The Canadian bank stocks have been hurting over the past two years. Indeed, continued rate hikes could propel the Canadian economy into some sort of downturn. Though recessions sound bad on paper, it’s important to remember that stock markets tend to be forward-looking. And given a recession has been on the radars of many for more than a year now, there’s a good chance that a big chunk of the recession risks are already priced into a battered name like CIBC (TSX:CM).
It’s hard to tell how much recession is priced in. But it’s times like this, when a stock can only seem to sink, that tend to be a terrific buying opportunity. Like it or not, bear markets are moments for long-term investors to get more value for their money.
CIBC stock has now lost more than 40% of its value since its early 2022 peak, just shy of $82 per share. It has been a painful drop that’s caused the dividend yield to swell above the 7% mark. As shares continue to make lows not seen since the depths of 2020, I do think brave investors may be able to snag a robust dividend at a compelling discount.
Of course, chasing dividend yield can be a dangerous game. If a firm slashes its dividend in half (or by more than half), it’s the investor who could be left holding the bag, as those who value passive income ditch the stock for an alternative.
CIBC: The dividend yield is close to the highest it’s been since the 2020 stock market crash
Fortunately, I don’t view CIBC as at risk for a significant dividend reduction. Though a dividend yield of over 7% is towering, it’s not on wobbly legs by any stretch of the imagination. Even if a recession pressures the Canadian housing market (note CIBC’s sizeable exposure to domestic mortgages), it’s hard to imagine the firm slashing its dividend if anything other than a catastrophic collapse in housing is in the cards.
In short, I view CIBC stock as pricing in plenty of recession risk at these depths. There’s a lot of fear in the name right now. And little in the way of expectations when it comes to its looming quarters. Just because the coming quarter won’t be spectacular doesn’t mean a number can’t come in better than feared. Indeed, when expectations are lowered to the floor, it becomes a whole lot easier to rally on the back of a modest earnings report.
At the end of the day, it all comes down to valuation. Personally, I’d rather be in a value play like CIBC ahead of earnings rather than a white-hot AI stock that has unrealistic expectations priced in.
The Foolish bottom line on CIBC stock
Today, CIBC stock trades at 9.9 times trailing price-to-earnings (P/E), making it one of the cheapest members of the Big Six bank stocks right now.
Though it’s always tough to catch a falling knife, I do view the dividend as bountiful and safe enough to go against the grain, even if it means risking a few painful knicks going into year’s end. Contrarian investing is never easy. But it can be incredibly profitable over the course of many years.
