hikes are not expected this year and some analysts suggest the next moves could actually be cuts. This should in turn reduce the likelihood of a plunge in home prices triggered by higher mortgage costs.

In the event that borrowers start to run into trouble, CIBC is capable of riding out a reasonable downturn, as the company is well capitalized with a CET1 ratio of 11.2%. The uninsured mortgages have a loan-to-value ratio of 54%, so things would have to get pretty bad before investors should start to worry.

Unemployment is near historical lows on average across the country and the Canadian economy remains in decent shape, so there doesn’t appear to be any major near-term dangers.

Should you buy?

At the time of writing CIBC trades at $113 per share at writing. That’s about 10 times trailing 12-month earnings, which is a steep discount to the 12.5 times investors are paying for the country’s two largest banks. Some difference should be expected, but the spread might be overdone right now.

CIBC continues to generate good profits and the dividend should be rock-solid. The current payout provides a yield of 5%, which is a healthy return while you wait for sentiment to shift.

If you have some cash sitting on the sidelines, CIBC might be an attractive pick today for a buy-and-hold dividend portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stock mentioned.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »