Still Bullish on 2 Canadian Banks

01/15/2013 9:00 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

For the most part, Canadian financial institutions bypassed all the troubles of their American and European counterparts, so not only did they avoid years of rebuilding but they're gaining international attention as banks of choice for investors around the world, notes Jack Adamo in Insiders Plus.

I've long been a fan of Canadian banks for their solid balance sheets and conservative operations. We currently have positions in Canadian Imperial Bank of Commerce (CM) and the Toronto-Dominion Bank (TD).

Both are making higher highs and higher lows on their long-term charts. Profitability is increasing modestly along with Canada's GDP, and their dividends, already better than American banks, have the fuel to grow. I expect these trends to continue. We will add 2% to each stock this week.

Canadian Imperial Bank of Commerce (CM)
Based in Toronto, CIBC provides various financial products and services to individuals, as well as small business, commercial, corporate, and institutional clients in Canada and internationally. It's one of the top four banks in Canada and, like the others, has very little in common with big US money center banks, having avoided the great majority of their pitfalls.

The shares have more than tripled in the last ten years, and recently hit a new all-time high. The quarterly dividend yields 4.6% and varies less than most foreign stocks. Yield growth has averaged 6.7% per year for the last five years. The shares trade for less than 11 times trailing earnings.

Last month, the company reported fourth-quarter and full-year earnings for the fiscal year ended October 31. Quarterly EPS were up 12.8% at $2.02. Excluding "items," the rise was 14.6%. Full-year earnings were up 6.6% to $8.07 after reasonable adjustments. On a GAAP basis, they were up a rousing 17%, but the particulars in this case make that less meaningful than the adjusted comparison.

Operating cash flow was four times higher than income, which is always a big plus. Given the challenging economic and interest rate environment, these are excellent results, and the stronger Q4 numbers suggest things might improve further in 2013, although the environment will remain challenging. I'm raising the buy range on Canadian Imperial.

The Toronto-Dominion Bank (TD)
TD provides financial and banking products and services to personal and small business customers in North America and internationally.

The company is well capitalized and well operated. The stock has more than quadrupled in the last ten years and shows no sign of slowing. It recently hit a new all-time high. Earnings are consistent and the stock pays a nice dividend, yielding 3.5% at its current price and payout.

Latest earnings didn't match CIBC's, but were good considering the climate. Fourth-quarter GAAP EPS was $1.66 versus $1.68 last year, while adjusted earnings of $1.83 were 5% higher than the comparable quarter. Full-year EPS was $6.86 according to GAAP, up 5%, and adjusted earnings were $7.42, up 8%. The shares trade for about 12-times trailing earnings.

Tier 1 Capital according to Basel III was a very healthy 8.2%. Return on equity was 16.3%, comfortably above the 15% threshold that Warren Buffett considers the measure of an excellent company.

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