CIBC (NYSE:CM) is the fifth-largest bank in Canada and has had an abysmal 2015. It dropped nearly -36% since its highs in September 2015. CIBC owns a ton of assets and this sell-off may be overdone. Is it time to pick up this Canadian bank now and is it at a bargain basement price or could the stock continue to decline in 2016?
Huge value play and fat 5% yield
CIBC has been one of the most attractive dividend plays on the TSX. Its yield currently is over the 5% mark and has a current P/E that is nearing the single digits. There are many negative headwinds that the Canadian banks are facing right now which has caused the stock to be a great contrarian play for long-term dividend investors. CIBC currently trades at a P/E of 10.01 which is currently lower than its five-year historical average of 11.0. Its P/B is at 1.7 which is cheaper than its five-year historical average of 2.2. The dividend also is 0.66% higher at 5.16% than its historical mean of 4.5%. This dividend is one of the safest in the Canadian market. CIBC has hiked its dividend for five consecutive quarters and raised its annual dividend for five straight years. CIBC pays out up to 50% of its net earnings so if its earnings can continue to grow in the coming years so will the dividend.
Strong 2015 numbers despite Canada's recession woes
Given that Canada was in a recession in 2015, CIBC reported fairly strong financial results. When compared to fiscal 2014, the adjusted net income increased 4.5% to $3.8 billion. The EPS increased 5.7% to $9.45. Total assets under management increased 12.2% to $170.5 billion. Book value per share increased 15.7% to $51.52. In the last year, CIBC's ROE was 20.6% which beat its peers in the Canadian banking industry with an average of 16.1%. We are indeed looking at a company with solid financials that's at a 25% discount compared to TD Bank which is the most expensive Canadian bank.
Risk vs. Reward Analysis: Is the risk of CIBC's large exposure to the Canadian housing market worth its cheap valuation?
There's no question that the Canadian housing market is inflated right now. Shark tank host and well known investor Kevin O'Leary is projecting that Canadian housing will not generate any additional return for another five years down the road. This is a big concern for CIBC since there is risk that if a Canadian housing collapse occurs then CIBC will be hit the hardest of all five big Canadian banks. If you believe that the housing market will remain flat for the next five years then CIBC will have slightly weaker growth advancing forward. However if you believe Canada's housing market will crash violently then you should stay away from CIBC because the stock will most likely crash hardest among its peers since it holds a huge number of Canadian mortgages. CIBC also is heavily exposed to the poor Canadian economy which is struggling right now with low oil prices. CIBC has over $17 billion in direct exposure to the energy sector, with 20% of the loans not being investment grade "junk."
The current price of CIBC is $63 per share. I think CIBC could see more downside in the months going forward and we will see a better entry point in mid 2016. If you currently hold the stock I would continue to hang onto it. If you are looking for a high dividend paying stock with a cheap valuation then your best bet would be to buy small portions of CIBC as it continues to decline going into 2016. However personally I would just wait on the sidelines at this point given the huge risk put forth on global markets.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.