Well I don’t think that this article should come as a surprise to too many of you. If you couldn’t tell by my recent watch list, I was itching to buy a stock! Time to move some cash from the sidelines and into an income producing an asset. This week I ultimately purchased one of the four stocks on my watch list. Here is why I decided to add to my stake in Canadian Imperial (CM).
the purchase – cm
On Tuesday, I purchased 10.1731 shares of CM at $88.86/share. This purchase added $40.6924 to my forward dividend income. Here is what I love. I had a chance to continue building a position in my portfolio. By adding $908 to my cost basis, my total position in CM is 20.3724 shares, which produces $85.56 in forward dividend income.
In my July dividend income summary, I received $10.18 in dividend income from the company and now I expect that dividend to double in October! I’m very, very excited that I was able to sneak my purchase in one day before the ex-dividend date so I could still capture the fourth quarter dividend! This was a huge factor in my decision when weighing investing in CM against the other four companies on my watch list. I love that I will be receiving a dividend from this investment in the next month. Plus, since the other companies on my watch list pay a dividend in either November or December, I still have plenty of time to add to my position and still capture their fourth quarter dividend. All in all, the timing of this investment could not have worked out better for me.
Why did I add to my position in CM? Well, as I summarized in my watch list article, the company crushes all aspects of our dividend stock screener. Their P/E Ratio is near 10X, payout ratio near 50%, and the company continues to growth their dividend (announced an increase at the end of August. One thing I did want to check out due to the fact that their P/E Ratio is significantly lower than the broader market’s P/E ratio was how CM stacked against some of the other Canadian Banks. Is CM generally more or less expensive than their competitors? Luckily, Lanny performed this for me back in July when he summarized his purchase of CM. In his article, he showed that CM’s P/E ratio was in line with two competitors (TD and BNS). Since then, the stock prices for each company have appreciated in a similar amount. What this tells me is that CM’s current P/E ratio is in line with other companies in their industry and they are not over-valued compared to their peers. Boom, not I’m very comfortable about the fact that this company has passed our stock screener.
Another metric that jumped out at me was CM’s strong Return on Equity (ROE). Typically, when Lanny and I discuss bank investments, we discuss a 10% ROE target. Well, CM’s ROE per their last earnings release was 16%. It must be a Canadian bank thing, because all the major Canadian banks had ROE’s well above our threshold. But it caught my eye and was a metric that has me very excited about this metric.
Lastly, after reading their third quarter report to shareholders, there were some other strong banking metrics. Strong credit quality metrics (24 basis point loan loss ratio) and capital ratios (10.4% common tier 1 equity ratio…even after their acquisition), and a 57% efficiency ratio. Again, there may be some difference between Canadian and US banks, but those are some strong metrics compared against what we typically see!
summary
All in all, I’m very happy with my purchase. I didn’t have a ton of cash to invest. However, I’m glad I was able to take advantage of this opportunity and continue to build a position in my portfolio. I was always conflicted about what to do with this position before my last watch list. I owned less than $1,000 of CM and received a nearly single-digit dividend each quarter. Was it worth holding the company? Well after some research, it turns out that the right decision was to add to my position and continue adding to this strong dividend paying Canadian bank. The metrics were right, so this was an easy decision for me to make. Man I cannot wait to receive my first increased dividend in October!
What are your thoughts about my investment decision? Would you have investing in CM? Or would you have instead opted for one of the other Canadian banks? What other companies are on your watch list? Have you purchased any stocks in the final week of the third quarter?
-Bert