CIBC (TSX:CM) is currently down more than 20% this year, though it’s still above the October low. Contrarian investors are wondering if CIBC stock is now undervalued and good to buy for a self-directed portfolio focused on passive income and total returns.
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CIBC overview
CIBC is Canada’s fifth-largest bank with a current market capitalization near $53 billion. The company took a big hit during the Great Recession when it was forced to write off billion of dollars due to bad bets on the U.S. subprime mortgage market. CIBC then refocused on lending to Canadian homebuyers and that strategy delivered solid profits as the housing market soared for the next decade.
Now, investors are concerned that the bank might be hit harder than its peers if soaring interest rates and persistent inflation trigger a recession and a meltdown in property prices. The Bank of Canada has increased interest rates significantly in 2022 in an effort to cool off the overheated economy and bring inflation back down to its target rate of 2%. The steep jump in mortgage payments on variable rate loans is putting some households in a difficult position. Owners with cheap fixed-rate mortgages will join that group as their loans come up for renewal.
As long as people still have jobs, there shouldn’t be a wave of defaults. However, if the economy slows down more than expected and businesses begin to slash jobs aggressively, the fallout could be a plunge in property prices, as people who can no longer afford their mortgages rush to sell before the home is worth less than what they owe.
In a worst-case scenario, the banks could take a meaningful hit. CIBC has a large Canadian residential mortgage portfolio relative to its size, so there would probably be some pain for the bank and its investors.
For the moment, economists predict a short and mild recession in 2023. Households and businesses are still sitting on savings built up during the pandemic and the jobs market remains strong.
CIBC earnings
CIBC generated fiscal 2022 net income of $6.22 billion compared to $6.43 billion in fiscal 2021.
Adjusted net income increased in the Canadian personal and business banking operations and in the Canadian commercial banking and wealth management segments but slipped by 17% in the U.S. commercial banking and wealth management division. Capital markets adjusted net income rose slightly compared to last year.
CIBC finished the fiscal fourth quarter (Q4) of 2022 with a common equity tier one (CET1) ratio of 11.7%, so the bank is well capitalized to ride out a downturn.
At the investor meeting in June, CIBC said it is targeting earnings growth of 7-10% over the medium term.
Dividends
CIBC announced another increase in the quarterly dividend when it reported the Q4 results. The new payout will be $0.85 per share compared to $0.83 per share. CIBC raised the distribution in the spring and also bumped it up late last year, so investors have received decent dividend gains in the past 12 months. The moves suggest that the board is comfortable with the revenue and earnings outlook, despite the economic headwinds.
At the time of writing, the new dividend provides an annualized yield of 5.75%.
Should you buy CIBC stock today?
CIBC trades for close to $59 compared to $83 earlier in the year. More downside could be on the way if the economy goes through a deep recession next year or in 2024.
However, at the current multiple of 8.8 times trailing 12 times earnings, the stock appears undervalued for buy-and-hold investors who are willing to ride out some potential volatility. The dividend should be safe, and you get paid well to wait for a rebound.
