There has been a lot of collective mental energy spent over the years analyzing Canada’s five largest banks. Which one should investors choose?
I propose a simple solution. Choose the one with the best dividend.
Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) fits the bill. It has a current dividend of 4.9% versus an average of closer to 4% for its peers. That’s a 20% dividend premium.
There are a couple of reasons why CIBC trades at a discount. The first is its Canadian-centric operations. With the exception of a few wealth management offices in the United States, it’s almost wholly Canadian.
Many investors are worried about Canada’s economy and certainly our housing bubble. They’re more attracted to banks with a larger U.S. exposure.
CIBC realizes this, and recently announced it would be acquiring PrivateBancorp, a Chicago-based bank, for $4.9 billion. The company hopes that U.S. profits will be 25% of the bottom line within five to seven years.
The problem? Many analysts say it paid too much for its U.S. prize, a deal that isn’t expected to add to the bottom line until at least 2018.
But CIBC is a solid operator with a long history of delivering steady profits and increasing dividends. Besides, the market is cyclical. At some point, another Canadian bank will struggle, and investors will decide they want CIBC shares instead. It has happened countless times before, and will happen again. It’s only a matter of time.
