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

open vault at bank
Dividend Stocks

Don’t Get Cute; Just Buy Stability: Top Defensive TSX Stocks to Buy Now

A healthy risk tolerance is essential for most investors, but many stray from the tried and tested, hoping to find…

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

TFSA Investors: Buy These 3 Stocks for $3,480 Yearly Tax-Free Income

One significant benefit of a TFSA-based dividend income is that it doesn’t weigh down your tax bill.

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Transform a $5,000 TFSA Into a $50,000 Retirement Nest Egg

The TFSA is a powerful tool that can grow a small investment into a substantial retirement nest egg over time.

Read more »

A meter measures energy use.
Dividend Stocks

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

Fortis has increased its dividend annually for the past five decades.

Read more »

analyze data
Dividend Stocks

3 Dividend Stocks That Are Screaming Buys in November

Here are three top dividend stocks long-term investors won't want to ignore during this part of the market cycle.

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

Generate $175/Month in Passive Income With a $30,000 Investment

Dividend aristocrats offer reliability, and many of them also offer generous yields. With sizable enough discounts, these yields can become…

Read more »

dividends can compound over time
Dividend Stocks

Best Dividend Stocks to Buy Now for Canadian Investors

These three stocks would be excellent additions to your portfolios, given their solid underlying businesses, consistent dividend growth, and healthy…

Read more »