The Truly Battle-Tested Bank With 8%-9% Growth

Aug.18.14 | About: Canadian Imperial (CM)

Summary

The Canadian Imperial Bank is one of the very few large-cap banks that did not cut its dividend during the most recent financial crisis.

Over the past ten years, the company has grown earnings and dividends by 8%-9% while also having a conservatively managed balance sheet to maintain dividends.

This stock may not be for everyone as the current valuation is over twice book value.

The most frustrating thing for income investors during the recent Financial Crisis of 2008-2009 was learning that many of the largest, supposedly safe U.S. banks had leveraged themselves, sacrificed liquidity, and assumed non-performing debt obligations to the point that anticipated dividend payments became slashed, or in some circumstances, eliminated altogether.

The silver lining is this: It also provided investors an opportunity to truly appreciate conservatively run banks that had built strong enough balance sheets to weather deep financial storms so that shareholders would not have to endure dividend cuts. One company worthy of consideration for investment is the Canadian Imperial Bank (NYSE:CM).

It provides one of the best examples of how a prudent bank can have an excellent business cycle if adequately prepared for rapid downturns in the economy: Over the past ten years, the Canadian Imperial Bank has grown earnings by 8.5% and grown dividends by 9.0%. The book value never got axed, and in fact increased by 3.0% annually over the past ten years, fueled primarily by asset growth of 2.5%.

What I find most admirable is this: the bank's dividends and book value held up quite well during the financial crisis. In 2007, Canadian Imperial Bank's book value was $33.31. By the next year, it only declined to $29.41, reaching a low of $28.96 in 2009 before rebounding to $32.17 in 2010. That, combined with the bank's liquidity to keep the dividend at $3.48 per share throughout the duration of the financial crisis, is a testament to the upside of owning a high-quality banking investment. The company hasn't missed a dividend payment since 1868 (not a typo).

You know, you always see people complaining about Canadian Imperial Bank's stock market valuation: "Oh, it looks too pricey. Oh, it's trading at two or three times its book value." Or, as is the case today, 2.26x book value. That analysis would be more complete if investors stopped automatically assuming that it's pricey because it trades at a double premium to book value and instead examined whether the quality of the portfolio was actually high enough to warrant its traditionally high valuation for a large-cap bank.

Canadian Imperial Bank does many things intelligently; for instance, it is co-branding a credit card with Tim Horton's to help stimulate monthly cash flow in payments that could come its way. Things like that are nice side projects for the bank. If it works out well, it will add a couple tens of millions to the bottom line. If not, it's a classic case of "heads I win, tails I don't lose much" types of initiatives that are worth it on a risk-adjusted basis. Canadian Imperial is selling off most of its credit card loans, and so the co-branded cards with Tim Horton's provide a chance to maintain a more stable grip on the lucrative credit card markets.

The dividend has increased every quarter this year -- going up from $0.96 to $0.98 to $1.00, and is still well supported by profits. The Canadian Imperial Bank is expected to make $8.60 per share this year, meaning that the current $4 annual rate works out to only 46.5% of the bank's profits.

What is so admirable about the company is that it is able to make high-quality loans with minimal losses. Its asset portfolio consists of 60% residential loans, yet only 0.44% of net loans account for losses. The high quality loan portfolio, coupled with annual growth of over 30% in the wealth management division (spurred on by the recent acquisition of Atlantic Trust) help explain why the bank has grown earnings per share by 23% annually coming out of the financial crisis.

The Canadian Imperial Bank is not for everyone -- the current valuation of 2.26x book value may suggest that the stock does not presently offer a discount to intrinsic value. But there is a lot that you do gain by choosing to focus on quality: you get a company that hasn't missed a dividend payment since 1868, that has very low loan losses, that has grown earnings per share by 23% annually coming out of the recession, and has grown earnings and dividends by 8.5% to 9.0% annually over the past ten-year business cycle that includes the second-worst financial crisis in the past century. That's my opinion about what makes the company attractive, but no one cares about your money more than you do, so you should draw your own conclusions.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.