CIBC offers a rising dividend with a low p/e

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CANADIAN IMPERIAL BANK OF COMMERCE $123 (Toronto symbol CM; Income-Growth Portfolio, Finance sector; Shares outstanding: 443.7 million; Market cap: $54.6 billion; Dividend yield: 4.4%; Dividend Sustainability Rating: Highest; www.cibc.com) is the smallest of Canada’s big five banks, with assets of $595.0 billion.

The bank recently announced that it will raise its quarterly dividend by 2.3%. Starting with the October 2018 payment, investors will receive $1.36 a share instead of $1.33. The new annual rate of $5.44 yields a high 4.4%. In the latest quarter, dividends equalled 43.0% of earnings.

CIBC’s revenue rose 28.1%, from $12.7 billion in 2013 to $16.3 billion in 2017 (fiscal years end October 31).

Chicago purchase already paying off

Those gains are partly due the bank’s June 2017 acquisition of Chicago-based PrivateBancorp Inc. That firm mainly lends to small and medium-sized businesses. It also provides wealth management services. CIBC paid $6.6 billion in cash and stock.

If you exclude costs related to the PrivateBancorp purchase and other unusual items, CIBC’s overall earnings jumped 32.3%, from $3.47 billion in 2013 to $4.59 billion in 2017.

Due to the additional shares outstanding, earnings per share rose at a slower rate of 28.4%, from $8.65 to $11.11.

In its fiscal 2018 third quarter, ended July 31, 2018, CIBC’s earnings rose 20.0%, to $1.40 billion from $1.17 billion a year earlier. Due to more shares outstanding, earnings per share increased at a slower rate of 11.2%, to $3.08 from $2.77.

Earnings from Canadian retail banking (45% of the total) rose 14.4% in the quarter due to higher interest rates. The Canadian commercial banking and wealth management business (24%) reported 20.3% higher earnings. That gain is due to strong demand for business loans and an increase in the unit’s assets under management.

CIBC’s U.S. operations (contributing 12% of total earnings) saw its earnings soar 280.0% due to the PrivateBancorp acquisition. As well, earnings from securities trading (19%) improved 5.2% on higher trading volumes.

Overall revenue in the quarter increased 10.8%, to $4.55 billion from $4.10 billion a year earlier.

However, loan-loss provisions rose 15.3%, to $241 million from $209 million. That’s mainly due to additional provisions at CIBC’s Caribbean operations after the Barbados government said it would restructure its debt held by CIBC and other foreign lenders.

Aimia deal protects credit card segment

In August 2018, CIBC joined a consortium of investors (including Air Canada and Toronto-Dominion Bank) that has agreed to buy the Aeroplan loyalty program from Aimia Inc. (Toronto symbol AIM) for $450 million. The buyers will also assume $1.9 billion of Aeroplan Miles liability (the points unused by its cardholders).

The bank has yet to reveal its share of the purchase price. However, it already issues Aeroplan credit cards, so this purchase would let it continue to expand that profitable operation.

CIBC will probably earn $11.76 a share in fiscal 2018. The stock trades at just 10.5 times that forecast.

CIBC is a buy.

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