"Dead Money" a Brief Look at CIBC

"Dead Money" a Brief Look at CIBC

"Dead Money." The term for a stock that has gone nowhere or will go nowhere for an extended period. CIBC, Canada's 5th largest bank has now provided no share price appreciation since 2007. You could basically have invented a product and turned it into a multi-trillion dollar company in the time that it has taken CIBC to go... nowhere.

Now for sure, there have been relevant dividends paid over time but how could a large, profitable staple of the Canadian economy go over 15 years without adding any value?

Well, the short answer is they did add value. The significantly longer answer is: What is value? Yes that's a question but realistically what's the right way to measure value? For me, it isn't exclusively stock price. So in an exploration about what's different between now and then (cause it sure isn't the stock price) let's explore what the books say the company should be worth. Don't worry I won't be going line by line through a bank's financials. I would however distill it to one thing, Book value per share.

Rewinding to 2007, CIBC was trading at just over 3 times book. Today we may look at that and wonder what possessed people to want to pay 3 times book for a bank stock but we did back then. I think, what possessed people was the fact that the banks were doing great. Those book values were growing by ~23% per year, making that 3x book something like 15x earnings. If you were to extrapolate what you saw back then (excluding dividends) it would look like paying a reasonable multiple for a company growing 20% CAGR. After all, why should a bank with nearly 20% earnings growth only have a 10PE/ 'bank' multiple? In that light, it seems a little less stupid.

Now CIBC trades at ~1.0 times book. Which today makes sense because returns on that book value have fallen and the market seems to think may be at further risk.

This also happens to be nearly the lowest valuation for them (and many banks) since the 90s. The other similar periods were when the economy shut down (COVID and GFC).

I'm sure some bears would point out the declining trend in Returns on Equity in addition to the dubious macro. It's possible that the trend will continue lower but my thinking is that much like 99, 02, 05, 09 & 2020, the earnings power will eventually spring back to the mid to high teens. Ideally for shareholders, perhaps even spend more time there.

CIBC also holds the distinction of being the only major Canadian Bank to record a YoY negative return on equity (a loss on a year over year basis) in the last 20 years. And as a matter of fact... they did so twice. 

I'll be honest, when I look at the 7 Canadian banks that I follow closest, I have 2 classifications. Good (3) & ok (4). CIBC fits the OK category. This doesn't mean that I don't want to own it (I actually do own a small amount) it just means it's one that I believe deserves a lower P/B multiple. I actually think the OK's are basically indistinguishable from each other, so if I'm interested in buying banks, I add to the cheaper end. The ok ones present an interesting conundrum (half explained above)... what if they're actually good? 

All the major banks were earnings high ROEs in 2007 and all had 'deservedly high' P/B multiples. There's not a good reason why they can't get their efficiency metrics back to the 'good' levels. Will they? No idea. I do think there's room between here and 3x here for reasonable appreciation. Even if not an 'appreciated appreciation' perhaps the stock might be even cheaper than it currently appears (able to add more value quicker). Remember also that back then we weren't just extrapolating nothing... the companies were adding value very quickly. That require a better valuation to be good.

Certainly things can get worse from here too or at least stay challenging for a while. Looking at 2007 however gives us a great analog of the ironic part of markets. Things were great for CIBC, roughly 'never better' so naturally, it was a terrible time to buy the stock. You don't want to buy high expectations. I think current expectations are beatable. Could they lose money next year? Yes. But they also could... and literally did then too.

The big banks don't cut their dividends very often. It's probably happened but I can't think of a case off hand. So I really look at the bank stocks similarly to how I might look at a cap rate. A base case for yield and probably eventually some growth and appreciation. I appreciate the yield which provides something that much of my portfolio is lacking. I think the market is pretty negative on the banks and eventually without any warning we'll find ourselves through the worst of 'it.' For now I don't mind sitting on the dividends even if the stock remains... well... dead money.

Disclosure: At the time of this article I own shares in $CM.TO as well as direct and indirect stakes in other entities mentioned in this article.

Not investment advice, please see (Can Do Investing: Ground Rules) page for more information.